Was S&P right to call the bottom of the subprime collapse?
Posted by: in Stocks Money NewsFiled under: Products and services, McGraw-Hill Companies (MHP), Economic data, Recession
Bloomberg News reports that McGraw Hill Co.’s (NYSE: MHP) Standard & Poor’s (S&P) reportedly called the bottom of the subprime meltdown after estimating its toll at $285 billion, up from a previous forecast of $265 billion. It raised its estimate because of increased loss assumptions for collateralized debt obligations (CDOs). And it claims that, “The bulk of writedowns may have already been taken.”
Maybe, maybe not. S&P is not exactly objective about this. It was among the ratings agencies that caused the problem in the first place. How so? As I posted, back when the $6.1 trillion MBS market was booming, investment banks would pit rating agencies against each other to see which one would give a AAA rating to the toxic waste they were brewing. If S&P won the contest, it would get the lucrative fee from the investment bank.
S&P and its peers made good money by lending their credibility to the firms they were supposed to rate objectively in exchange for those fees. And when the MBS market began to collapse, the ratings agencies suddenly realized that there was no more new ratings business to be had. So they had to go plan B — trying to salvage their reputations by downgrading the MBSs that they had previously blessed. This reinforced the collapse of the MBS market.
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