September 17, 2009

Standard & Poor's Ratings Services Recalibrated Its Ratings Criteria For Collateralized Debt Obligations (CDOs) Hhmm... Timing is Interesting!

I can't believe I am actually witnessing the ratings agencies hustling and bustling. I wonder what lit a fire under them to do the jobs investors rely on and used to trust? Hhmm... Oh I see now could this be because Rating agencies under scrutiny over toxic debt by the Securities Exchange Commission (SEC)? If they are indeed going to rate securities truthfully, expect more JUNK on the way!!!

WHEN a crisis hits, it's human nature to pin the blame on someone. And in the aftermath of financial market turmoil, the credit ratings agencies are under heavy fire after a string of spectacular failures.

Not only were the big agencies - Standard & Poor's, Moody's and Fitch - blind to the looming meltdown. They also allowed the toxic debt to spread through the arteries of the world economy by stamping investment-grade credit ratings on products that have since been exposed as high risk and in some cases, virtually worthless.

Now regulators and investors are hitting back.


The Wall Street Journal
2nd UPDATE: S&P May Downgrade $578B Of CDOs On Criteria Change
written by Jay Miller
Thursday SEPTEMBER 17, 2009, 3:59 P.M. ET

Standard & Poor's Ratings Services recalibrated its ratings criteria for collateralized debt obligations, resulting in the ratings firm's putting about 4,790 CDO tranches totaling $578 billion on watch for downgrade.

The changes will make the CDO ratings more comparable to ratings in other sectors, S&P said.

The ratings agency will introduce tests - both quantitative and qualitative - to supplement its default-simulation model. S&P will also adjust its models to target AAA default rates it believes are commensurate with conditions of extreme macroeconomic stress, such as the Great Depression, as well as BBB default rates consistent with the highest actual corporate defaults over the past 28 years.

S&P said downgrades are likely to be multiple notches after reviewing the tranches over the coming months, with Chief Credit Officer Thomas Gillis estimating that outstanding synthetic CDOs will likely experience an average downgrade of four notches. Super senior AAA tranches will probably be affected less, with expected downgrades of two to three notches, while tranches rated AAA will likely be affected more, with an estimated downgrade of four to five notches.

Of the tranches on watch for downgrade, 3,076 tranches totaling $319.6 billion are from 957 U.S. transactions. Another 1,626 tranches are from 623 European transactions and are $250.5 billion in size.

"We believe that adding quantitative and qualitative elements to our analysis...will provide a more robust analysis than using only simulation models," Gillis said.

Ratings agencies have been criticized about being overly optimistic with their ratings earlier this decade when structured-finance securities were created by packaging loans into newly created investments. CDOs, which use sliced-and-diced assets such as subprime-mortgage bonds to create customized products offering various levels of risk, have been at the heart of steep write-downs at big banks and brokerage firms.

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