Wednesday, December 30, 2009
Vampire Squid Strikes Again!
"Back two years ago when the mortgage meldown was heating up, we wrote an article called 'Junk Mortgages Under the Microscope' (see fortune.com) dissecting a particularly wretched mortgage-backed securties issue peddled by Goldman Sachs [GSG]. ... We thought this was a cautionary tale--but it's turned into a horror story. All the tranches of this issue, GSAMP-2006 S3, that were originally rated below AAA have defaulted. Two of the three original AAA-rated tranches (French for 'slices') are facing losses of about 90%, and even the 'super senior', safer-than-mere-AAA slice is facing losses of 25%. ... Our tale begins in April 2006, when [GSG] sold $494 million of securities to institutional investors seeking yields somewhat above those that were available on US Treasuries or high-rated corporate bonds. ... In our case, borrowers' stated equity in their homes averaged less than 1%--0.71%, to be precise. Even that was doubtless overstated because a majority of the mortgages were low-documentation and no-documentation. Despite these problems, the formulas used by Moody's and S&P allowed [GSG] to market the top three slices of the security--cleverly called A-1, A-2 and A-3--as AAA-rated. That meant they were supposedly as safe as US Treasury Securities. ... As of Oct. 26., date of the most recent available trustee's report, only $79.6 million of mortgages were left, supporting $159.5 million of bonds. In other words, each dollar of bonds had a claim on less than 50 cents of mortgages. ... Now to the investment lessons: The first is, Don't put your faith in rating agencies, even though some branches of the federal government, including the [Fed], use ratings to determine whether certain securities qualify as collateral under federal loan programs to financial institutions. ... The second lesson is: No matter how fancy the name is on the offering statement--[GSG], the calumny being heaped on it lately notwithstanding, is still Wall Street's alpha outfit--you're on your own if the issue heads south", Allan Sloan and Doris Burke at Fortune, 21 December 2009.
I commented on this issue on 29 October 2007, link: http://skepticaltexascpa.blogspot.com/2007/10/how-stupid-are-rating-agencies.html. Imagine, Vampire Squid is Wall Street's "alpha outfit". What an indictment!