Moody's Investors Service is placing on review for possible downgrade five classes of subprime triple-A rated RMBS tranches collateralized by failed mortgage lender, IndyMac.

A triple-A rating is deemed the most isolated from risk. In the capital structure of securitizations, downgrades of such a prime rating were unthinkable only two years ago. When the credit crisis began to unfold, the rating agencies often came out in support of the quality of triple-A ratings. Now, however, as the agencies continue to tighten criteria, cracks are beginning to appear in prime investment grade tranches.

The announcement is joined with the news that Moody's is downgrading 27 securities from eight subprime RMBS transactions, worth $117m and mainly junk, issued by IndyMac. According to the ratings service, the rating actions are the result of an analysis of credit enhancement relative to updated collateral loss projections. The annualized loss rate from one year prior to one year from now projections are taken into account in the review. The rating agency placed the tranches on review after considering the lifetime risk of loss, which is derived by weighting the two previous factors.

"Additionally, most effected transactions have, at some point, passed performance triggers and released portions of credit enhancement," clarifies the report.

Interestingly, the triple-A paper is not from recent vintages, but rather on mortgages originated in 2000 or 2001, around the same price such a property would get today, but presumably before underwriting and LTV standards softened considerably. (The two programs are: IndyMac Home Equity Mortgage Loan Asset-Backed Trust, Series 2000-C and Home Equity Mortgage Loan Asset-Backed Trust, Series 2001-C.)

Write to Jacob Gaffney.

Call me a geek, but my favorite daytime TV is a Congressional hearing into the causes of and solutions to this financial crisis. Who needs The View when you can watch some of the most ill-informed and selfishly motivated folks in American public life grandstanding for voters back home.

The hot ticket in June has been the House Oversight and Government Reform Committee’s inquiry into the BofA-Merrill merger, “How Did a Private Deal Turn Into a Federal Bailout?”

First, on June 11, the committee interrogated Kenneth D. Lewis, who had testified to New York Attorney General that nine days after the shareholder vote he discovered a $12 billion loss at Merrill Lynch. At that point, Mr. Lewis says he said to then-Treasury Secretary Hank Paulson that he was “strongly considering” backing out of the deal. According to Lewis, Paulson ultimately said that if BofA didn’t go through with the acquisition, Lewis and the Board would be fired.

If you missed it, the webcast is archived on the Committee’s nicely organized website, along with open statements, written testimony, and e-mails subpoenaed from the Fed. I haven’t tuned in again, but my strongest memories are of a sequence of elected representatives lauding Ken Lewis’ long distinguished career and deal prowess. Many expressions of sympathy and concern that so distinguished a banker was threatened by his regulators! Much solicitude re: Lewis’ need to delicately avoid using so harsh a term as “threaten” (he still has a job and they still regulate him!).

The committee wasn’t all pitching softballs to Lewis of course. Check out Rep. Dennis Kucinich’s (D-Ohio) opening statement, in which he suggests, with the support of documents and other evidence, that it was Lewis who was threatening to invoke the material adverse change (MAC) clause unless the government anteed up more bailout cash.

But the temper of the hearing is summarized in Chairman Edolphus Towns’ closing statement. Lewis’ testimony, he reminds, is just one side of the story.:

However, I do think it is fair to observe that a flawed financial regulatory process was at work in this case. We see closed door meetings, coded messages, motives questioned and private e-mails. Basically the regulators and the financial institutions seemed to be making up the rules as they went along.

Apparently, now that financial regulatory reform is up for consideration, lambasting the huge financial institutions is out of season. Populist pandering is over – the real business is on the calendar – blaming the regulators for the mess the financials have made.

BTW, we will never be treated to the ultimate spectacle – Congress investigating how Congress screwed it all up. Congress demanding to know of its own members and their staff how and why that whatsit legislation got slipped into that other whatsit legislation and what havoc it has wrought since. And so on.

Was He Pushed or Did He Jump? Part II

Which brings me to last week’s installment, the June 25 “grilling” of Fed Chairman Ben Bernanke. Recall that this event was prefaced by ranking member Darrell Issa’s statement the evening before ( backed with subpoenaed emails available on the site) that the Federal Reserve had both pushed Lewis to consummate the deal and then tried to cover it up by concealing its concerns from the OCC and the SEC.

