The subprime crisis is now expected to spread to bond mutual funds, as many hold securities tied to subprime debt, the Associated Press reports.
And the reason so many of these funds had this exposure is that the ratings agencies erred in giving these instruments high marks. In fact, about 80% of bonds backed by subprime mortgages is rated triple-A, the same as U.S. Treasury bonds, and as much as 40% is backed by delinquent credit cards.
“The ratings agencies just completely missed the boat in their methodology for rating these things,” said Janet Tavakoli, president of Tavakoli Structured Finance.
“The problem is some of these mortgages were just phenomenally bad. There was sort of an assumption that house prices would never fall,” agreed George Washington University Finance Professor Richard K. Green.
The Securities and Exchange Commission has launched a review of the ratings agencies and is going to look into whether those that give advice to sellers of mortgage debt are, in fact, creating a conflict of interest.