S&P Strikes Back: Pulls Rating On $1.5 Billion CMBS Deal, Forces Goldman And Citi To Scrap Sale

In possibly the most important underreported news of the day, Goldman and Citi were forced to scrap a $1.5 billion CMBS deal after S&P shocking refused to rate the notes. This unprecedented development left GS and C scrambling. Per BusinessWeek: "The deal won’t close today as planned because S&P is reviewing its criteria for commercial mortgage-backed securities and can’t provide a rating, the banks said in a joint statement through Business Wire. “Ratings are a condition precedent to closing and settlement,” Goldman Sachs and Citigroup said in the statement. “Standard & Poor’s had previously informed Goldman and Citi that they were prepared to rate” the transaction, they said." End result: $1.5 billion CMBS deal scrapped as it doesn't have the blessing of a rating agency.

This means that anyone who thought that S&P would take the (much deserved) relentless criticism of its endless incompetence without retaliation, will be disappointed.

So let's get this straight: everyone bashes the rating agencies when they tell the truth (Europe), everyone bashes the rating agencies for not telling the truth, and being bribed muppets of the administration (PIMCO and the administration telling S&P how to scare America into debt ceiling submission), everyone bashes the rating agencies for being incompetent idiots during the credit bubble (no explanation needed there), and lastly, everyone still relying on every single word the rating agencies utter.

Here is a proposal: instead of targeting S&P and Moody's, who only do what they are told by Wall Street, by Obama, and by their clients, how about addressing all the incompetent, lazy and greedy "asset managers" who are "enabled" by S&P and Moody's and who choose to do no work or analysis of their own, and as such have no other benchmark other than a rating to go by, which is naturally completely wrong. But how dare anyone cast blame where it truly is deserved: at the heart of the corpulent, bald, and midlife-crisised status quo? After all Ferrari has to sell many more cars to meet its record quota.

More from BusinessWeek on the scrapped sale:

The ratings company, based in New York, won’t give debt grades to any new transactions that are based on the criteria, including the Goldman Sachs and Citigroup deal, it said.


The banks had overhauled the transaction after investors demanded more protection from losses amid concern that ratings from S&P and Morningstar Inc. didn’t accurately reflect the risks, people familiar with the matter said last week. They were seeking to sell securities totaling $1.5 billion, according to data compiled by Bloomberg.


Goldman Sachs and Citigroup boosted the buffer that protects AAA securities from loan defaults by increasing the amount of lower-ranked debt that is first to absorb losses, the people said. The so-called credit enhancement on the highest- graded debt was raised to 20 percent from 14.5 percent.


Banks issued $3 billion in commercial-mortgage backed bonds last week at the highest yields this year as investors pushed back on deal terms after debt crises in the U.S. and Europe roiled markets. Deutsche Bank AG and UBS AG cut a planned sale of commercial-mortgage backed securities by more than 36 percent to $1.4 billion yesterday, according to people familiar with the sale.


S&P ’’is reviewing the application of our conduit/fusion CMBS criteria in relation to the calculation of debt service coverage ratios,’’ the risk assessor said in a separate statement dated yesterday. ’’The review was prompted by the discovery of potentially conflicting methods of calculation.’’

In other words, the opportunity cost of S&P starting to do the right thing, i.e., reviewing its corrupt "business practices" with an eye to actually fixing them, is that members of the kleptocracy will be unable to invest other people's money in various components of the structured ponzi for a while, which also means that bonuses will be lower as the groupthink train will have to invest in other, riskier securities. Which also means that Wall Street is also about to turn on the rating agency scapegoating dial to 10 as our kleptocratic betters start being very concerned about where this year's multi-million bonuses will come from.


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