Bloomberg is reporting S&P; will implement a “stress test” of subprime mortgages.
Standard & Poor’s said it may cut the credit ratings on $12 billion of bonds backed by subprime mortgages, prompting investors to dump the securities. S&P; is preparing to lower the ratings on 2.1 percent of the $565.3 billion of subprime bonds issued from late 2005 through 2006 because the housing slump is worse than the company anticipated. The announcement sent U.S. government bonds higher, the dollar lower and caused shares of financial companies to drop.
[Mish Comment: $12 Billion? 2.1%? Is this a joke? Hell, they ought to downgrade it all. The excuse might be that most of it was rated properly in the first place but realistically speaking we all know that to be another blatant lie.]
“S&P;’s actions are going to force a lot more people to come to Jesus,” said Christopher Whalen, an analyst at Institutional Risk Analytics in Hawthorne, California. “When a ratings agency puts a whole class on watch, it will force all the credit officers to get off their butts and reevaluate everything. This could be one of the triggers we’ve been waiting for.”
Almost 65 percent of the bonds in indexes that track subprime mortgage debt don’t meet the S&P; ratings criteria that were in place when they were sold, according to data compiled by Bloomberg.
[Mish comment: I stand corrected. They should only downgrade 65% of it. The rest should be put on credit watch. Seriously what’s with this pathetic downgrade of a mere 2.1% of the debt?]
S&P;’s review covers ratings on 612 pieces of bonds backed by subprime mortgages. S&P; will implement a “stress test,”of hypothetical scenarios to see how a bond will react.
[Mish comment: Excuse me but don’t we already know? What else would you call it when there are no takers on the ask at 11 cents on the dollar for Bear Stearns’ High-Grade Structured Credit Strategies Enhanced Leveraged Fund. The offer was a mere 5 cents. That’s not stress?!]
Critics of the ratings companies include Bill Gross, chief investment officer at Pacific Investment Management Co. Gross, who runs the world’s biggest bond fund, said last month that Moody’s and S&P; gave mortgage bonds investment-grade ratings because they were fooled by the “six-inch hooker heels” of the collateral backing them.
[Mish comment: Gee no mention of Mish. Then again I was not as colorful as to describe the ratings companies as hookers like Gross did. Then again I think that Moody’s and the S&P; knew full well what they were doing. If they didn’t then I think were incompetent. So what is it? Incompetent Hookers?]
“I’d like to know: Why now?” Steven Eisman, a portfolio manager at Frontpoint Partners in New York said on a conference call hosted by S&P; to discuss the possible ratings changes. “The news has been out on subprime now for many, many months. The delinquencies have been a disaster for many, many months. The ratings have been called into question for many, many months. I’d like to know why you’re making this move today instead of many months ago.”
[Mish comment: “Why now?” is very easy to answer. The blowup at Bear Stearns forced the issue. The ratings companies as well as Bear Stearns was hoping that this would blow over. Obviously it didn’t in spite of a multitude of fools yapping on CNBC how contained this mess is. Guess what? It’s still not contained and it is going to spread all the way to ridiculously rated grade A rated paper.]
Tom Warrack, an S&P; managing director, said it takes time for performance to show through.
“We have been surveilling these deals actively on a regular basis beginning in 2005 and 2006,” Warrack said on the call. “We believe that the performance that we’ve been able to observe now warrants action.”
[Mish comment: That is one of the most ridiculous understatements of the year. Your heels have to be colored brightly to make such a straight faced statement. Yes, “action is now warranted”, but it was also warranted last month, in April, In March, in February, and in January. And action is warranted on far more than a measly 2-3% of the issues.”
Fran Laserson, a spokeswoman for Moody’s, and James Jockle, a spokesman for Fitch, said they had no immediate comment.
Mish comment: This is all part of the strategy. If you can’t say anything good, then simply hide under a rock]
Huge Rally in Treasuries
By the way. That’s quite an island reversal in treasuries today.
Click on chart for a better view.
Imagine what might happen if and when 65% of the subprime debt is downgraded (as it should be). Imagine the flight to safety when it spreads to A rated debt. That’s when we will really see a “stress test“. If today was any indication, expect some fireworks.
Mike Shedlock / Mish/