News Flash: Toxic Waste Still Toxic
Last year I linked to a Wall Street Journal piece about "re-remics." In a nutshell, banks were taking the sliced-and-diced AAA securities that blew up in the great crash of 2008, reslicing them using only the remaining good bits, and creating a whole new bundle of AAA securities. My comment at the time:
Shiny new AAA securities! Hooray! And there's more! Ratings for re-remics come from the same ratings agencies that bollixed up the original ratings. And investment banks pocket fat fees for performing the financial alchemy. What could possibly go wrong?
So cynical, Kevin! Surely banks had learned their lessons. And ratings agencies too. Except, um, apparently not: "Standard & Poor’s cut to junk the ratings on certain securities, backed by U.S. mortgage bonds, that it granted AAA grades when they were created last year....The reductions were among downgrades to 308 classes of so-called re-remics, or re-securitizations, created from 2005 through 2009."
Created last year! After the great ratings fiasco of the previous decade. Felix Salmon comments:
I consider myself pretty cynical when it comes to structured finance, but this comes as a shock even to me. S&P knew, when it was rating these re-remics, exactly where it had gone wrong in the first round of structured-credit ratings, yet somehow was unable or unwilling to fix the problems in that group.
Tracy Alloway quotes S&P citing significant deterioration” in the performance of the underlying mortgages as the reason for the downgrade — but the whole point of a triple-A-rated mortgage-backed security is that it's robust to such deterioration. If it isn't, then it should never have been rated triple-A in the first place.
If we needed one more reason to strip all official recognition from credit ratings, this is it. S&P and Moody's are clearly completely incompetent, and no one should base any investment decisions on the random series of letters they apply to bonds. If the CDO fiasco wasn't enough to make them change their ways, then nothing will be.
This is the kind of thing that leaves you speechless. But maybe Felix is right: maybe it's time to tear down the whole lot of them, sow the ruins with salt, and figure out some way to start all over again. The whole episode just boggles the mind.