Standard & Poor’s, the credit rating firm, said that it would tighten the standards it used to rate bonds backed by subprime mortgages, a tacit acknowledgment that it might have been too optimistic about the housing market, The New York Times reports
At the same time, Standard & Poor’s said that it would probably downgrade bonds totaling a relatively small $12 billion, a move that surprised investors with its tone and timing. A rival agency, Moody’s Investors Service, followed suit later in the day, saying that it would downgrade 399 bonds with a face value of $5.2 billion and put another 32 bonds on watch.
Financial markets fell sharply on the news of possible downgradings. The S.& P. 500-stock index declined 1.42 percent, to 1,510.12, and the Dow Jones industrials fell 1.09 percent, or 148.27 points, to 13,501.70. Shares in Lehman Brothers, the biggest underwriter of subprime mortgage bonds, fell 5 percent, and Bear Stearns declined 4.1 percent.
The previous “forecast and our expectations were based on the best available information that we had at the time,” says Thomas Warrack, a managing director at S.& P. “That information has increased and significantly changed what our belief is for home prices through and including 2008.”
Analysts note that the expectations for losses have been steadily rising and if S.& P.’s worst case is realised most of the bonds below AA rating will be wiped out. A downgrading of AAA bonds could be significant because it would force large pension funds like Calpers to sell bonds.