Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

Rating Agencies

Those Who Bury History Are Doomed to Repeat It

Back during the last significant mortgage crisis (S&L liquidations by Resolution Trust Corporation) in the 1989-1991 period, Lars Toomre followed Lew Glucksman and Larry Fell from Lehman Brothers to Primerica where he headed what then was known as Smith Barney's mortgage-securities trading department. As Lars has described since, it was much akin to moving from a battleship to a small destroyer in the midst of perhaps a once in a century cyclone.

At that point, the Capital Markets division of Smith Barney was not prepared to take on tens of millions in positions, let alone the hundreds and even billions positioned by its larger broker/dealer brethren. As a result, there was a significant effort undertaken to upgrade the mortgage areas procedures, systems and people. Aldon Hynes, for instance, quickly joined Lars where he single-handedly assured that the first LAN was installed on the trading floor and each trading professional had a connected computer on his desk. With the demise of Drexel Lambert in the early months of 1990, several mortgage researchers joined Smith Barney, including Chris Schorin and Linda Lowell. Although we subsequently went in different directions, their research then was and has continued to be quite good.

On April 9th 2008, Linda Lowell published a piece entitled Viewpoint: Those Who Bury History Are Doomed to Repeat It. Her "perspective – that's one with over 20 years in MBS/ABS research — is the fact that, by abandoning the Great Depression as the worst-case benchmark and shifting to models based on contemporary mortgage performance, the ratings companies helped create the current house price crash and credit squeezes that are routinely compared to the Great Depression." This article is a great review of how the rating agencies came to create mortgage credit rating scenarios and is well worth reading.

Some readers may recall that Toomre Capital Markets LLC ("TCM") addressed the issue of the rating agencies in the post Bond Rating Agencies Get Subpoenas. The reader might want to reference both articles as they reflect on the UBS structured product research report Linda Lowell references at the end of her article to answer the question "Which rating company's ratings are most reliable?" According to UBS, the rankings are Fitch, S&P and pulling up the rear Moody's. Somehow TCM is not at all surprised that Moody's – which always has seemed to put commercial interests at the forefront of accuracy – still lags the other rating agencies.