Moody’s Investors Service and Standard & Poor’s, the arbiters of creditworthiness, are losing their credibility in the fastest growing part of the bond market, Bloomberg reports.
The New York-based ratings firms last month gave a new breed of credit derivatives triple-A ratings, indicating they were as safe as U.S. Treasuries. Now, investors are being offered as little as 70 cents on the dollar for the constant proportion debt obligations, securities that use credit-default swaps to speculate that companies with investment-grade ratings will be able to repay their debt.
“The rating doesn’t tell me anything,” says Bas Kragten, who helps manage the equivalent of about $380 billion as head of asset-backed securities at ING Investment Management in The Hague. “The chance that a CPDO won’t be triple-A tomorrow is a lot greater than it is for the government of Germany.”
The legacy built by John Moody and Henry Varnum Poor a century or more ago is being tarnished by losses on securities linked to everything from subprime mortgages that the firms failed to downgrade before it was too late to high-yield, high – risk loans.