2007 Deja Vu As Bond Issuers Game Rating Agencies Once Again

Tyler Durden's picture

With home prices rising at near-record paces in SoCal, corporate debt yields at record-lows, equity markets surging at near-record rates, and high quality assets dwindling by the minute under the heel of a central bank jack boot; it is perhaps no surprise that investors have switched from finding leverage through the balance sheet (i.e. crappy quality firms) to finding leverage through the instrument (i.e. structured credit). The trouble this time is that yields (and spreads) being so low, the creators of the new-normal ABS, CDOs, and CLOs have to stoop to the old tricks to make their money (as we noted here). As Bloomberg reports, bond issuers are once again exploiting the credit rating agency pay-for-performance business model to create "high-quality" collateralizable assets from utter garbage - such as auto loans and office buildings.


Via Bloomberg,

Deja Vu all over again:

Almost six years after the start of the worst financial crisis since the Great Depression, bond issuers are again exploiting credit ratings by seeking firms that will provide high grades on debt backed by assets from auto loans to office buildings considered inappropriate by rivals.


Fitch Ratings isn’t grading a deal linked to a Manhattan skyscraper after saying investors needed more protection.




The securities won top grades from Moody’s Investors Service and Kroll Bond Rating Agency Inc.


Blackstone Group LP’s Exeter Finance Corp. got top-tier ratings from Standard & Poor’s and DBRS Ltd. in the past 15 months on $629 million of bonds backed by car loans to people with bad credit histories, even as Moody’s and Fitch said they wouldn’t grant such rankings.

Issuers (and structurers) have more room to manipulate than ever before thanks to the unintended consequence of regulation:

U.S. regulators doubled the number of companies sanctioned to assess securities to 10 since 2006.




"Imagine the pharmaceutical industry having six FDAs, all competing to approve drugs," - "everyone would be dead."

But who is to blame?

Issuance of bonds linked to loans and leases are staging a comeback as the Federal Reserve’s unprecedented stimulus, including a pledge to keep benchmark interest rates close to zero into a fifth year, pushes investors into riskier assets.


Banks have arranged $31.5 billion of commercial mortgage-backed securities this year with issuance poised to climb 50 percent from 2012 to $70 billion, according to Credit Suisse Group AG.


Issuance of bonds tied to subprime auto debt of $7.7 billion this year compares with $5.7 billion in the first four months of 2012,

A Specific Example...

Fitch said yesterday in a statement that it was asked not to rate a transaction linked to a $782.8 million loan on the Seagram building at 375 Park Avenue in New York after determining that investor protections were insufficient for top grades.




The mortgage on the tower, designed by Ludwig Mies van der Rohe, allows the borrower to take on higher levels of debt on the assumption that the building will generate more cash in the future. The deal, rated AAA by Moody’s and Kroll, assumes $74 million of income from the property, compared with $54 million as of 2012, according to Fitch.


So-called pro-forma lending was common during the property market boom leading up to a record $232 billion in commercial-mortgage bond sales in 2007, sparking a surge in defaults when properties failed to meet those expectations. The type of underwriting was a “major reason” behind ratings cuts on AAA securities issued from 2005 through 2008, Fitch said in its statement.


Kroll's defense (crystal ball like):

“We tried to take into account the property’s performance and the context of its market,”

and finally summing it all up:

“Nothing’s really changed” in the ratings business, David Jacob, former head of structured finance at S&P

but some are actually trying to stop this:

“My plea today is that you take action,” Franken, a Democrat from Minnesota elected to the Senate in 2008, told participants at the SEC roundtable today. “If we maintain the status quo we are leaving ourselves far too vulnerable to another catastrophe.”

It seems our recent note - from bust to bubble with no recovery in between is increasingly appropriate...


But irony of ironies given the above story in which Kroll is willing to rate on apparently pro forma growth expectations and Fitch isn't, Bloomberg notes...

