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Why We Shouldn't Count on Fiscal Pol...   Dr Seuss on CDOs
Dec 20 2007 4:30PM EST

Standard & Poor's: The Other Victim of the MBIA Announcement

David Gaffen has a good round-up of reactions to MBIA's announcement that it is carrying $8.1 billion of nuclear waste CDO-squared on its balance sheet.

The main puzzle seems to be this: S&P knew all about this when it affirmed MBIA's triple-A credit rating. But the markets clearly don't think that MBIA is nearly as creditworthy as S&P does. So while today's news is undoubtedly hurting MBIA (the stock closed down 25% on the day), it might well have equally nasty medium-term repercussions on S&P, whose main currency is its reliability and trustworthiness. Here's Gaffen:

While the ratings agencies were able to downgrade ACA, a less important insurer, they seem to be engaging in a "cross this line and you die...ok, this line and you die" Yosemite Sam-style game with MBIA and others.

It really is ridiculous how much stock is placed in credit ratings. It puts the ratings agencies in an impossible condition, and forces them to move in smaller increments and less frequently than they would if they were being completely honest. Maybe a general move towards taking them less seriously would, weirdly enough, make them more reliable.

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