Gas Week

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Thirty-five local councils bought Federation, a Lehman Brothers CDO rated AAA by S&P and marketed by Grange Securities, which tracks the US sub-prime mortgage index

Posted by gasweek on 21 September, 2007

According to Janne Gray in The Australian Financial Review (20/9/2007, p.68), thirty-five local councils (not including Corowa) bought Federation, a Lehman Brothers CDO rated AAA by S&P and marketed by Grange Securities, which tracks the US sub-prime mortgage index. AAA ratings questioned: Federation hasn’t been downgraded, but its value has fallen more than 60 per cent. Now they wonder how CDOs backed by mortgages given to people with a bad credit history or little income managed to attract AAA or AA ratings. Councils rely heavily on ratings because state governments require them to park surplus funds in investments rated A or higher, as they are believed to be very safe.

Ratings for “long-term”: “Our ratings reflect the credit risk over the life of a security. They’re not meant to represent short-term changes in market price,” said Jennifer Elliot, group managing director, Asia-Pacific, for Moody’s. “That it is an opinion of the likelihood of default, and makes no claims about market prices or the liquidity of the instrument.”

Agencies acknowledge problems: This week, the ratings agencies’ defences started to crack. Moody’s president Brian Clarkson acknowledged it might provide investors with extra information about how CDOs would behave in a liquidity shock.

The Australian Financial Review, 20/9/2007, p. 68

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