S&P Report on Subprime Write-downs

While there is plenty of blame to go around in the entire banking debacle, let’s not forget who the key enablers were: The rating agencies. Their business model is a modern form of payola, with bond underwriters as customer #9. This allowed them to slap triple AAA ratings on the paper held by firms such as Bear Stearns.   

When you consider just what a criminally negligent job they have done in covering nearly
everything, from sub-prime infected RMBS to all manner of derivatives,
to the duolines themselves, it is really beyond comprehension.

Last week, we heard from S&P, who opined the end was in sight for the sub-prime write downs. Are these guys really the best messenger for this?

(I may have to change the name of this blog to The Big Schandenfreude)

Which leads to this advert, circa 2005. Its a classic:



If anyone can scare up the full report, send it to me @ Yahoo . . .

See also:
States and Cities Start Rebelling on Bond Ratings
NYT, March 3, 2008

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What's been said:

Discussions found on the web:
  1. Ralph commented on Mar 20

    I understand and agree. I could not believe that when S&P said that last week the dow rallied 100 points!

    Do, folks not consider the source????

    What I have to ask though. When are we going to get angry about crap like this? Push for change for quality data? Do we have to wait until a complete collapse? Do we have to set ourselves up for a decade of hard times, before we care enough to fix this kind of thing?

  2. Taylor commented on Mar 20

    It’s like the kid who’s spent all day riding the roller coasters, and now they don’t want to go home when the amusement park is closing.

  3. Herman the German commented on Mar 20


    it is: “Schadenfreude”, from :
    “der Schaden” (damage, injury, loss, harm) and “die Freude” (pleasure, joy, delight) as in Beethoven’s Symphony No. 9 “Ode an die Freude” (“Ode to Joy”), a poem by Friedrich Schiller.

    So “The Big Picture” becomes “Die Gro├če Schadenfreude”

    Barry, fantastic blog, fantastic work!!!!
    Vielen Dank!

  4. michael schumacher commented on Mar 20

    Take a look at the SPX markets folks……although this was used as the reason the market was juiced upwards you have to look at HOW…. not the why.

    Every single “rally” (with the exception of blatant market manipulation ala sticking it to shorts on options expiry week at least 4 times that I recall) has it’s basis in SPX markets. Is it any coincidence that the BSC story was dropped on the market when the bulk of reactionary selling would be absorbed by the futures market?? Not a chance…..the indexes never dropped below the futures low from the night before.

    This is totally telegraphed and managed…..one more to think about…was it a coincidence that the Fed happened to schedule it’s latest Policy statement on the very day Goldman delivers what it called earnings?

    Apparently inflating the value of bonds while having to write down mortgage obligations is OK as long as Mr. Market is not surprised…..

    And yet all this information is available in the filings over at the SEC but apparently no one seems to read them or understand them at all………..well I do.


  5. American ZIRP commented on Mar 20

    Is it just me, or do the credit markets look to be under increasing strain again today.

    TED Spread at 2.21, 3 month T-bill way low…

  6. wally commented on Mar 20

    The ratings agencies? Come on now… how do you expect somebody to ‘guarantee’ bond or investment vehicle performance for a fee? If they were certain, they’d move to the equity position, not to the fee position. The risk goes to the equity position.

    The blame goes to the investors – they are responsible for checking what they bought and the risk that goes with that.

  7. Donkei commented on Mar 20

    TED >2.00

    Nothing to see here. Move along. All’s well. Fannie and Freddie have rescued America.

  8. American ZIRP commented on Mar 20

    So…can the Fed keep the SPX above 1270 for the whole recession? :)

    Afterall, Dick Bove says “everyone back in the water!” I kid, but…

  9. michael schumacher commented on Mar 20

    for you Johnny Cash fans:

    “how high is the Ted Spread mama?”

    2.1 and risin’

    Feel free to repeat over the course of the next three weeks.


  10. edhopper commented on Mar 20

    As John Foggerty says: It’s deja vu all over again.
    Like the other great debacle of this decade, Iraq, those who instigated, promoted, cheerlead, profited from and are responsible for this crisis, will escape unscathed from this and will not only be welcomed to continue to spew their B.S., but be sought out to offer us their sage advice.

  11. Ivan Y commented on Mar 20

    Two things:

    (1) I’ve decided that ratings only work as a lagging indicator. “Past results are not indicative of future returns.” Now the implications for this are much broader, but that’s a separate discussion.

    (2) Why is everyone convinced that the fed can “run out of ammo”? Why aren’t negative interest rates possible?

  12. American ZIRP commented on Mar 20

    And the award for “having a firm grasp of the obvious” goes to the ECRI:

    The United States is “unambiguously” in a recession, a New York-based forecasting group said on Thursday, citing a nine-month decline in its weekly measure of the economy.

    Why do they tout their “weekly leading indicator” when they announce the recession when we are unambiguously in it?

    Sounds like a coincident indicator to me.

  13. Estragon commented on Mar 20

    Ivan Y,

    (1) I believe the ratings agencies explicitly state that their models are based on historical information.

    (2) In theory, nominal interest rates could be made effectively negative by, for example, levying a temporary “stamp tax” on t-bills.

    Real interest rates can be (and currently are) negative any time rates < inflation.

  14. zot23 commented on Mar 20

    Question (OT) for the good folks here.

