S&P Commits Professional Suicide With Ratings Round Trip, Underlying CRE Remains Toxic Garbage

Tyler Durden's picture

Rare? Medium Rare? Medium? Well Done? S&P? Indeed, as the last peg in the gradation of burnt to a crisp, S&P smells completely done.  As in there isn't even left a shadow of a doubt that all S&P does is pander to the solicitations of whatever few remaining clients it may have, or, as the case may be, the U.S. government. Any credibility S&P, which one would be excused for confusing with Sycophantic & Pathetic, may have tried to salvage over the past 6 months has been gutted and left to dry after this most recent fiasco, which is the final straw on the McGraw-Hill subsidiary's expedited route to the NRSRO utterly discredited trash heap. From Bloomberg:

Standard & Poor’s backtracked on ratings cuts issued last week and raised the ranking on commercial mortgage-backed debt from three bonds sold in 2007.

The securities, restored to top-ranked status, had been downgraded as recently as last week, making them ineligible for the Federal Reserve’s Term Asset-Backed Securities Loan Facility to jumpstart lending.

S&P lowered the ratings on a class of a commercial mortgage-backed bond offering from AAA to BBB-, the lowest investment-grade ranking, on July 14. The New York-based rating company reversed the cut today, S&P said in a statement. In a related report, S&P said it adjusted assumptions on the timing of projected losses on the mortgages.

“It is a stunning reversal and certainly raises questions concerning the robustness of their revised model,” said Christopher Sullivan, chief investment officer at United Nations Federal Credit Union in New York. “It may engender further uncertainty with respect to ratings outlooks.”

Debt rated below AAA isn’t eligible for the Federal Reserve’s TALF. Investors sought $668.9 million in loans from the Fed to purchase so-called legacy commercial mortgage-backed bonds on July 16, the first monthly deadline to finance the purchase of the securities.

To recap: AAA to BBB- and back to AAA in one week. How many pieces of silver from disgruntled affected CMBS clients (or how many persuasive phone calls from the NY Fed) did it take for S&P to vomit in the face of the few remaining people who had been willing to give the rating agency one last chance at redemption? At this point, nobody cares, just as nobody will ever care again about any bullshit lettering this "rating" agency assigns as an indication of creditworthiness for any entity. For all intents and purposes, undertakers are now shoving S&P's shrivelled carcass deep into the bowels of the credibility morgue where it will remain forever entombed in an unmarked grave, with a final forensic assessment of professional suicide. As expected, nobody will shed any tears of mourning.

Amusingly, S&P's commercial real estate cowardice comes on the heels of a great report issued this morning by CreditSights' REIT analyst Craig Guttenplan titled "REIT 2Q Fundamentals: Protracted Pain Despite Gain." Craig writes:

  • CRE fundamentals for the core domestic property types continued their downward progression during the second quarter with vacancy rates rising and market rents declining as continuing job losses and other negative economic news weighed on both consumer and business sentiment.
  • Despite the weakening in fundamentals, REIT security prices have rallied strongly from the beginning of the second quarter to date on the sector’s re-equitization and deleveraging as well as the broader compression trade due to an improvement in overall credit market conditions.
  • The dramatic upturn in REIT equity during the second quarter underscores how operating fundamentals continue to be a secondary concern to the market’s primary driver of capital markets and liquidity.

And summarizes as follows:

Commercial real estate (CRE) fundamentals for the core domestic property types continued their downward progression during the second quarter. Vacancy rates rose and market rents declined on a national level across-the-board in retail, office, and multifamily as continuing job losses and other negative economic news weighed on both consumer and business sentiment. While this no doubt is negative for the CRE market, it is also not a surprise. CRE fundamentals notoriously lag the economic cycle with their severity and timing driven by how bad the downturn is and how long it lasts.

Surely this alone should be sufficient for S&P to upgrade every CMBS bond possible to AAA and even induct them into the "$1 million sponsor" AAAA club.