My brief of the affair is that a string of Congresspeople from both sides of the aisle quoted from an array of internal Fed emails, interagency correspondency and previous statements by Lewis, Bernanke and others in an attempt to force Bernanke to reveal that he conspired with Paulson to threaten Lewis’ job if he didn’t go through with the merger. A more detailed analysis I cannot offer as I confess, even after hearing the thing twice, so many versions of time lines and he-said-you-said were perpetrated that I am more confused than if I were trying to make sense of a crime scene after Inspector Clouseau had been there. Suffice it to say, there is something there for everyone, pro- and anti-Bernanke, pro- and anti-TARP, pro- and anti-regulation, pro- and anti-Lewis.

Dramatic stuff. A showdown in the offing, with a lot of folks watching. This hearing was not relegated to a mere webcast, with a 4in by 3in video window and audio laughably out of sync, the stream finally freezing when server capacity is exceeded. This hearing was carried on cable and could be seen on giant TVs.

Several people got off message, addressing their complaints about the GM takeover, firing GM management, government ownership in general to Bernanke. I am always shocked and disappointed, but for me they’re the clowns, less interested in the gritty reality of markets and meltdowns and the mechanisms at work than in spinning an ideological narrative or posturing for the voters at home while voting with the lobbies and campaign funders. They are the heart and soul of the legislative and policy process, on both sides of the aisle and busy as bees in one Administration after another.

But no one went farther off base in that hearing than Rep. Marcy D. Kaptur (D-Ohio), who chose this moment to ask what the American Banker blog called the “Left Field question of the day.”

I think it might be worse than that – it was a serious attempt to implicate Ben Bernanke as the enabler of a nefarious conspiracy between BlackRock, BofA and Merrill to conduct the systemic, controlled fraud that is the mortgage securitization process and that has its roots in Blackrock CEO Larry Fink’s invention of “the subprime instrument” and sale of the first $1 billion to Freddie Mac in 1983.

The press has covered the soap opera aspects of the Lewis’ and Bernanke’s hearings quite well, but they have ignored Kaptur’s astounding contribution to the hearing record. Perhaps they dismiss her. After all, this is the same Rep. Kaptur who, at a January 2008 House Budget Committee hearing said to Bernanke, “Seeing as how you were former CEO of Goldman Sachs ….” Paulson interrupted to say she was confusing him with the Secretary of the Treasury. Unfazed, Kaptur asked if she’d gotten the firm wrong. Someone explained that was Paulson, so she asked where he came from. When Bernanke responded he’d been the CEO of the Economics Department at Princeton, she expressed satisfaction that the matter had been clarified for the record.

This relationship between BofA, Merrill and Blackrock has alerted Kaptur to the possibility that “there may be some clever foxes in the henhouse over there at the Fed as our nation proceeds to dig out” of this crisis.

Here’s the conspiracy: in acquiring Merrill, BofA also acquired a near majority share in BlackRock and the Fed gave BlackRock contracts to analyze some of the mortgage-backed securities “held by Fannie and Freddie on behalf of the government.” BlackRock is now in a position to cover its tracks, mishandling and mispricing the billions of dollars of troubled assets it sold to the government.

Having established these remarkable links, Kaptur asked point blank if Bernanke knew what year BlackRock’s CEO Larry Fink sold the first tranche of MBS to Freddie Mac.

“No I don’t know
“Do you think that’s important for you to know?” Kaptur in full-on Perry Mason mode.
“Do you know what other instruments BlackRock sold to the federal government” over the past few years
“No I do not”
“Well I would say its pretty important for you to know some of that. Because one of the difficulties with these instruments is you can’t unwind them. You cut them up into pieces, you sell them off, and given what we know about these pools of toxic assets that I ask if the Fed couldn’t be in collusion with Mr. Fink in covering up his own potential fraud by giving him the opportunity to shift the portfolios and have access to information that no one on this committee has access to in ways favorable to those clients he served and in ways favorable to that company today. How can we assure ourselves that is not happening?”

WOW! (I apologize if I missed a few connectives capturing that quote.) But there’s more:

… I am deeply concerned that the Fed itself is involved in the manipulation of the mortgage markets particularly the toxic assets that the public of the united states now owns.

Ben Bernanke in collusion with Larry Fink to cover up over 20 years of fraudulent activity. It makes possible collusion with Paulson to prevent BofA from invoking the MAC clause seem like a hang nail.

Really? First of all, BlackRock is an investment manager, not a securities dealer.

