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Australia
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Rating Agencies
S&P Gets In Trouble For Giving AAA Rating To Obviously Terrible Thing
By Matt Levine
Oh man, CPDOs. CPDOs! Why was I not aware? This Australian court decision is like 3,000 pages long but it is riveting; if you built a CPDO, email me, I will buy you a drink and you can tell me all about it. My God it’s so beautiful.
The story is that ABN Amro invented a structured-credit monstrosity called a constant proportion debt obligation, got it rated AAA by S&P, and sold it to some people; it ended up in the hands of some Australian regional councils, and then it chewed their hands off. As well it might have! It was monstrous. Anyway the councils sued S&P (and others) and today they won their lawsuit, which is bad news for S&P, though they kind of deserved it.
To simplify enormously the CPDO deal was:
- You are a ten-year pool of money
- You make a levered investment in some 5-year investment grade credit indices
- Every six months you roll that investment into the next 5-year index
- If credit has widened, you have lost money and therefore lever your investment more, to try to make your money back
- If credit has tightened, you have made money and therefore ratchet down your leverage, hoping to get out in one piece
- If you keep winning you take more money off the table until you end up with your money in Treasuries for the remainder of the 10 years
- If you keep losing you run out of money and just give up, with your investors losing everything
This is obviously a martingale gambling strategy and the analogy is made extensively in the opinion but don’t worry about that now. Worry about the purity of the ratings arb here. It is breathtaking. Here is the core trick of it: S&P rated structured credit products based solely on the probability that they would pay off less than 100% of their principal plus interest, and not at all based on the expected loss if that happened. A triple-A rating required a <0.728% probability of defaulting. What this means is that: Read more »
The House of Moynihan has said goodbye to a bunch of employees down under. Read more »
Earlier this week, a cobra escaped from the Bronx Zoo. With a snake on the loose in NYC, was CNBC anchor Mandy Drury ever “afraid it would make its way” to her apartment? Not in the least, she told a co-worker, who interviewed her at her desk about the situation earlier today. Read more »
Earlier this week in Sydney, the head of UBS’s institutional sales desk, George Kanaan, and executive director Mark Fitzgerald were “sent home” after a gentle shove by Kanaan in Fitzgerald’s direction “quickly escalated,” with the two being separated by colleagues. They were told to leave the building immediately and have not been allowed back since Tuesday. Read more »
Back in February, Macquarie employee David Kiely got in a little hot water with his employer for looking at some topless shots of Miranda Kerr on his computer. It should’ve been no big deal but unfortunately his floor was being filmed on live TV at the time and as the Aussies couldn’t be perceived as condoning that sort of thing, they put him on a time-out. He was ultimately allowed to keep his job but management has taken extreme precautions to ensure something like this won’t happen again, namely equipping everyone’s computers with a child-lock. What’s a horny Aussie to do? Consider taking lunch at this establishment, where you can get you fix.
A WOMAN has stripped off naked in front of dozens of people having breakfast at a popular Darwin restaurant. Witnesses said the woman took off all her clothes after she and another woman had a full-on fist fight over a man yesterday. “That was just a shocker,” eyewitness Fernando Dentes, 34, said. “People were trying to eat.”
Can we talk about Australian banks for a moment? Earlier this week, ANZ Bank of Australia warned that its profits could fall by 25% and said it was writing down $1.2 billion (Aussie money) of bad loans. This contributed to a massive sell-off in Australian financial stocks, which were already hurting from last week’s news that National Australia Bank was taking a $830 million write down.
ANZ’s problems are simply an Australian version of what’s been happening in the US–a housing boom was attended by a mortgage boom (or was it the other way around?) and now mortgages are defaulting at unprecedented rates. NAB’s problems, on the other hand, aren’t even an Australian version of what’s happening in the US–they are what’s happening in the US. Most of NAB’s write-downs came from debt linked to the US mortgage market. NAB said it is suffering a 50% loss on American housing loans.
Veteran Australian business writer Robert Gottliebsen says that this paints a very bleak picture for financial markets around the world, and for the US in particular.
“This is an unprecedented event and means that the cost of bailing out the US financial system is now far beyond the highest estimates. A US recession is now locked in, but more alarmingly, 55 per cent loan losses point to the possibility of a depression,” he writes.
Gottliebsen thinks that write-downs of $1,300 billion “and perhaps even more” are “on the cards.”
NAB will shock Wall Street [Business Spectator]
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