Fitch Ratings lowered its outlook on France’s triple-A rating to “negative” from “stable,” indicating there is a 50-50 chance the nation could lose its top investment-grade rating over the next two years. The move came as Fitch also placed its ratings on six other euro-zone nations, including Spain and Italy, on watch for downgrade after it concluded a “comprehensive solution” the region’s debt crisis is “technically and politically beyond reach.” [WSJ]
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What Are You Paying Ratings Agencies Zero Dollars For, Anyway?
By Matt Levine
Fitch released a report today saying “ohmygod banks Europe” and the market went down and maybe there’s a causal link, whatever.
The report mostly takes notice of US banks’ European exposures in general, and the mystery of net versus gross derivatives exposure in particular, in which one asks “if Bank A sells CDS on $100bn of Italian debt to Bank B, and buys CDS on $100bn of Italian debt from Bank C, then when things go pear-shaped is it on the hook for zero (because it has no ‘net exposure’) or $100bn (because Bank C goes belly-up) or somewhere in between (because of collateral, sub-1 correlations, etc.)?”
It’s an important question: net exposures are manageable, gross exposures are terrifying, and there are legitimate questions about whether in a stress case the netting could break down. Various people who are smarter than me have tried to triangulate around parts of the answer using public data.
I don’t know the answer and doubt I’ll find out, though my gut is that netting should kind of sort of mostly work (I find Graph 5B of this, and the definition of “bilateral netting,” oddly comforting). What troubles me today, though, is that Fitch has no clearer answer than I do. Continue reading »
VantageScore has managed to sell Fitch Ratings on the idea that they should use their FICO score replacement as a means to rate mortgage securities. In general I like the idea. Instead of vague “prime” or “Alt-A” terms, or using FICO scores that vary depending on the agency delivering them, there is a consistent measure that can flow up to the aggregating securities for ratings, to define tranches, etc.
Like it or not, securitizing mortgages continues to be essential to mortgage financing, a rather significant component of the economy. Pariahs though the ratings companies and terms like “CDO” look today, and as much as I hate introducing simple “scores” to complex credit and risk analysis, something practical has to be done. And, like I always say, better a credit score derivative blended by two ratings agencies, than just one.
Fitch Becomes First Rating Agency to Accept Mortgage Loans Based on VantageScore [BusinessWire]