Second, Kaptur seems to be confusing Blackrock the investment manager operating since the late 1980s with BlackRock Solutions, a standalone subsidiary created at the start of this decade to capitalize on the money manager’s investment in reputedly state of the art security analytics, prepayment, credit and pricing models and information systems by forming BlackRock Solutions.

More realistic concerns (than a cover-up of past dealings) would be that information about Solutions’ customers portfolios might leak back to the investment managers or that the pricing of Solutions’ customers assets might be influenced by investment managers “axes.” BlackRock asserts that there is a tall “Chinese Wall” between the investment managers and BlackRock Solutions. If there weren’t, the Solutions customers would have sussed this out (say by reality checking their results against Citigroup’s Yieldbook, another dealer’s proprietary analytics, or a Solutions competitor’s systems), cancelled their subscriptions, launched high profile lawsuits and brought an end to the lucrative fee income stream passed up to the parent.

Unfortunately, Kaptur’s time was up. She had to wait until the last two minutes of the hearing to get another shot at Ben. Climbing right to the top of the precipice of free association, she strung the following assertions together:

“In 2004 the FBI warned the public and the administration mortgage fraud was heading toward an epidemic level in our country. The Fed did nothing. Now the Fed under your watch has hired Blackrock, a firm owned 49% by BofA headed by a man who invented the subprime instrument while at First Boston and then later at BlackRock traded billions of dollars of these securities to Freddie Mac and Fannie Mae over the last decade. I quote a sentence and will place into the record a quote from Bloomberg News, Fink’s rocketlike rise at First Boston was largely a result of his creative work with MBSs: the then novel idea of slicing and pooling mortgages and selling them as bonds. And he took his took his concept to Freddie Mac, where he sold the mortgage company’s board on a $1 billion package. That was just the beginning of it.

Actually, Kaptur was quoting out of context and omitted information that did not fit her twist on much more innocent facts. The article, “Blackrock is the Go-To Firm to Divine Wall Street Assets,” May 8, 2009, that she apparently quoted from is actually very favorable to Fink and his firm and quite clear on the difference between BlackRock’s investment management and analytic Solutions units.

Bloomberg actually says “Fink took his concept to Freddie Mac, where he sold the mortgage company’s board on a $1 billion package of what became known as collateralized-mortgage obligations, or CMOs.”

As a matter of fact, those CMOs carried Freddie’s guarantee and would have to have been backed by loans that met Freddie’s underwriting requirements (in 1983 loans were underwritten manually to traditional prime lending criteria). Characterizing this concept as the first subprime instrument is either a signal of incorrigible ignorance or a willful lie.

Freddie Mac bought the concept, not the securities. The bonds were sold to other investors. In that CMO, the underlying principal payments were time-tranched, creating short, intermediate and long-term bonds that would appeal to bond investors with different investment horizons and requiring a narrower repayment window than a pool of mortgages. This nifty invention dramatically expanded the market for GSE MBS just as the thrift industry was collapsing and the last banking crisis getting underway. Until the invention of the CMO, the market for mortgages and GSE pools was pretty much limited to and provided an important new source of funding for prime mortgage loans.

Stay Tuned

Committee Chair Towns closing statement suggests this show can run all summer. First, significant inconsistencies exist between Bernanke’s testimony, Lewis’ testimony and the Fed’s internal emails. Two, “It is still unclear whether Bank of America was forced by the Federal government to go through with the Merrill deal, or whether Ken Lewis pulled off what may have been the greatest financial shakedown of all time.” Finally, the Committee now knows that the SEC and FDIC played a role in the transaction and must testify as well.

Next up, former Treasury Secretary Hank Paulson has agreed appear before the Committee in July.

I can’t wait. Of course, I want to hear what Kaptur is going to ask the real former CEO of Goldman, but if people are going to go off topic, I hope someone asks – for me – if he really believed banks could sell their underwater toxic assets without destroying already shrinking capital, or if instead the whole plan was just a ploy to get a lot of money to rescue Goldman Sachs from its trouble CDS commitments with AIG.

And if someone is going to read media reports into the record, I can recommend two ferocious indictments by Matt Taibbi from Rolling Stone magazine: “The Big Takeover,” how Wall Street insiders are using the bailout to stage a revolution and “The Great American Bubble Machine,” how Goldman Sachs has engineered every major market manipulation since the Great Depression and is about to do it again in the carbon-credit market on stands now.

But, uh, that’s a rock & roll magazine. And Taibbi uses the expletives we are all thinking. Guess someone else will have to provide the fun.