Two weeks ago, Standard & Poor’s put out a press release: The credit rating agency warned it was poised to downgrade almost 1,200 complex mortgage securities.
So what? Isn’t that dog-bites-man at this point?
Well, two-thirds of these mortgage bonds were rated only last year, long after the financial crisis. And S&P was supposed to have taken the distress of the housing crash and credit crisis into account when it assessed them. But in December, the ratings agency admitted that it had made methodological mistakes, including not understanding who would get interest payments when.
As everyone knows by now, the credit ratings agencies played an enormous role in creating the conditions that led to the financial crisis. Their willingness to slap Triple A ratings on all manner of Wall Street- engineered mortgage rot was enormously lucrative for the raters but a disaster for the global economy.
Unfortunately, as the episode in December shows, the credit ratings agencies are still struggling to get it right. These likely downgrades arose in a small corner of the market called “re-remics.” What you need to know about them is that they were do-overs. Wall Street took bonds that had collapsed (and which the agencies had mis-rated the first time) and re-bundled them again. Generally, the top half was rated Triple A, supposedly exceedingly safe.
The agencies rated billions of dollars worth of these bonds, mostly just in the last two years. With shocking rapidity, even some of those Triple As have defaulted.
The lesson is that the agencies are still susceptible to problems that plagued them before the crisis. “What we’ve seen in re-remics truly does encapsulate everything that was wrong not just with ratings agencies, but with banking system as a whole prior to the boom," says Eric Kolchinsky, a former Moody’s executive who tried to blow the whistle on ratings problems at the firm.
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