Yesterday Moody’s put the debt of four of the six big U.S. banks – GS, JPM, MS, and WFC – on review for downgrade, and the other two – C and BAC – on the amusing “review direction uncertain,”1 because Moody’s is becoming increasingly convinced that, if those banks blew up, the government would not bail out their holding company unsecured debt. Not entirely convinced – it’s just “consider[ing] reducing its government (or systemic) support assumptions to reflect the impact of US bank resolution policies” – but more convinced, anyway. More convinced than it was in March, when it announced “that it would reassess its support assumptions for bank holding companies in the US and that it would consider whether to revise these assumptions by the end of the year.”
- 01 Aug 2013 at 11:44 AM
What does a AA credit rating mean? The intuitive answer is something like “it means that the rating agency rating the thing thinks it has a probability of default no higher than X% and no lower than Y%,” where X and Y are the boundaries of AA- and AA+ respectively, and sure, that’s about right. But there’s an important loophole there which is that each rating agency can set X and Y to be whatever they want. I can make AA a ~1% probability of default, and you can make it ~20%, and no one can tell us who’s right and who’s wrong, because it’s just some letters, y’know? There’s no a priori relationship between those letters and any particular probability of default.
That seems sort of odd, so Congress in the Dodd-Frank Act directed the SEC to look into standardizing the relationship, and the SEC looked into it, and in 2012 they came back to Congress and said no dice. Because basically everyone – ratings agencies but also issuers of and investors in bonds – preferred the current non-standardized system where ratings agencies just rate bonds however they want.1 Read more »
- 17 Jun 2013 at 9:41 AM
Would you have predicted this?
This paper investigates the impact of credit rating changes on the sovereign spreads in the European Union and investigates the macro and financial factors that account for the time varying effects of a given credit rating change. We find that changes of ratings are informative, economically important and highly statistically significant in panel models even after controlling for a host of domestic and global fundamental factors and investigating various functional forms, time and country groupings and dynamic structures. Dynamic panel model estimates indicate that a credit rating upgrade decreases CDS spreads by about 45 basis points, on average, for EU countries.
I would not have! Perhaps I am biased from living in a country where credit ratings are a contrary indicator of sovereign interest rates, and where municipal defaults inevitably lead to helpful comments from ratings agencies like “If the payment doesn’t get made, we would downgrade the rating.” Apparently, though, sovereign ratings matter, at least in Europe and at least at some points on the ratings scale.1 Read more »
- 28 Mar 2013 at 5:14 PM
It’s bad enough that S&P has to go and defend itself against what it says are completely meritless allegations with regard to its totally up-and-up, if not-always-in-the-ballpark-of-accurate, credit ratings. But it’d really prefer not to have to hire local counsel in Denver, Des Moines, Hartford and 14 other remote hellholes that the states that are suing it insist on using as their seats of government. Read more »
- 22 Jun 2012 at 10:03 AM
Are we supposed to care about these downgrades? I like Glenn Schorr at Nomura, emphasis mine:
We think the net financial impact of these downgrades will be manageable as 1) potential collateral calls are small percentages of these firms’ liquidity pools; 2) counterparties have been preparing for this for some time and ratings downgrades have been an issue for the last 2+ years (there was little impact on Citi and BAC when they were downgraded back in September of 2011); 3) ratings are a relative game: given that Moody’s downgraded all capital markets firms, no single-firm is an outlier, so we don’t expect to see one company uniquely impacted. Yes, we get that counterparties looking to do long-dated derivatives might prefer a single-A rated entity, but as Basel III is implemented and more derivatives move to central clearinghouses, counterparty ratings should become less meaningful and clients will adapt (and not do all their business with JPM and GS).
It would be a serious misinterpretation of credit ratings to think of them as a global rank ordering of risks in the world. “A-rated things are of course safer than BBB-rated things,” you say, and get punched in the face repeatedly by life. A-rated things are not safer than BBB-rated things. A-rated RMBS CDOs were not safer than BBB-rated corporates, A-rated corporates are not safer than BBB-rated municipalities, and A-rated banks are it goes without saying not safer than BBB-rated software companies. Nobody really suggests otherwise – if they did, this graph would be a huge embarrassment to Moody’s: Read more »
How excited are you by the prospect that the Treasury might regulate credit ratings? Us either. And, as it happens, even the Treasury isn’t so keen on the idea. To wit:
The Obama administration is resisting calls to get involved with ensuring that credit ratings are reliable and said on Wednesday this would force investors to rely even more on the ratings.
Although credit rating agencies have been accused of assigning top ratings to complex securities that later crumbled in value, the government should not be in the business of regulating their methodologies or ratings performance, a top Treasury official told Congress.
“To do so would put the government in the position of validating private sector actors and would likely exacerbate over-reliance on ratings,” the Treasury’s assistant secretary for financial institutions Michael Barr said.
Government validating private sector actors? I’m sure you know that the Treasury would never contemplate such a thing.
Treasury Resisting Calls to Regulate Credit Ratings [CNBC]
- 27 Nov 2013 at 1:30 PM
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