    I’ve been considering using something like Everbank where you can get CDs in currencies other than the dollar. I already have precious metal hedges, a small store of physical cash (dollars), and a nice toe hold in the market, but this would seem to be a decent way to curb the Fed-a-licious inflation dollar freefall that is in full effect these days.

    My question to you folks is what are good currencies that will hold up well against a weakening dollar? Euros seem overpriced a bit, is the Canadian Looney a good bet, the Swiss Franc? I’m afriad I’m new to using other currencies for this purpose.

    Any advise is appreciated, thanks.

  15. Don commented on Mar 20

    I love it that Buffett, the guy who calls derivatives financial weapons of mass destruction, is Moody’s biggest shareholder. It gets even better because Moody’s rates ABK and MBIA, competitors to Buffett’s new muni insurance company.

  16. JL commented on Mar 20

    Are the guys real Wall Street Pig Men or are they models?

  17. Estragon commented on Mar 20


    You can also use the likes of FXC (loonie), FXE (euro), and FXY (yen), or trade currency directly through the likes of Interactive Brokers.

    The loonie is vulnerable to a pullback with the energy/commodity complex and spillover from the US slowdown in the near term.

  18. MarkTX commented on Mar 20

    Ratings Model?
    Negative Interest Rates?

    F That…

    OP Expiration? Yeah…That’s the ticket….

    Nothing to see here, just move along…..

  19. cathompson commented on Mar 20

    But they’re so well groomed and tailored!

  20. EV commented on Mar 20

    This ad refers to their bank loan recovery analysis. Though they have bungled immensely in rating structured products, their analysis of Bank loans is still universally respected.
    In the old days people focused on default risk and largely ignored recovery analysis. S&P’s work has helped to change that. I don’t think the entire organization should be painted with the same brush.

  21. Douglas Watts commented on Mar 20

    Hope nobody’s eating, but the guy on the left looks like he’s on the commode.

    And straining.

  22. William Roth commented on Mar 20

    In my opinion the failure of the ratings agencies is a major cause of the credit crisis. Not only did they fail to appropriately rate mortgage backed securities to begin with, they are continuing to fail to downgrade them in a timely manner. Moreover, they failed to accurately rate the monolines and they failed to accurately rate Bear until after it collapsed. The rating agencies, in theory serve a valuable function, allowing investors to feel confident in a security or company without doing extensive research. Without reliable rating agencies, institutions and investors must do extensive reserch prior to any investment. In this way, the unreliability of the ratings agency has done much to freeze credit markets and make investors cautious in their purchase of equities.

  23. Deborah commented on Mar 20

    Call me your Schandenfreude cousin…

  24. Avid fan commented on Mar 20

    Please list out the full yahoo address and I’ll have some materials based on your request.

  25. mw commented on Mar 20

    What in the world is our great Fed chief going to do when the “ammo” runs out, and they can’t think of any more Facilities? (STUPID FED TRICKS) Mark my word.. later this year (Not TOO much later!) we are going to have another massive DOWN day, and Uncle Benny will be reduced to cheap card tricks ( YES WITH A REAL DECK OF PLAYING CARDS!)

  26. mw commented on Mar 20

    What in the world is our great Fed chief going to do when the “ammo” runs out, and they can’t think of any more Facilities? (STUPID FED TRICKS) Mark my word.. later this year (Not TOO much later!) we are going to have another massive DOWN day, and Uncle Benny will be reduced to cheap card tricks ( YES WITH A REAL DECK OF PLAYING CARDS!)

  27. wunsacon commented on Mar 21

    >> “how high is the Ted Spread mama?”
    >> 2.1 and risin’

    MS, nice one!

  28. VoiceFromTheWilderness commented on Mar 21

    I think you are being too easy on other actors in the system. Though I had no idea in 2005 how the ratings agencies functioned, it was quite clear that the housing story was a lie — ‘always goes up’ is always a con. More substantively none of the purported reasons why it should always go up made any sense. The best was changing demographics/population but population wasn’t changing anywhere near as fast as house prices. the ‘fundamentally desirable’ argument ignored that housing had indeed gone down dramatically in ‘fundamentally desirable’ places like southern california in very recent memory.

    No anyone with half a BS detector knew there was BS going on, the only question was how much. The idea that we (shareholders and bond holders) are paying management to either a) do things they know are stupid, like believe the ratings agencies (whom they should have had the technical expertise and inside knowledge to know were compromised) or b) follow the herd in utilizing ‘instruments’ they don’t understand (ask buffett about managing things you don’t understand, and then ask yourself why he’s still the riches man in amaerica) is absurd. Senior management in industry and government has deliberately adopted a policy of doing easy things for personal gain, and that isn’t the ratings agencies fault.

    Indeed the entire society has come to believe that the best way to go is to ‘see nothing, and know nothing’ and now (once again) has woken up screaming casting about for someone to blame. The good news, in some sense, is that the people in charge of the actual blame machine (the law) are just as thoroughly committed to making sure they win out over anyone else as the people they should be prosecuting, so the blame won’t land anywhere near where it should, the only party that is partly to blame that really will pay is tax payers — i.e. not the inheritors of the wealth generated by the great financial innovation scam. The bad news is that most taxpayers are too busy knowing nothing to understand what is going on, and it looks like, to uninterested in their own welfare to create actual political change to stop the slow-death of the american political system.

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