Subprime Mortgage-Backed Security to Get Higher Credit Rating From S&P than US

We've already seen how the bond market doesn't really care at all about the  S&P  500's downgrade of the US, and today we get an example of why maybe it shouldn't care:  S&P  is going to give an MBS of subprime mortgages a AAA rating.

You probably recall that AAA-rated subprime MBS nearly fired the entire global economy into the sun a few years back. Well, they're still happening! And meanwhile the US is rated AA+, suggesting you are marginally less likely to get your money back from a US Treasury bond than from one of these subprime MBS. Does that make sense to you?

We've got a call in to  S&P  and will update if and when we hear back from them. The group inside  S&P  that rates sovereign debt is very different, and uses different criteria, than the group that rates MBS. Ultimately the ratings have the same meaning, however.

 Al Yoon  of Dow Jones Newswires reports:
Consumer lender Springleaf Financial on Wednesday will sell  $242 million  in residential mortgage-backed securities backed by subprime loans originated in past years, according to an investor.

The offered subprime bonds are expected to yield 4% when priced on Wednesday morning, according to a note sent to investors from co-lead underwriter  RBS Securities . The bonds are protected by a 51.15% credit enhancement, and rated AAA by  Standard & Poor's , said the RBS note.

The bond is one of several that issuers--including Springleaf under its previous name, American General Finance--have cobbled together with older delinquent and performing loans since 2008. The proceeds are typically used as a financing source.

Springleaf is 80%-owned by  Fortress Investment Group , and in May set plans to raise equity for a real estate investment trust that would invest in subprime mortgages. The subprime model has captured the attention of financial markets as other issuers have had trouble in restarting a private market for high-quality home loans.

Fortress acquired its stake last year from  American International Group's  AIG Capital Corp.

 Zeke Faux  and  Jody Shenn  of  Bloomberg  have a must-read, full blowout story on this, with more details on the Springleaf offering and on just how much the bond market is not listening to ratings any more, and a reminder of why:
Money managers are lending to the government at rates that, in some cases, are about a third of what they demand to hold top-rated mortgage notes, four months after Congressional investigators said  S&P  helped spur the longest economic contraction since the 1930s by assigning inflated grades to the bonds from 2005 through 2008.

More than 14,000 securitized bonds in the U.S. are rated AAA by  S&P , backed by everything from houses and malls to auto- dealer loans and farm-equipment leases, according to data compiled by  Bloomberg .

 S&P  has said it made mistakes in structured finance since the crisis including misunderstanding cash flows and using conflicting methods to analyze the securities. Its owner,  New York -based  McGraw-Hill Cos ., depended on credit ratings for 27 percent of its  $6.19 billion  of revenue last year, down from 33 percent of  $6.77 billion  in 2007,  Bloomberg  data show.

"These are errors that could cause airplanes to crash if this was aerospace engineering," said  Sylvain Raynes , a principal at  R&R Consulting  in  New York  and a former analyst at  Moody's Investors Service .

(This story has been posted on  The Wall Street Journal Online's  Market Beat blog at http://blogs.wsj.com/marketbeat.)
By  Mark Gongloff