Friday, June 29, 2007

Subprime Morgtage Mess & Enron

Ahh, the similarities between the two just keep coming. From Minyanville:

An important Bloomberg article this morning spills the beans on how the game is really played on Wall Street.

# Standard & Poor's, Moody's Investors Service and Fitch Ratings are masking growing losses in the market for subprime mortgage bonds by not cutting the credit ratings on about $200 billion of securities backed by home loans, Bloomberg is reporting.
# This is precisely the mark-to-model and conflict of interest issue Minyanville Professor John Succo first raised more than a month ago.
# Bloomberg has found that almost 65% of th bonds in the indexes that track subprime mortgage debt don't meet the ratings criteria in place when they were sold.
# So why aren't the ratings agencies downgrading the credit ratings?
# Downgrades by S&P, Moody's and Fitch would force hundreds of investors to sell holdings, Bloomberg says.
# Meanwhile, executives at S&P, Moody's and Fitch say they are waiting until foreclosure sales show that the collateral backing the bonds has declined enough to create losses before lowering ratings on some of the $6.65 trillion in outstanding mortgage-backed debt.
# That certainly sounds reasonable... until one realizes that both S&P and Moody's maintained investment-grade ratings on Enron debt until days before the company filed for bankruptcy.

Boy, that last point is really the kicker.

Does it make you feel the subprime mortgage problems are "well-contained"?

That mark to market model sounds like the perfect scam, er, I mean plan for me to leverage my Mad Magazine collection into a McMansion. I wonder if anyone will buy into it?
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