S&P Cuts to Junk Mortgage Bonds It Rated AAA in 2009

Standard & Poor’s cut to junk the ratings on certain securities, backed by U.S. mortgage bonds, that it granted AAA grades when they were created last year by Credit Suisse Group, Jefferies Group Inc. and Royal Bank of Scotland Group Plc.

The reductions were among downgrades to 308 classes of so- called re-remics, or re-securitizations, created from 2005 through 2009, the New York-based ratings company said today in a statement. About $150 million of the debt issued last year, as recently as July, with top rankings were lowered below investment grades, according to data compiled by Bloomberg.

“The downgrades reflect our assessment of the significant deterioration in performance of the loans backing the underlying certificates,” S&P analysts Cesar Romero and Terry G. Osterweil said in the statement.

Such re-securitizations, used by Wall Street after the credit crisis began to help create more valuable debt to sell or to restructure investors’ holdings, last year expanded from home-loan bonds to commercial-mortgage securities and collateralized loan obligations backed by company loans.

Residential re-remics exceeded $40 billion last year, according to newsletter Asset-Backed Alert. The notes differ in several ways, such as by including fewer underlying bonds, from the so-called collateralized debt obligations created during the credit boom that in some cases had AAA rated classes that defaulted and returned nothing to investors in less than a year.

Blaming the Raters

S&P, a unit of McGraw-Hill Cos., was the only firm to assign grades to the 2009 securities initially ranked AAA and cut to junk, according to Bloomberg data. Ed Sweeney, a spokesman, declined to comment.

Investors including public pension funds and policy makers such as a Senate investigative panel have blamed ratings companies including S&P and Moody’s Investors Service for helping cause the global financial crisis by assigning top grades to mortgage-linked securities that later blew up.

Amid a global recession and the criticism, S&P has downgraded at least once $2.3 trillion of $3.3 trillion of U.S. residential securities created in 2005, 2006 and 2007, and last year lowered approximately $3.5 trillion of about $10 trillion of securitized debt it rates worldwide, based on original balances, according to a report from the firm.

Lawmakers and regulators have debated for three years how to reduce conflicts of interest at ratings companies. Yesterday, the Senate approved an amendment to financial reform legislation that would let a committee of investors, bankers and ratings- firm officials decide who rates asset-backed securities.

Loss Protection

Remics, or real estate mortgage investment conduits, are the formal name of certain mortgage bonds. Some of the new securities created in re-remic deals offer investors an additional layer of protection from losses and downgrades, which boost the capital needs of banks and insurers and can force some investors to sell debt.

Duncan King, a spokesman for Credit Suisse, and Michael Geller, a spokesman for Royal Bank of Scotland’s RBS Securities unit, declined to immediately comment. Joss Passman, a spokesman for Jefferies, didn’t immediately return a message.

High-yield, or junk, debt is rated below BBB- by S&P.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net