Raters got fees, didn't get it right in sub-prime

Hey, don't let off the rating companies so easily.

And imagine, that's what I heard after writing a headline that said, "Let's all blame the rating companies for everything.''

That's not enough, it seems. But what do you expect when estimates of losses in the sub-prime mess seem to climb almost weekly?

The New York Times carried a front-page story, on October 25, putting the figure at $400 billion, that was a lot higher than the $240 billion (adjusted for inflation) that the savings and loan crisis cost more than a decade ago.

There's still a lot of pain left. This is what happens when a bubble bursts and people look around for someone to blame. The real problem is cheap money and bankers giving away loans to bad borrowers.

Au contraire, said some readers. The rating companies played a very real role in the entire sub-prime mortgage securities collapse because they rated the securities packages.

What's more, the companies graded these particular creations with almost no historical data to base their ratings upon and with the active cooperation of the bankers who put them together. And of course they stood to gain handsomely, earning fees on the boom in new, rated transactions.

The rating companies have denied that any collaboration or improprieties took place. The Securities and Exchange Commission said that it is looking into whether issuers and bankers "unduly influenced'' ratings, chairman Christopher Cox told the Congress on September 26.

The basic idea with sub-prime-backed securities was that you could bundle a bunch of mortgages together in different batches and allocate all defaults to one batch, making the others AAA.

So you could set up a deal, say, where 20 per cent of the debt was subordinated and the rest gets a AAA rating.

Well, it hasn't worked out that way now. So the rating companies have been putting these things on watch or downgrading them, by more than the customary level or two.

"When an asset class rating regime collapses within a few years of introduction, it seems clear that a fundamental misunderstanding of the structure occurred,'' wrote Robert Fuller, a principal at Capital Markets Management, a financial consulting company in Hopewell, New Jersey.