TD Institutional Services reports today that on Friday, credit-rating agency Moody’s cut the ratings on 131 bonds backed by pools of speculative subprime loans because of unusually high rates of default and delinquencies among the underlying mortgages (WSJ). Moody’s also said it is reviewing 247 bonds for downgrades, including 111 whose ratings it had just lowered. All the bondswere issued as recently as last year. The actions affect about $3.0 bln worth of bonds, representing less than 1.0% of the over $400 bln in subprime mortgage-backed bonds that were issued in 2006. However, some observers are critical of the rating agencies’ conflict of interest (issuers pay fees to have the securities rated) and the slow progress to address the housing downturn, with the downgrades coming well after market adjustments. So far more than 170 bonds backed by second-lien subprime loans, or about 18% of such bonds that Moody’s rated last year, have had their ratings downgraded.
Comments: rating agencies have had their hand in the liquidity cookie jar with extra force this cycle. Rating agencies are meant to be gate-keepers not just another part of the marketing machine.