In subprime meltdown, lots of blame to go around

By Herbert Lash - Analysis

NEW YORK (Reuters) - A turn for the worse this week in the subprime home loan meltdown has pundits and investors playing the blame game.

This week lots of fingers were pointed at the rating agencies. Many investors castigated the credit assessment firms, which made lots of money reviewing and grading bonds tied to these risky home loans, for being late with warnings on these securities.

Two weeks before, Wall Street firms were the culprits -- for buying these risky securities and then making them into multitiered credit cakes with a punch and selling them to funds and investors.

And earlier in the year, it was greedy home loan brokers and lenders, and naive or desperate consumers looking to buy a home with risky loans who were the instigators of the subprime crisis.

The turmoil in the U.S. home loan market was triggered by tens of thousands of home loans going bad. These loans, known as subprime, were offered during the housing boom to borrowers with slim or shaky credit histories. As the loans began to default, the impact roiled a slumping housing sector, banks, homeowners, markets investors and the economy.

The tale of woe that has evolved in the risky housing loan sector has a cast of characters and a number of chapters and reads like an epic encompassing struggling homeowners, Wall Street mavens and a few of the Seven Deadly Sins.

"Frankly it's the greed factor all over again," said Bill Featherston, a managing director at broker-dealer J. Giordano Securities Group, which is based in Stamford, Connecticut.

WHERE TO BEGIN

Lawyers are sharpening litigation knives and politicians are calling for reforms, investigations and someone to blame.

But it is unclear who will ultimately pay.

The rating agencies, after weeks of taking heaping abuse, this week slashed ratings and earlier forecasts on deteriorating subprime loans and reassessed billions of dollars of debt, much of which had received a clean bill of health due to their rosy outlooks for U.S. housing.

Standard & Poor's cut ratings on $6.4 billion of debt and Moody's Investors Services downgraded $5.2 billion. Both now project losses for subprime loans originated in 2006 to reach as high as 14 percent, more than double at the start of the year.

But S&P, Moody's and Fitch Ratings reveled during the boom years when credit raters stoked record growth in a $1 trillion debt market that included CDOs and the underlying subprime loans. The newfangled bonds contributed to as much as half of the raters' total revenue growth.

A growing chorus of critics say raters were irresponsible in giving their stamp of approval to bonds that should have been rated much lower.

"This is like selling liquor to a minor without carding them, or selling a hand gun and saying they're not being used to kill people," said Joseph Mason, an associate professor of finance at Drexel University in Philadelphia. "They are selling these ratings, and the label says don't use it for investment purposes. That's clearly not the case."