Jules Kroll, CEO of Kroll Bond Rating Agency, says largest credit rating firms are putting profits ahead of accuracy, "They’re selling themselves out just as they did before," adding that, "If you want to see the next tsunami, wait for outcome in high yield and watch what washes up on shore"


and at the same roundtable, Douglas Peterson, president of S&P Ratings Services, wouldn’t comment on whether market is in “bubble,” saying prices reflect excess liquidity

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EscapeKey's picture

Who is stupid enough to buy these?

Stoploss's picture

"assumes" = ass u me, always has always will.

Should be replaced with the word: lazy.  Assumptions are for fools.

Freedumb's picture

Just a guess.... A few german Landesbanks, CALPERS, State St., the Fed, and the BOJ. They'll probably be sold out on day 1.

Winston Churchill's picture

Desperate  pension funds worldwide.

Same as last time.Only Ben has made them far more desperate.

Perfect setup for your 401k to be invested in 'safe' UST's.

Kills two birds with one stone.

Mr. Saxby's picture

The dumbest of the dumb, of course. 401(k) mutual funds and money market accounts.

Shizzmoney's picture

You know what is more productive to society than a "bond"?

Taking that bond, setting it on fire, and making smores with it

css1971's picture

Bonds are fine. The problem is buying bonds from people you don't know if you should trust and therefore handing responsibility for making the decision over to a third party who's being paid by the bond issuer...

i.e. The problem are bond buyers being total morons who deserve to lose everything.

q99x2's picture

I spoke with a realtor here in SoCal last week that said home prices are climbing so fast they are having difficulty appraising them.

Bay of Pigs's picture

To say Americans have short memories on this is being way too nice.

We are a nation of financial fucking retards. 


CCanuck's picture

Why would you be-little retards that way??

Every "retard" I know wants to work and contribute at some level.

Most Americans just want a free phone, and a platform to be a Doochbag!

JR's picture

The housing trends are entwined with the dramatic changes in Hispanic populations. You can't discuss what's happening in housing now without connecting it to the massive increase in Hispanic population. That's a key part of wealth transfer in America.

The 2012 estimated population of the State of California is 38,041,430; the number of White-persons-not-Hispanic (the Census Bureau definition of white people) living in California now represents only 39.7% of the population. It will be U.S. taxpayers, i.e., White-persons-not-Hispanic, who will once again be forced to pick up the subprime mortgage tab. That is the purpose of the 1965 U.S. Immigration Act --  the destruction of whites as a majority in America and the plunder of their standard of living.


"Have Hispanics become the majority ethnic group in Southern California?"

"The Hispanic population now represents the largest ethnic group (40.57%) followed by White (38.85%), Asian (10.19%) and African American (7.30%). The white population represents the largest ethnic group in Orange County (51.26%), Riverside County (51.04%), and Ventura County (56.75%). The Hispanic population is the largest ethnic group in Imperial County at 72.22%. Los Angeles and San Bernardino Counties have no majority ethnic group."


Los Angeles County, California (Wikipedia)

Non-Hispanic whites were 2,728,321 (27.8%) of the population.[14]Hispanic or Latino of any race were 4,687,889 persons (47.7%); 35.8% of Los Angeles County is Mexican, 3.7% Salvadoran, 2.2% Guatemalan, 0.5% Puerto Rican, 0.4% Cuban, 0.4% Honduran, 0.4% Nicaraguan, 0.3% Peruvian, 0.3% Colombian, and 0.2% Ecuadorian.[15]

San Bernardino County, California (Wikipedia)

Hispanic persons, 45%;  White persons not Hispanic, 32.7%; Black persons, 9.6%;  American Indians and Alaska Native persons, 2.0%; Asian persons, 6.9%; Native Hawaiian and Other Pacific Islander persons, 0.5%; Persons reporting two or more races, 3.3%.

As for the city of San Bernardino, San Bernardino is the poorest city of its population size in California, and the second poorest in the US next to Detroit, Michigan.[9] %). The Non-Hispanic Whites were 20.0% of the population in 2010,[16] compared to 65.6% in 1970.[17]


Debt Slave's picture

+1000 JR.

