Bloomberg on the Nuclear Option: Rating Agencies ‘Masking Subprime Bond Risk’

In what has to be the most forceful major media story on the subprime credit crunch that I’ve seen yet, Bloomberg reporter Mark Pittman just lets fly:

Standard & Poor’s, Moody’s Investors Service and Fitch Ratings are masking burgeoning losses in the market for subprime mortgage bonds by failing to cut the credit ratings on about $200 billion of securities backed by home loans … That may just be the beginning. Downgrades by S&P, Moody’s and Fitch would force hundreds of investors to sell holdings, roiling the $800 billion market for securities backed by subprime mortgages and $1 trillion of collateralized debt obligations, the fastest growing part of the financial markets … Losses may rival the savings and loan crisis of the 1980s and 1990s. The Resolution Trust Corp., formed by the U.S. government to resolve the thrift crisis, sold $452 billion of assets at a cost to taxpayers of about $140 billion.

You know that when we start talking about the current mortgage market difficulties in the same breath with the RTC days, it’s time to phone Houston. (You know, as in we’ve got a problem.) The article nails the crux of the issue – the agencies are being overly cautious in their approach, because everyone knows what’s at stake. But analysts are growing increasingly concerned that a failure to act is doing more than postponing the inevitable — but making it worse:

“We’re taking action as we see it,” said Brian Clarkson, Moody’s global head of the structured products in New York. “We’re not doing knee-jerk responses.” Ratings companies are postponing the inevitable as defaults by subprime borrowers increase, investors and analysts say. Downgrades of CDOs “could finally force the hand of ratings-sensitive holders,” Morgan Stanley analysts led by Vishwanath Tirupattur in New York wrote in a reported dated June 28. “Our worry is that this selling would be very unbalanced, with no established taker of risk on the other side, even at current market levels.”

Be sure to read the entire story: it’s quite a departure from the usual Bloomberg coverage, and I hope they do more of it. And for a market that supposedly moves in slow motion, things seem to be picking up speed pretty quickly. Update: I’ve added a clip from Bloomberg TV to the Video Channel on this subject.

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