Editor: David Reiss
Brooklyn Law School

October 28, 2013

S&P on Rating Mortgage-Backed Securities Before The Crisis

By David Reiss

S&P has posted The Role of Credit Rating Agencies in The Financial System, remarks by its president at the United Nations. The remarks reflect S&P’s narrative of the events leading up to the Subprime Crisis. This narrative is, unsurprisingly, self-serving but revealing nonetheless.

  • We, like others, did not anticipate the U.S. housing downturn, which led to the financial crisis. But with the exception of our ratings on U.S. mortgage-related securities, our ratings have performed as expected. (3) 

Seems like a perfect example of the exception swallowing the rule . . ..

  • In September of 2008, we were all in the depths of the financial crisis. During that time the vast majority of the securities S&P rated performed as we anticipated, including many structured finance ratings. But the performance of our ratings of certain U.S. residential mortgage-related securities was a major disappointment. Like nearly every other market participant, analyst and interested government entity, we did not anticipate the U.S. housing collapse and its effect on the economy as a whole. (4)

As I have said before, this is self-serving revisionism, when S&P’s own analysts predicted the collapse of many of the mortgage-backed securities that they rated before the Bust.

  • We have taken significant actions to further strengthen our independence from issuer influence. We have long had policies to manage potential conflicts of interest such as a separation of analytic and commercial activities, a ban on analysts from participating in fee negotiations, and de-linking analyst compensation from the volume of securities they rate or the type of ratings they assign. After the crisis, we decided to strengthen analytical independence by rotating the analysts assigned to a particular issuer and enhancing analyst training. (4)

No mention here of the fact that their longstanding policies appeared to have not been up to the task of controlling for conflicts as far as anyone was concerned . . ..

  • For mortgage-related securities, for example, we significantly increased the credit enhancement required to achieve a ‘AAA’ rating and made it more difficult for securities to achieve high ratings. (4)

Thank goodness for that! Time will tell if these new assumptions adequately reflect the risk of default for complex MBS.

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