In an a dramatic example of what is known as fundamental analysis which in its many years of Simplistic & Parasitic existence S&P never quite got the hang of, Craig provides a very illuminating overview of what is likely the biggest cog in the REIT/CRE/CMBS wheels - expiring leases:

Going along with the consensus view for a near term bottoming of the economic downturn in late 2009 or early 2010, we envision an environment of deteriorating fundamentals that persists through sometime in 2012 or 2013. Given this expectation, we looked at the lease expiration schedule for our retail and office universe to see who is most exposed over this time frame. However, we would point out that the longer duration of these lease types (5-15 years) means that many expiring lease rates are not necessarily going to be significantly lower than when they were originally signed and in certain cases there may still be positive marks-to-market. That said, it is clear that significantly positive marks are no longer going to be the norm or there should at least be some moderation of positive marks relative to more recent periods. For those companies whose portfolios are currently fully marked, lower lease rates should impact revenues more immediately than those with still positive embedded marks.



Despite our expectations for a bottoming of CRE fundamentals in 2012 or 2013, we note that rental rates should remain at depressed levels for the subsequent few years relative to the recent boom period as fundamentals slowly strenghten. So even if a company has a small percentage of its leases rolling during 2009 through 2013, market rents in 2014 and 2015 will likely be lower than market rents in 2006 and 2007 as they recover from their lows. Additionally, while good diversification by most major REITs limits exposure to single tenants, tenant bankruptcies can speed up the lease expiration timetable and force space that was once considered occupied for the longer term back on the market. We note that disclosure around lease expirations can vary by company so our figures are based on what is most readily available in the companies’ quarterly financial supplements.

Needless to say, more reason to upgrade anything and everything that even remotely smells of CRE.

Zero Hedge's advice to Moody's: if you don't want to follow S&P into the NRSRO abbatoir, please run, don't walk to your nearest computer, purchase a CreditSights subscription, and read all of Craig's research pieces on REITs and CRE. Not only will you learn a lot, but you will hopefully avoid S&P's mistake. Alternatively, you can follow in their footsteps, clearing the path for Egan-Jones' unobstructed emergence as the only objective, unopposed, legitimate rating agency in the western world. We await your move with baited breath.

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Anonymous's picture

Wow. Just.. wow.

GoldmanSux's picture

Hey Warren...just sayin'

McGraw Hill= Business Week= $1

Washington Post= Newsweek= $1, leaving the newpaper = NYT $900M mkt cap.  WPO mkt cap 3.6 Billion.

Sometimes sellin' something aint a bad idea.

Anonymous's picture

Govenments the main 'buyer' of these, though. Mark to make believe makes everybody happy, gotta be money in that. Where is my fucking country?

Danz Gambit's picture

"Change we can believe in"  -  what a sad fucking pathetic joke that was

Anonymous's picture

you didn't believe him did you?

We were so desperate for change, we didn't stop to ask whether it was going to be positive change.

Bob's picture

We elected a brilliant, inspiring and well-meaning man who is in so far over his head on economic issues that it appears he can be lead by the nose by Wall Street without a clue.  Just keep giving the great Stand-Up rap, Barry . . .

Sad, sad, sad.   

Anonymous's picture

S&P lost my respect 28 years ago when the visiting Pres & Chair admitted, behind closed doors, that the WPPS rating was totally downgraded because of the politics and what Moody's was doing....

That on the merits, WPPS was still a AAA credit in as much as these munis held effectively a 1st mortgage on Grand Coulee Dam and the rest of the BPA.

In other words, they dropped their pencils and whetted their thumbs...

Which way the wind blows?

Anonymous's picture

i wish i could heap more contempt and contumely on s&p but it seems that durden vented my spleen for me. s&p was either incompetent in the initial downgrade or incompetent on the upgrade - it's no win for them....they are losers, twits, dildos all at the same time....

Anonymous's picture

why are you pretending there is such thing as 'reputation'? All the evidence suggests that this mythical force you speak of does not exist.

