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Anyone who hasn't been cozily sleeping under a rock for the last month is well aware of the recent string of hedge fund blowups and poor performance in the CDO (Collateral Debt Obligation) space attributable to the implosion of the subprime mortgage space. While it is certainly the fault of the fund managers for becoming involved in such a speculative space due to mouthwatering potential returns, there's also an understated culprit: the ratings agencies.

Ratings agencies essentially determine the riskiness of a given fixed income instrument and, as the name implies, give the security a rating. For example, the theory goes, a C-rated bond is more risky than an A-rated bond. But as Bloomberg has recently reported, these agencies are losing credibility, especially in the credit derivative space.

For example, the article references CPDO funds. Basically these are funds that sell credit default swaps. Credit default swaps are insurance policies on a given fixed income security defaulting. While the ratings agencies have been rating these funds very well (meaning they consider them to be conservative/safe), these funds have dropped 19%-33%. For a product rated AAA (lowest risk) this type of volatility is ridiculous.

Those cited in Bloomberg aren't the only ones who are growing skeptical of the ratings agencies. In fact, when the Chairman of Bear Stearns (NYSE: BSC) was forced to explain two of the company-owned hedge funds 'blowing up' he partially attributed it to poor performance from highly-rated securities.

Investors losing trust in Moody's and S&P? originally appeared on BloggingStocks on Tue, 14 Aug 2007 13:02:00 EST. Please see our terms for use of feeds.

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