Makers and takers. We can see it. Soon it will be common knowledge.

NobleSavage's picture

Central Banks need to "diversify" their portfolios. But, they are better off buying Detroit in order to spark the Manufacturing Renaiisance.

Smuckers's picture

AAA :  Assets Are Absent

EARLPEARL's picture

a fool and his money are soon parted....what difference does it make as to who gets the fools money???

Headbanger's picture

Oh I hate that deja vu all over again.. Unless of course it's with the hot blonde babe I nailed in high school in my 66 Goat.

PontifexMaximus's picture

I just read the headlines, we have to thank them, offering new material to the market, what to worry about, everyone is flush of liquidity. So hail them!

Tsar Pointless's picture

I'll mention this to my fellow Pittsburghers on the bus home tonight, and see if they are as aware of this as they are Game 1 of the NHL semifinal round matchup between their beloved Penguins and the Ottawa Senators.


I'm sure they will be. Total sarcasm there, yes.

Doubleguns's picture

The elite got away so cleanly last time so wash, rince and repeat is gonna work again. and again and again till all the money is sucked out of this country. 

pauhana's picture

Jeez, did you really have to quote Al Franken?  Really?  Al Franken?  Kinda stopped reading at that point.

Toolshed's picture

Nice to see the pidgin screen name, but what bra? Why you no like braddah Al? Cuz he howlie or what? Where the good kine buds stay? I no have. Sigh.

pauhana's picture

Hey, bra - I no da kine respect Al.  No ees he haole.  He lolo, das all.

prains's picture

this time it's dippherant!

DormRoom's picture

Party like it's 2007.  Oh wait--

miker's picture

You've got lots of folks in this country that only know how to do one thing.....develop, borrow, financialize, etc.  The music is playing again thank to Bernanke and the moral hazard has been blown away.  It will pop again.  Wonder if the little guy will take it in the a.. again?

JJ McApe's picture

i see the main problem in corporations not hiring and only raising prices to maximise profits.

here in the eu they removed some weight control laws or something. so you get the same product but with 30% less in the package if you know what i mean.

f.e. you buy a 3-pack of snickers but the bars weight not 100g like before more like 75g... this shit goes on everywhere. if you calculate this stealth inflation into the real price increases you got like 50% real inflation if you go to the supermarket.

and stock markets are going up... thanks nestle, kraft, and co... for robbing us blind :)

Debt Slave's picture

Always, and he will vote approval of it as always, like he did in 2008.

Whiner's picture

Same guys sitting in same chairs doing the same thing that brought you 2008. An entrenched and growing fraud system with Fed buying monthly MBSs. It's all they know, plus knowing nobody is going to jail- that's already been conclusively establish. So rave on big debt-fraud machine. I am ready for the coming barter system.

SKY85hawk's picture

I'm surprised you don't mention BlackRock's $multi billion Rental Realty bonds and who rated those MBS.

Remember they were gonna fix up REOs and rent them, profitably, in 60 days?

$2 to 3 billion by BlackRock, no idea who else is doing this plan.  They’ve admitted they can’t rent these houses profitably.  So, they’re SECURITIZING the house’s mortgages into MBS that will be sold to other Investors. 

Source:: http://www.zerohedge.com/news/2013-04-03/guest-post-crowded-trade-buy-rent-housing




are we there yet's picture

If Detroit and Cyprus issued a joint bond  with a picture of George Soros to inspire confidence it might sell.... for a dollar as a gag gift.

I have a $1000 US treasurey bond with a picture of Einstein on its front to inspire confidence. I also have an older US treasury with a picture of Hellen Keller to inspire confidence. I do not think any US treasury has Obama on it.

Debt Slave's picture

If you buy their paper you deserve to lose your money. If you make money, then bully for you. But there is no way that I would play this game.