Bob's picture

It does seem that if it were relevant, the Big Three would be drowning in disrepute already.  Yet they have been installed by the Gov as the continuing authorities on risk . . .

Totally insane.   

Assetman's picture

My understading is that only 3 bond issuances are affected.  And how many did S&P downgrade last month?

Still, given the nature of these freshly "re-assumed" upgrades, I'm sure that others who weren't so lucky are wondering:

(a) who do I know that bondholder "X" knows (Tim Gaithner) that can help give me the same ratings boost?

(b) how much do I need to pay S&P for the pleasure of changing their assumptions on the timing of my bond's demise?

I mean, anyone can change their assumptions for a price now... can't they?


Stuart's picture

The fact that only 3 bond issuances were affected is not the point.   You just got delivered hard tangible proof of system aided and abetted fraud and evidence of what is now on the Fed's balance sheet is toxic crap.  The integrity of the TALF and other programs is now legitimately called into question.



Assetman's picture

Oh, I'm getting the point Stuart.

But isn't anyone curious what is actually contained in the 3 bonds, the parties involved, and the rationale on why S&P would change their assumptions for total toxic doom for these securities???

It's really easy to jump to conclusions (I suspect the same things as well), but I would rather ask S&P the questions and see them squirm while giving an answer.  And if they don't provide an answer, well, we can assume the worst.

I'm just wondering why nobody is asking the questions and placing S&P under the gun.

Anonymous's picture

They should just water-board the fuckers. That way Obama can close Guantanamo and still keep the torturers busy so they do ot write their memoires.

Anonymous's picture

The worst part is that in 10 years or less it'll all be forgotten and forgiven and these crooks will be right back at it - assuming the public ever even noticed at all.

Frank Partnoy exposed how the rating agencies work in "Fiasco", way the hell back in 1997. Since at least that date there's been no excuse.

Anonymous's picture

This won't be going on in 10 years. One way or another, the seeds being sown are guaranteeing that the mechanism that allows for this to occur (our "system") will not be around in anything like its current format, if at all.

I'm not chumbawumba, but I bet that guy is as prepared as he can be. (Hat tip to chumbwumba.)

Anonymous's picture

guys I live in former communist country in the middle of europe, I thought that we are way too far from normal markets, corruption etc. But what shit is in the USA, I could not believe. If someone told me two zears ago that all this will happen iun US, in terms of corruption and manipulation people will be in the streets..but nothing is happening.

Anonymous's picture

You do not understand that almost all Americans hold the dream of getting rich through asset inflation, especially real estate. George Washington was a land speculator. America exists essentially to inflate assets. There was always a distrust of this among the populace and for one brief moment in the 30's political power turned against it but that passed. The populace now understands that if we don't reinflate assets, all assets real and financial, then America is broke and broken-. Any and all lies going to the purpose if boosting asset prices is a patriotic duty.

erich's picture

Yep, don't take away the dream!  Realism is a bore!

Anonymous's picture

da nije mozda Hrvatska, Srbija ili ne daj boze BiH ? if not sorry for asking ... i was just curious to see if ANYONE from my former country ( Croatia ) reads this blog, or has any interest in financial world ...

Quantum Noise's picture

Wow... you would think that even if all their employees were bipolar they would have enough of them to better smooth out the output.

Can I get a job at S&P? It seems like a pretty cool job to me, since this indicates that they rate bonds on the weather, not after any sort of economic analysis. I bet their working day is from 10am to about 10:03 am.

Anonymous's picture

Apocalypse Now- Let's call this what it is - a protection racket. As a corporation you pay for protection in the form of purchasing a credit rating. So much more civilized than a thug with a baseball bat.

Gordon_Gekko's picture

I think more of it as a convenient arrangement for the "favored parties" to sell whatever trash they want to the unsuspecting public by paying a small fee and getting it stamped "AAA"

Anonymous's picture

The FT has a headline today:
"US rating agencies escape overhaul
Plan aims to reduce conflicts of interest"

The downgrades were a conflict of interest (with the interests of the Treasury and banks).

