S&P Analyst: “It Could Be Structured by Cows And We Would Rate It”

Barry Ritholtz at his blog, The Big Picture, has the information on what analysts’ ratings are really worth.  I have reproduced the story from the The Big Picture blog below, but please feel free to visit Mr. Ritholtz’s blog as well – it is an excellent resource for anyone interested in a strong technical analysis of the markets:

S&P: We Knew Nothing! Nothing!

Posted by Barry Ritholtz on Wednesday, October 22, 2008 | 03:58 PM

in Credit | Derivatives | Legal | Really, really bad calls

Repeat that headline in your best Sergeant Schultz voice for maximum effect. Then read the testimony of Deven Sharma, President of Standard & Poors in the same voice:

S&P is not alone in having been taken by surprise by the extreme decline in the housing and mortgage markets. Virtually no one — be they homeowners, financial institutions, rating agencies, regulators, or investors — anticipated what is occurring. Although we highlighted to investors looming issues we saw in the housing market as far back as early 2006, the reality remains that in publishing our initial ratings on many of these securities we never expected such severe, negative performance in the housing and mortgage markets. There is no doubt that had we anticipated the extraordinary events that have occurred — and we did not — we would have utilized different economic forecasts and would not have assigned many of the original ratings that we did . . . (emphasis added)

You decide: Perjury, or mere ignorance?

A significant number of economists, strategists, academics and blogs all forecast the housing disaster way way in advance. Not only me, but Nouriel Roubini, and James Grant and John Paulson and Jim Rogers and Peter Schiff, and lots of sites: Calculated Risk and The Mess that Greenspan Made and ML-Implode and Mish and Housing Doom and NJ Real Estate Report and iTulip, and, well, you get the idea.

But it turns out that two S&P analysts, April 2007, via an IM conversation, were also discussing it:

Rahul Dilip Shah: btw: that deal is ridiculous

Shannon Mooney: I know right … model def does not capture half of the risk

Rahul Dilip Shah: we should not be rating it

Shannon Mooney: we rate every deal

Shannon Mooney: it could be structured by cows and we would rate it

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IM Conversation via House Oversight Committee

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Source:
TESTIMONY OF DEVEN SHARMA, PRESIDENT, STANDARD & POOR’S
BEFORE THE COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM UNITED STATES HOUSE OF REPRESENTATIVES
OCTOBER 22, 2008

http://oversight.house.gov/documents/20081022125052.pdf