In Part One I looked at the fact that at last the ratings agencies are starting to fail in their attempt to get law suits against them for according Triple A status to rubbish asset backed securitizations, thrown out at the preliminary hearing stage. There is still a long way to go before these cases come to court proper, and in all probability they will get settled out of court anyway. But as I pointed out in Part One, whatever happens, the success of the action brought by Abu Dhabi Commercial Bank and fellow investors against Moody's and Standard & Poor's, has released a whole raft of internal ratings agency emails and other internal communications into the public domain. These have been submitted in evidence to the court and are available for download from the Thomson Reuters site.
They make for an absolutely riveting read. What they seem to show is the ratings agencies desperate to collaborate with the banks in order to be able to award Triple A status to SIVS, despite the clear knowledge that much of the underlying sub-prime mortgage collateral was extremely dubious. What appears to be the case is that when a new ratings model, designed specifically to be more appropriate for evaluating low quality and sub-prime mortgage collateral, produced results that would have jeopardized or flatly negated the ratings agency's desire to award Triple A status, staff were ordered to go back to using the older, inappropriate model, in order to secure the "right" results.
The Cheyne SIV had significant exposure to sub-prime and required a new model and new data to analyse possible outcomes. The plaintiff's cite a "senior Moody's analyst" on Cheyne saying that the Triple A residential mortgage backed securities assets "did not have a track record [in a liquidity crisis] ... and also cite a "senior Moody's executive" as admitting that "there wasn't enough historical data on new variants of adjustable rate loans to allow for reasonable predictions of performance". "When he told his supervisors at Moody's that using the new Moody's model would result in downgrades to bonds, the Moody's analyst was instructed to use the old model."
All this is pretty damning, but my absolute personal favorite is a comment, said to be from an S&P executive responding to pressure from Morgan Stanley to "grandfather" existing deals (ie use older, inappropriate models and data used on past RMBS securitizations for RMBS SIVs with higher sub prime content). The executive wrote to others at S&P: "Lord help our (...) scam... this has to be the stupidest place I have ever worked at."
Another analyst complained "It could be structured by cows and we would rate it." Still another communication said: "The ratings agencies continue to create an even bigger monster - the CDO market. Let's hope we are all wealthy and retired by the time this house of cards falters."
Of course, these are the edited highlights chosen by plaintiff's lawyers from a vast collection of emails and internal correspondence that Moody's had to hand over. One could almost certainly produce a very different and much more ratings agency friendly set of snippets from that same universe of emails if one wanted to take the other side of the argument. But the picture that emerges is of an agency far too concerned with pleasing its client and retaining ratings business at the expense of doing a proper, impartial and competent job assessing the SIV. None of this is new, in the sense that it is now absolutely taken for granted by all and sundry that the ratings agencies have to bear a large share of the blame for the toxic RMBS products that underpinned even more toxic financial innovations such as the CDO squared instruments that really blew gaping holes in bank balance sheets once they went smash in the crash. But what is new is the sense that at least a number of ratings agency staff were fully aware that what was happening was "inappropriate"... This takes matters dangerously close to fraudulent behavior rather than simple incompetence and opens the door to the possibility of some really gargantuan punitive damages at some future date. Given the scale of the losses that many banks who bought into RBMS products in one shape or form experienced, the final bill facing the ratings agencies promises to be of eye-watering dimensions.
Further reading on ratings agencies:
- Abu Dhabi Commercial Bank blows the lid off ratings agency "independence"- Part One, Anthony Harrington
- More ratings agency fun, more market crashes, by Anthony Harrington
- What Would a New Bretton Woods Mean for the IMF? by Augusto Lopez-Claros
- Are ratings agencies brewing up their own destruction or just stirring the pot? by Anthony Harrington
Tags: ABS , Abu Dhabi Commercial Bank , asset backed securities , CDO , Cheyne SIV , e , Moody's , ratings agencies , Standard & Poor's