S&P Rates Subprime Mortgages Higher Than U.S.

[scandal 951]

http://finance.yahoo.com/news/SampP-Rates-Subprime-bloomberg-1790233405.html

S&P Rates Subprime Mortgages Higher Than U.S.

bloomberg

Standard & Poor’s is giving a higher rating to securities backed by subprime home loans, the same type of investments that led to the worst financial crisis since the Great Depression, than it assigns the U.S. government.

S&P is poised to provide AAA grades to 59 percent of Springleaf Mortgage Loan Trust 2011-1, a set of bonds tied to $497 million lent to homeowners with below-average credit scores and almost no equity in their properties. New York-based S&P stripped the U.S. of its top rank on Aug. 5, saying Washington politics were making the country less creditworthy.

Treasuries gained about 1.95 percent and U.S. borrowing costs have fallen to record lows as investors repudiated the downgrade, according to Bank of America Merrill Lynch indexes. S&P has awarded AAAs to more than $36 billion of securities in the U.S. this year that were created by bankers who continue to gather thousands of loans, bundle them into bonds of varying risk and pay ratings firms a fee to assign credit rankings.

“Everybody has been led to believe over the years that AAA means AAA means AAA across the board,” Gregory W. Smith, the general counsel for the $41 billion Public Employees’ Retirement Association of Colorado, said in a telephone interview on Aug. 24. “Anybody that didn’t learn in the 2008 crisis that doesn’t apply should find another line of work.”

[Usui Takumi 1,562]

Is S&Ps credibility in danger of a downgrade?

[mawilson 2,133]

Standard & Poor’s is giving a higher rating to securities backed by subprime home loans, the same type of investments that led to the worst financial crisis since the Great Depression, than it assigns the U.S. government.

Subprime loans have real underlying assets associated with them. The US government has nothing but hot air.

[Mr. Big Dog 10,747]

Subprime loans have real underlying assets associated with them.

Yep, those assets worked out real well couple of years ago. I think the fact that S&P gets paid for these ratings by the bankers that put that ####### together has something to do with the higher ratings the agency assigns. S&P is essentially the equivalent of a #######.

[mawilson 2,133]

Yep, those assets worked out real well couple of years ago.

They did not, but the Fed is working hard to inflate our way out of debt, so the assets will appreciate eventually.

Not so with government debt which is set to explode without fiscal tightening.

[SMR 368]

They did not, but the Fed is working hard to inflate our way out of debt, so the assets will appreciate eventually.

Not so with government debt which is set to explode without fiscal tightening.

Perhaps. But the fact remains that subprime mortgages have defaulted and nothing has fundamentally changed to make that impossible in the future. The US government may also default.

The US government may have been worthy of a downgrade. But subprime mortgages are certainly not worthy of a higher rating that the US government. The S&P is certainly guilty of a conflict of interest in this case.

[Mr. Big Dog 10,747]

If US government debt is more risky than subprime mortgages (which is what S&P stipulates with their ratings), then why would such subprime mortgages carry a significantly higher interest rate? In the real world, the more risky a loan, the higher the interest rate it commands. In the S&P world, the higher the fee paid, the better the rating applied.

[mawilson 2,133]

If US government debt is more risky than subprime mortgages (which is what S&P stipulates with their ratings), then why would such subprime mortgages carry a significantly higher interest rate?

Because US government debt is a "safe haven" - the way Pearl Harbor was a safe haven in 1941.

If France's AAA rating was called into question, their interest rates would most certainly go up.

The US gets downgraded and our interest rates go down, because everyone starts freaking out and buying Treasuries.

It's the same basic reason our currency gets stronger when the economy sucks, and weakens when the economy improves.

[SMR 368]

Because US government debt is a "safe haven" - the way Pearl Harbor was a safe haven in 1941.

If France's AAA rating was called into question, their interest rates would most certainly go up.

The US gets downgraded and our interest rates go down, because everyone starts freaking out and buying Treasuries.

It's the same basic reason our currency gets stronger when the economy sucks, and weakens when the economy improves.

This doesn't make sense. If people buy treasuries when the economy gets worse, it's because they have faith in them. Admittedly, that faith may be misplaced. Maybe the Japanese fleet is waiting nearby, but I don't see it. The S&P may see that fleet, but they haven't exactly been the picture of clairvoyance.

In the end, though, I think the crux of the problem isn't really that the US is rated too low. It's that the sub-primes are rated too high. I can agree that there is increasing risk in treasuries. The general faith of the market helps treasuries even as market indicators may work against them. But rating sub-prime backed securities as AAA? If it were 2005, you might say that the S&P made an error of judgment. While that calls into question the value of their ratings, the much bigger question we have now is the question of the integrity of the S&P, not just judgment.