Anonymous's picture

All the rating agencies are a sham. They are just a government created monopoly to sell trash to whoever is stupid enough to trust them.

Anonymous's picture

Did they move Wall Street to Mayor Dailey's Chicago when I wasn't watching? Don Barak anyone?

Gilgamesh's picture

Actually, no one had to move anywhere.  If anyone doesn't know where S&P's HQ is, take a look.  Then refer back to the previous discussion about which important tenant happens to reside in the same building.  And who their neighbors are on two sides (and various others within spitting distance).  But I'm sure that proximity has Zero to do with anything.

Anonymous's picture

del fisco's steakhouse???

Anonymous's picture

Beware of anything rating AAA by S&P...good chance it's toxic crap.

lizzy36's picture

You know the worst thing about this? nobody cares.

They are not even trying to cover up their blatant fraud anymore.  Why would they?

A bit of outrage, but seriously it is getting harder and harder to get it up for outrage over these things.

Who amongst us didn't expect S&P to capitulate on this issue so those CMBS in question would become TALF eligible.  It was never as question of "if" only "when".

I am not sure what the end game is  here. Self interest and preservation of the good ol' days in perputity (while the taxpayer bends over so frequently they are rendered incapable of standing erect)?


Gilgamesh's picture

I think the TALF as it stands now is set to expire is Sept (maybe Dec?), and the application approval process takes months.  In the middle of the intense lobbying to get this extended, it seems that there might have been just a hint of pressure to move up the timetable on getting these back to AAA.



lizzy36's picture

I beleive TALF for CMBS was extended out for 3 years.

Anonymous's picture

Kick that can down the road. But the real question to me is, as the can gets heavier and heavier, how far down the road does the can move when kicked? Probably not far. We should HOPE for a Japan-style lost decade or two. That would be a positive outcome for the science experiment currently being conducted by the Fed and the Feds.

Ruth's picture

Love Egan-Jones, like a David against Goliath.  Yesterday in Congressional Oversight it was obvious Moody rep had no credibility.  Our only hope is Neil Barofsky, the Special Inspector General, which supposedly has many investigations going on.  I hope he prosecutes and gets the ball rolling the other way.  Does anyone know much about him?

niamor's picture

Heck! What are they on about.  Talk about trying to fool all the people all the time.


-- TD great piece, although I dare to say the writing is a bit errr. lyrical... even bordering on the self indulgent:  "For all intents and purposes, undertakers are now shoving S&P's shrivelled carcass deep into the bowels of the credibility morgue where it will remain forever entombed in an unmarked grave". I had to read that one 3 times to figure out what you were on about!!

Hmmm on second thoughts, don't change anything.  That's part of the ZH brand now

erich's picture

Has anything like this ever happened?  They are not even stating it was a technical error, they changed their assumptions.

curbyourrisk's picture


The same piece of $hit companies that caused this mess will bring us full circle...to repeat the same mess.

End the ratings agenices now!!!!!

aus_punter's picture

it would be funny if it weren't so sad

as long as fixed income buyers remain unable or unwilling to do their own work, sadly, the ratings agencies will always exist

Anonymous's picture

the vast majority being unwilling. they only willing to blame everyone else when it hits the fan.

Anonymous's picture

Dear S&P and Moody's:

Rot in hell dirtbags

Bubby BankenStein's picture

There is a simple and insidious explanation:

Black Market Credit Enhancement

This is a replay of the AIG caper, except this time the taxpayer is writing the insurance.  The US Gov. is effectively writing CDS to protect the debt, and the Taxpayer pays the premium and takes the risk of loss.  Brilliant!

The rating agencies have been told to play.

Undertaker's picture
Undertaker (not verified) Jul 22, 2009 8:22 AM

It's been pretty busy down here at the morgue but I'll see if I can fit them in.

Anonymous's picture

didnt the treasury hire an outside adviosory firm to value this stuff...or are they just acting like a good poodle consultant