S & P Gave Triple A Rating to Dummy Investments –

 And Even a Dummy Can Figure Out Who the Dummy Was

A mortgage backed bond is a pretty easy investment to understand.  A financial firm takes a large number of mortgages and bundles them into a package.  The package is then divided up into small units so that investor can buy a fraction of the entire package.  In this way investors get to invest in mortgages, and get the diversification that comes from owning a small piece of a large number of mortgages.

These CDO’s (Collateralized Debt Obligations) get even better for investors because they can be rated.  S & P in July of 2007 rated one such CDO, something with the name of Delphinus CDO 2007-1 issued in July 2007 and this is what happened.

S&P originally assigned its highest rating to the deal based on "dummy," or hypothetical, assets, then maintained that triple-A rating even though bankers had replaced them with lower-quality assets that didn't meet the firm's ratings standards, according to emails among S&P analysts that were disclosed in congressional testimony.

As for the e-mails that support the condemnation of S & P, well here they are.

So the question here is, who exactly is the “Dummy”?  The choices are

1. The Issuer: 

No that’s wrong.  The issuer made a huge amount of money by creating the CDO in the first place, and as far as anyone knows, no one associated with the issuer has suffered in any way.

2. S & P

No that’s wrong.  S & P gets huge fees from issuers to provide ratings for these securities.  And even though

Moody's downgraded Delphinus from triple-A to "junk" status in January 2008. S&P followed suit in February.

The S & P company continues to be in the ratings business, and surprisingly enough doesn’t seem to have suffered any from what appears to be a monumental attack of greed and stupidity on their part. 

3. The Investors

Yes, that’s right.  The investors, people and institutions who bought these securities thinking they were Triple A instead of “Junk” are the real dummies.  See they relied on a firm like S & P to be honest and upright, and who does that with respect to investing any more.  They bought Triple A rated bond that should have been on "double secret probation".