S&P Follies

In case you had any doubts about the objectivity or even reasonableness of the credit rating agencies, consider this.

From the WSJ:

In a reversal in its evaluation of a clutch of mortgage bonds backed by commercial property, Standard & Poor’s on Tuesday raised the ratings on several securities it had downgraded a week ago.

The move came the same day the Obama administration detailed a plan to overhaul regulation of credit-ratings firms by requiring increased disclosure and stronger oversight, and curbing the practice of “ratings shopping.”

In the S&P action, among the bonds returned to the top-notch triple-A category from the triple-B minus category are securities that make up the benchmark GG-10 deal.

The ratings firm said it raised the ratings following the implementation of its “recently updated criteria.”

S&P spokesman Adam Tempkin said in an email that the firm had received inquiries from market participants on how it applies losses in the AAA category “that prompted us to clarify our approach. In doing so, we are also introducing refinements to the approach.”

The upgrade means that these bonds are now eligible for a Federal Reserve program that offers investors cheap loans to buy them.

Market participants said they are confused by S&P’s actions.

“Every time they do this, they erode their credibility as a ratings agency,” said Derrick Wulf, a senior portfolio manager at Dwight Asset Management in Burlington, Vt.

It would be really helpful to know how they can move a security from BBB minus to AAA on the basis of emails, clarification of an approach and refinement to the approach. How in the world can anyone have any faith in the letters these guys slap on deals.

This appears to be a rather thinly disguised attempt to play ball with the Fed and its TALF program. The Fed is set to ride to the rescue of the CMBS market via the TALF but they have to maintain the pretense of only accepting the highest graded collateral. Presto, the rating agencies, knowing who butters their bread these days, roll over. You want AAA you got AAA.

Is it possible to have any faith whatsoever in the ratings these guys assign? It seems more a political exercise as opposed to one intended to truly get at the credit worthiness of a security. Not to put too fine a point on it, but it’s a way for interested parties to cover their butts as opposed to giving the investor any useful information about the quality of what they might purchase. Such is the world we seem to have created recently.

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