Global Economic
Trend Analysis

Recent Posts

Wednesday, August 01, 2007 12:00 AM

Totally Discredited S&P

Mish Moved to MishTalk.Com Click to Visit.

On 2007-07-31 American Home Mortgage went under. After receiving multiple margin calls, it simply ran out of cash. Bear in mind that just a couple weeks ago it "reaffirmed" its $.70 dividend. Today it was lights out. The stock was halted on Monday and sank 90% when trading resumed today. See Liquidity Crunch at American Home and Unable to Borrow for a recap.

Dave Donhoff at No Bull Mortgage sent me the following earlier today.

AHM/ABC Kapputt
From our clearing firm's office this AM;
Subject: Notice: American Brokers Conduit closes it's doors

Our office received a phone call this morning from the Operations Manager of American Brokers Conduit in Las Vegas, Nevada. They have ceased doing business as of this morning. They have no money for wires on loans that have already signed loan docs. Please contact our Rep, Sanja and she will see that your files are returned to you so you can place your loans with other lenders.
Dave posted this comment on The Market Traders: "This is significant as the first MAJOR A-paper mortgage bank, with significant volume and a huge brokerage base, to go belly up."

AHM is out of money and out of business. It's the end of the line for American Home Mortgage. Judging from insider sales, it seems only one insider, John A. Johnston (president Western Division) saw this coming and bailed. A few of the losses are staggering.

Absurdity at the S&P

The S&P is sure right on top of things as this 3:42 PM headline shows: S&P Puts AHM Rankings on Negative Watch. Wow. What a bold, stunning, and timely move by the S&P. Let's take a look.
Standard & Poor's Ratings Services on Tuesday placed its "average" residential prime ranking for American Home Mortgage Investment Corp. on credit watch with negative implications.

The ratings agency also removed the home lender from its "select servicer list."

S&P believes the company's financial troubles could result in higher turnover in its servicing operation and hurt servicing performance.
How clever of the S&P to figure out that a company that has stopped doing business might experience "higher turnover in its servicing operation and hurt servicing performance". That is simply stunning analysis. Who else could have figured that out?

Now that American Home Mortgage has ceased doing business, I suppose it's safe for the S&P to remove AHM from its "select servicer list". Does (or did) the S&P have a relationship with AHM and if so what was the nature of it? (I don't know, I'm simply asking).

Rating Company Disclosures
  • Moody's: "Moody's has no obligation to perform, and does not perform, due diligence."
  • S&P: “Any user of the information contained herein should not rely on any credit rating or other opinion contained herein in making any investment decision.”
In Fitch Discloses Its Fatally Flawed Rating Model I asked a series of questions and still have no answers. Here they are again.

Questions To Ponder
  • How many billions of dollars will be lost because of absurd pricing models?
  • How can it be that an entire system of investment decisions are based on ratings that the ratings companies tell everyone not to use for investment purposes?
  • Were the ratings companies grossly incompetent or just foolish?
  • Will the disclaimers of the ratings companies hold up in court?
  • How long will it be before there be a court test of those disclaimers?
  • Why has only a minuscule portion of subprime debt (2.1% or $12 billion of a massive $565.3 billion of subprime bonds) downgraded. See Stress Test.
  • Are the ratings companies under pressure by the banks and/or the Fed to not rerate this debt?
  • Why is it that ratings companies are allowed to have outside business relationships with the companies whose debt they rate?
  • Did banks realize how absurd those ratings were but look away because of greed and the ease in offloading he debt to pension plans, insurance companies, and hedge funds out of pure greed?
  • Heck, did the upper echelons at the ratings companies themselves know their ratings model was flawed and look the other way out of greed?
  • How long before there is a government sponsored bailout of this mess? Hint small ones are starting already. See Please - No More Help! for a discussion.
  • How long before Bernanke starts cutting rates?
  • How high will gold prices rise when Bernanke starts cutting?
Here's the big question:
How big will the taxpayer bailout be?

Running Scared

Forbes has an interesting article out today called Running Scared.
On a day when another mortgage lender, American Home Mortgage, teetered toward liquidation, Standard & Poor's said the U.S. corporate bond market was officially speculative grade.

The big ratings agency said 50.7% of the corporate bond market is now rated speculative grade, the first time this has happened, marking a decade-long shift toward more aggressive finance strategies and the evolution of the leveraged finance market. S&P calls anything below BBB- "speculative," but most people just call it junk. These days, the market calls it scary.

S&P said the ratings mix of corporate bonds continues to deteriorate as firms borrow to buy back shares and make acquisitions, but the key factor to the deterioration is simply the sheer number of lower-rated bonds coming to market. Through the first half of 2007, 70% of 158 new issues were rated B, according to S&P research.

"It would not be surprising to see even more new speculative-grade entrants this year," wrote Diane Vazza, S&P's managing director of fixed-income research, in a note Tuesday. "Though firms may have to curtail leverage" to find buyers.
Without a doubt the S&P has made many huge mistakes recently in rating debt associated with mortgages. The models Moody's, Fitch, and the S&P used to rate mortgage debt are now thoroughly discredited. Worse yet is the fact that everyone of the rating companies refuse to downgrade all but 2%-3% of the worst mortgage debt. And putting American Home Mortgage on credit watch after it ceased business can only be considered bizarre.

The S&P says 50.7% of the corporate bond market is now rated speculative grade. What the S&P does not say is how much of the debt that is not rated speculative should be rated speculative. What the S&P also does not say is how much of the total debt it has rated is over rated.

According to Bloomberg "Almost 65 percent of the bonds in indexes that track subprime mortgage debt don't meet the ratings criteria in place when they were sold." The S&P is so freaking behind the curve in debt downgrades that a company has to cease doing business before being removed from its "select servicer list". So exactly who (and why) would anyone have any confidence in the S&P's ratings of damn near anything?

But whether or not the S&P, Moody's, or Fitch has the nerve to act, the credit markets won't sand still. American Home Mortgage sure proved that with a stunning 90% drop overnight.

Mike Shedlock / Mish

Last 10 Posts

Copyright 2009 Mike Shedlock. All Rights Reserved.
View My Stats