S&P `System Error' Sparks Changes in U.S. Residential Mortgage-Bond Grades

Standard & Poor’s, the credit- rating firm criticized for certain AAA rankings it assigned to U.S. mortgage bonds, said it downgraded 224 classes of the securities after discovering a “system error.”

The company reviewed ratings on bonds created through 50 securitizations that bundled residential mortgages from 1994 through 2007, New York-based S&P said today in a statement. S&P examined 470 securities in making the cuts, and boosted ratings on 17 bonds.

The changes stem from “the correction of a system error that had caused the loan group mapping for these transactions to be incorrectly displayed in our surveillance systems,” Jessica Barbara and Terry G. Osterweil, analysts at S&P, said in the statement.

S&P and credit ratings company Moody’s Investors Service, which both reported record profits from 2004 through 2008, “failed to assign sufficient resources to adequately rate new products and test the accuracy of existing ratings,” according to the U.S. Senate’s Permanent Subcommittee on Investigations. The committee is among the congressional panels that held hearings on the global financial crisis that sparked more than $1.8 trillion in losses and asset writedowns worldwide.

Ed Sweeney, a spokesman for New York-based McGraw-Hill Cos.’s S&P unit, declined to immediately comment beyond today’s announcement.

Ratings Changes

S&P said in March it had lowered its ratings at least once on $2.3 trillion of $3.3 trillion of U.S. residential securities issued from 2005 through 2007. Lawmakers and investors including public pension funds have accused S&P and Moody’s of helping fuel the financial crisis by giving top rankings to mortgage bonds based on the firms’ business interests, rather than the creditworthiness of the debt they reviewed.

In a report last month, the Securities and Exchange Commission criticized Moody’s for a 2007 decision against changing ratings on certain so-called constant proportion debt obligations, even after it discovered a modeling error that rated the securities 1.5 to 3.5 notches higher than they should have been.

While the SEC said a Moody’s committee in Europe improperly valued its reputation above keeping investors informed, the agency decided not to sue because of jurisdictional issues.

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

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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