Thoughts on Moody's "Tough Stance"

According to the Wall Street Journal Moody's Says It Is Taking Hit for its tough stance on lending standards.

Moody's Investors Service says it is paying a high price for its tough stance on lax lending standards for commercial mortgage-backed securities.

In a new report that assesses the status of the market, the Moody's Corp. unit said it was passed over and not hired for 75% of the commercial mortgage-backed securities rating assignments issued in the past few months as a result of its requirement that issuers add an extra layer of credit enhancement. Moody's said issuers are "rating shopping" -- meaning they were hiring competitors that would hand out higher ratings on securities. Because Moody's makes money rating ...

It is absolutely laughable for Moody's to claim it is taking a tough stance on ratings. For starters all of the ratings companies have fatally flawed ratings models. In addition Moody's admits the following "Moody's has no obligation to perform, and does not perform, due diligence." As I have said before, truer words were never spoken.

In Moody's In Wonderland I wrote about Moody's stunning display of twisted logic, whereby they actually made it a blessing to have rising default risk.

In Mispricing Risk / Conflict of Interest I talked about the obvious conflict of interest between ratings companies and the companies they rate.

In The Rating Game Scam I commented on a Bloomberg article accusing the S&P and Moody's of Masking $200 Billion of Subprime Bond Risk.

Original Ratings

In Stress Test I noted that Almost 65 percent of the bonds in indexes that track subprime mortgage debt don't meet the S&P ratings criteria that were in place when they were sold, according to data compiled by Bloomberg.

So far the S&P has downgraded less than 2% of of the $565.3 billion of subprime bonds issued from late 2005 through 2006. The initial claim by the S&P was $12 billion but the S&P made a mistake. It was a mere $7 billion.

In Moody's downgrades risky mortgage debt back on April 30th I see Moody's downgraded $348 million of bonds in lower-rated classes. Wow, Moody's had the nerve to downgrade a whopping $348 million of bonds out of a $14.1 pool of subprime garbage.

On July 10th I see Moody's Downgrades Residential Mortgage-Backed Securities.

Moody's Investors Service has cut its ratings for 399 residential mortgage-backed securities (RMBS), citing higher-than-expected delinquencies in the underlying loans, the same day that Standard and Poor's said it may start cutting ratings on $12.1 billion of mortgage-related debt.

Moody's has an additional 32 securities under review for possible downgrade. The securities were originated in 2006 and their downgrades would affect a total of $5.2 billion in debt.

There's another big WOW for you. Moody's downgraded $5.2 billion in 399 securities and has the nerve to consider reviewing (drumroll please...) another whopping 32 securities.

A google search for "Moody's Downgrade Debt" turns up a couple other small items but no totals were given none of it was it mortgage related that I could see.

In S&P, Moody's to cut rates of risky debt The Political Gateway posts a combined total (Moody's & S&P) debt downgrade at $17 billion ($5 billion and $12 billion respectively).

But on July 13th we see S&P: Whoops! A $5 billion subprime blunder.

Standard & Poor's admitted to making a nearly $5 billion blunder in correcting its own estimate for subprime securities it is reviewing for ratings cuts. S&P corrected the volume of residential mortgage-backed securities it placed under review for downgrade on Tuesday to $7.35 billion from $12.1 billion.

"This is obviously sloppy by S&P," said Mirko Mikelic, a fund manager at Fifth Third Asset Management in Grand Rapids, Michigan. "I don't think anyone's doing back flips."

S&P said the volume corrected represents 1.3 percent of the $565.3 billion U.S. subprime mortgage market it rated between the fourth quarter of 2005 and the fourth quarter of 2006.

So assuming the S&P downgrades all $7.35 billion it is looking at and adding in another $5 billion for Moody's and let's be real generous by adding in $5 billion for Fitch we have a grand total of $17 billion of downgrades out of a pool of $565 billion of some of the worst mortgage dates to hold. That's a whopping 3% when according to Bloomberg, Almost 65 percent of the bonds in indexes that track subprime mortgage debt don't meet the S&P ratings criteria that were in place when they were sold.

Of course not all of that debt was subprime. Then again, doesn't that make matters worse? How much of it should have been subprime but was rated as high as AAA by insane rating strategies of CDOs squared and the like. Moody's can't even bring itself to downgrade what nearly everyone on the planet knows is toxic garbage.

So this talk of a "tough stance" by Moody's is a total crock. OK so maybe Moody's is losing out on a few ratings because of shopping around. So what? Not playing the ratings game scam is easy to do now with all of these blowups we are seeing. It's much tougher to do what needs to really be done, and that is to downgrade much more debt that it has. Moody's is obviously taking the easy way out on that score. And the fact that so much more debt is deserving of these downgrades shows you just how badly Moody's failed to do the right thing in the first place.

Moody's attempt to play the role of victim is tremendously galling given that it has failed every step of the way from initial ratings to now, to do what needs to be done.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/