MonkeyBusinessBlog: Why Exactly Are S&P and Moody's Still Around? And Why Are They Getting Paid to Rate ANYTHING?

Bloomberg News has the following article out today Morgan Stanley Plans to Turn Downgraded Loan CDO Into AAA Rated Bonds

Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.

Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf Capital Management LP, an investment firm based in Purchase, New York.

As far as we are concerned, God bless. Structuring in and of itself isn't a bad thing. It's only when "credit magic" is applied, like the kind that blew us a trillion new orifices, that we have a problem with. Although I have to say, this quote is a bit alarming;

A lot of banks and insurers “cannot buy anything but AAA,” said Sylvain Raynes, a principal at R&R Consulting in New York and co-author of “Elements of Structured Finance,” which is due to be published in November by Oxford University Press. “You’re manufacturing AAA out of not AAA, therefore allowing those people who have AAA written on their forehead to buy.”

Sylvain.....Buddy!! That's so 2006! Obviously you were speaking with your "thinking voice" by accident.

Anyway, I'm sure these repacks or re-REMICs are done well and the AAA is really AAA. Seriously. The best bonds get made now and I'm sure the default and loss severity numbers reflect reality. What really bothers me is why and the hell should S&P or Moody's get a dime for rating these bonds? Why are these f**kers still even around? Nobody in their right mind is going to buy these bonds BASED on these Fredos stamp that they are true AAA right? If they do then they do not belong in this game. With all the regulatory reform that gets talked about, if insurance companies, banks and pension funds are still renting their brains out to S&P and Moody's, then they need to get put in the box for a long time. If anything, the buyer should be calling in someone like Egan-Jones to independently verify the credit and paying them to do it, or split the cost with the issuer.

Some may be alarmed that the Street is back to structuring. That's not what gets me. What gets me is S&P and Moody's are still getting paid by the issuer to rate the bonds like none their craven and asinine behavior ever happened.