And now it’s time to play another round of credit ratings roulette, that wacky game where you get to commit investment suicide by basing your portfolio selections on those wild and crazy ratings publishers. Spin black and click! the Triple-A Treasure is yours. Spin red and bang! there you are standing in an endless line marked Destination Downgrade. Even the Federal Reserve Bank gets to play!
What makes this game so very exciting is that you never know which security will blow up in your face and which will get you a ticket to heaven. It could be one-in-the-same piece of paper. That paradox may be just one of many reasons that the hedge fund investor who suggested Lehman Brothers was a full-throttle short more than a year ago — David Einhorn of Greenlight Capital — says he’s shorting the stock of Moody’s Investors Service. (Wouldn’t it be interesting to have dinner with him and Moody’s supporter Warren Buffet, whom the WSJ today says sold 8 million shares, bringing the stake down to 16.98% from 20%?)
This week Standard & Poor’s wins the Road Runner Award for its most recent flip-flop on a set of securities that could affect a $7.6 billion deal while Moody’s gets the brass ring for a sucker punch to small business people. Let’s spin the barrel:
Those commercial real estate loans are triple-A after all. Issuer: Goldman Sachs. Time elapse between downgrade and upgrade: one week. The Financial Times blog can hardly believe it:
Let’s be very clear here: one week ago, according to S&P’s “independent judgment, testing and analysis” a clutch of Goldman’s CMBS transactions were deemed sufficiently troubled to merit deep downgrades. One week and some “refinements” later, and “class A-2, A-3, and A-AB commercial mortgage pass-through certificates from GS Mortgage Securities Trust 2007-GG10″ are back to triple-A.
Today, the Wall Street Journal says the ratings shift “unsettles” investors for a deal it explains is a benchmark in the industry. Give the Rupert Murdoch paper the understatement award for a move that is completely and totally baffling and roils a government program to sell commercial MBS to help troubled real estate companies raise more cash. CMBS in the facility must be triple-A rated. I elaborate on this in the next entry for Credit Rating Roulette:
About that asset deal benefiting from taxpayer subsidies? Bad news: The triple-A awarded six weeks ago may be a no-go. Issuer: CIT Vendor Finance. I guess Moody’s didn’t understand that CIT Group was in distress when it gave the $954 million issue the rating needed to be part of the Term Asset-backed Securities Loan Facility (TALF) which enables investors to borrow cheaply to buy the debt — thereby creating fresh cash to lend to small businesses. In a June 6 news release, CIT noted that not only was the debt its first TALF-eligible issuance (i.e., triple-A) it was also the first small ticket equipment lease TALF deal. The downgrade deserves special mention because a CIT bankruptcy is unlikely to affect payments from the debt which is backed by commercial equipment leases. But it may make it even harder for small business people to raise money — even without a CIT bankruptcy. Bravo!
And that concludes today’s rounds of Credit Rating Roulette. Please feel free to submit your entries, the more outrageous the better.