News Column

Don't panic! S&P insists bonds blamed for crisis pain are safe

August 27, 2014

TIM WALLACE



THE COMPLEX and opaque structured bonds blamed for exacerbating the credit crunch have turned out to be relatively safe investments, credit ratings agency Standard and Poor's insisted yesterday.


Banks were criticised for taking portfolios of bad loans and wrapping them up into mortgagebacked securities before the crunch.


They were then given high-quality ratings by S&P and others, but investors panicked at the start of the credit crunch, fearing the bonds were in fact worthless.


Uncertainty over the quality of the loans meant investors struggled to judge the bonds' value, and blamed ratings agencies for misleading them.


However, S&P yesterday said the bonds had turned out to be relatively good quality after all.


Seven years on from the start of the panic, the agency said only 1.6 per cent of European structured finance securities had defaulted.


Consumer residential mortgage backed securities, a focus of investor and political worry, has a default rate of just 0.06 per cent.


However, other categories performed more poorly - the more complex collateralised debt obligations of asset-backed securities had a default rate of 41.88 per cent.


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Source: City A.M. (UK)


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