Subprime: Rating Agencies Were "Willingly Duped
By Martin de Sa’Pinto, Senior Financial Correspondent
NEW YORK InsideEDGE (HedgeWorld - Subscription Required) - July 27, 2007

EXCERPT

“ABS CDOs spreads are very wide in the secondary markets because ratings agency opinions lack credibility,” said Janet Tavakoli, president of Tavakoli Structured Finance. “In some cases, they have been willfully blind to the true risks of these securities.”

“The ratings agencies shouldn’t just accept broad information about the collateral underlying these securities, especially as this is provided by the issuers and investment banks, both interested parties in ensuring that the ratings across the CDO structure are as high as possible,” added Ms. Tavakoli. “They [the sponsors / issuers and investment bank underwriters responsible for due diligence] should prove [to the rating agencies] that they’ve checked appraisals and made a statistical sampling of the portfolio.”

This, she said, should include checks that mortgages have not been mis-sold, and that the homeowner can cope with the reset when the ‘teaser’ period comes to an end.” She notes that in the coming period of mortgage re-setting, teaser rates will in some cases be ratcheted up 3-400 basis points [Reset coupons vary, but LIBOR + 600 bps is common], which will lead to more foreclosures and further deterioration in CDOs on RMBS.

“But the instigators are those who lent money to thinly capitalized mortgage brokers,” continued Ms. Tavakoli. “These brokers would never have been in business without financing from the investment banks.”

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