Fro Jerome's The Next Domino (Jan 21st, 2008)

AMBAC, the largest of the monolines, was downgraded this week-end by Fitch, the smallest of the 3 rating agencies (Moody's and S&P are widely expect to follow suite soon), after it emerged that its proposed capital-raising plan would not be seen as sufficient and was cancelled. This means that:

• AMBAC can no longer do any business; clients that were looking to enhance their bonds through them can no longer do so, and will see their borrowing costs increase;
• even worse, all bonds which are already guaranteed by AMBAC will now lose their own AAA rating, which means that all the investors that need to hold a given proportion of such highly rated paper (and there are a lot of them) are going to need to sell that paper, which no longer fits in their portfolio. This could cause a massive drop in their price if they all sell at the same time, losses for many institutions, and more chaos in the financial system.

And there's close to a trillion dollars of such paper around. We're looking at the mother of all financial stampedes here, if and when the monoline insurers are downgraded by the two big rating agencies...

William K. Black: The Two Documents Everyone Should Read to Better Understand the Crisis (March 28, 2009)

The first document everyone should read is by S&P, the largest of the rating agencies. The context of the document is that a professional credit rater has told his superiors that he needs to examine the mortgage loan files to evaluate the risk of a complex financial derivative whose risk and market value depend on the credit quality of the nonprime mortgages "underlying" the derivative. A senior manager sends a blistering reply with this forceful punctuation:

Any request for loan level tapes is TOTALLY UNREASONABLE!!! Most investors don't have it and can't provide it. [W]e MUST produce a credit estimate. It is your responsibility to provide those credit estimates and your responsibility to devise some method for doing so.

Fraud is the principal credit risk of nonprime mortgage lending. It is impossible to detect fraud without reviewing a sample of the loan files. Paper loan files are bulky, so they are photographed and the images are stored on computer tapes. Unfortunately, "most investors" (the large commercial and investment banks that purchased nonprime loans and pooled them to create financial derivatives) did not review the loan files before purchasing nonprime loans and did not even require the lender to provide loan tapes.

Moody's Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression.

Maybe make up something about Engels success on the markets. Some masonic/templar stuff thrown in for the frisson?

What do you think?