This is pretty funny. So Standard and Poor’s showed how rigidly they look at the bare facts when they downgraded US credit. Ten-year Treasury bonds have been dropping ever since. But S&P isn’t so concerned about every financial instrument that they are unwilling to dole out triple-A ratings on occasion. Like, for example, subprime mortgage bonds.

Standard & Poor’s is giving a higher rating to securities backed by subprime home loans, the same type of investments that led to the worst financial crisis since the Great Depression, than it assigns the U.S. government.

S&P is poised to provide AAA grades to 59 percent of Springleaf Mortgage Loan Trust 2011-1, a set of bonds tied to $497 million lent to homeowners with below-average credit scores and almost no equity in their properties. New York-based S&P stripped the U.S. of its top rank on Aug. 5, saying Washington politics were making the country less creditworthy.

I mean, this is getting ridiculous. The difference between those subprime MBS and US Treasuries is that S&P gets paid by the issuer of the MBS. Period. The issuer-pays model is completely broken and it threatens the financial stability of the country. S&P and the other credit rating agencies habitually make political decisions instead of decisions based on the data, with wide-ranging consequences.

Incidentally, who are the financial institutions selling subprime MBS that S&P is rating triple-A? The Royal Bank of Scotland, and… Bank of America. And we see that investors completely don’t buy the rating:

The transaction was reworked after marketing began to give those securities more protection against losses than S&P required, a sign investors may not have trusted the grades. An additional $49.7 million of the deal ranked AAA that will suffer losses first was split from the rest and not sold.

The safer debt was sold at a yield of 4 percent and has a projected average life of 2.44 years, one of the people said. That’s about 20 times the rate demanded on two-year Treasuries.

An S&P spokesman said “We believe our ultimate success will be driven by the value investors derive from our ratings and analysis.” Apparently that value is zero.

David Dayen

David Dayen