Okay, figure this one out. Standard & Poor’s has decided to re-assign triple-A ratings to several commercial mortgage backed securities that it slashed into junk territory just a week ago.
On July 14, S&P cut its ratings on billions of dollars worth of CMBS issued by Goldman, Credit Suisse and Wachovia, among others, as part of its ongoing review of its methodologies. Nor were the cuts minor – in one instance, S&P downgraded one class of a Goldman transaction from triple-A to double-B – deep in junk territory – and five others to triple-B minus from triple-A.
The downgrades effectively stripped these securities of their eligibility for the TALF, and sent ripples through a market that was already abuzz with speculation as to how S&P’s changed methodology would ultimately affect its rated universe of CMBS deals.
Because, as we noted in June,
Not only do the potential changes have implications for banks, which may find $235bn worth of AAA-rated CMBS suddenly downgraded, it also has implications for CDOs, and the Federal Reserve’s Talf programme, which requires eligible CMBS to have only triple-A ratings.So just what was S&P thinking when it announced on Tuesday that it had completely changed its mind about the creditworthiness of these securities?
According to the WSJ, which cited an email from S&P spokesman Adam Tempkin, the firm raised the ratings following the implementation of its “recently updated criteria.”
Would these be the same criteria that resulted in the downgrades in the first place?
From the WSJ:
S&P spokesman Adam Tempkin said in an email that the firm had received inquiries from market participants on how it applies losses in the AAA category “that prompted us to clarify our approach. In doing so, we are also introducing refinements to the approach.”
Mr. Tempkin said the ratings firm listens “attentively to all feedback from the market at any time,” and makes “changes when we think it makes sense analytically.”
“While we consider all feedback received, we use independent judgment, testing, and analysis in arriving at credit opinions and criteria development/implementation,” he wrote.
Let’s be very clear here: one week ago, according to S&P’s “independent judgment, testing and analysis” a clutch of Goldman’s CMBS transactions were deemed sufficiently troubled to merit deep downgrades. One week and some “refinements” later, and “class A-2, A-3, and A-AB commercial mortgage pass-through certificates from GS Mortgage Securities Trust 2007-GG10″ are back to triple-A.
This flip-flop – or as the WSJ put it, “stunning reversal” – does nothing to clarify S&P’s approach, contrary to Mr Tempkin’s assertion. Instead, it further confuses the market and does much to erode what little credibility the rating agency had left.
How’s that for feedback.
Related links:
Re-mimicking the crisis – FT Alphaville
Worries over systemic risk in CMBS – FT