• 30 Jun 2014 at 5:22 PM

(Technical) Default Watch ’14: Argentina

Today’s the big day for the uniquely recalcitrant debtor’s second big D in 13 years, now that its least favorite jurist has reiterated once again that, its best efforts not withstanding, it isn’t allowed to pay only the creditors it wants to pay while piously promising to “meet its obligations, pay off its debts and honor its commitments,” except maybe to these vulture usurers “trying to bring us down to our knees.” Well, maybe not the big day, since failure to pay today—and U.S. District Judge Thomas Griesa made very clear that the “illegal” payment “will not be made,” or he’s gonna start holding people in contempt—amounts to a mere “technical” or “selective” default for 30 days. Then, maybe Moody’s will do something about it. Read more »

Even a ratings agency can see that a $400 million loss, some impending arrests and Mike Corbat’s heartache are not good for business. Read more »

Let’s say, for argument’s sake, that you are a member of a long-entrenched board of directors. Perhaps at a company that has been run (ineptly, perhaps) exclusively for the benefit of its ruling family. Then, disaster strikes, and someone—perhaps Carl Icahn, or Dan Loeb, or someone who used to work for Carl Icahn or Dan Loeb—notices just what a corporate governance and/or shareholder value nightmare you’re supposedly to be overseeing.

Now, let’s make the further assumption that all of the outrageous things the aforementioned activist(s) will say about you and the company to which you have a fiduciary duty are true. With that annual meeting coming up and a full slate of dissident director candidates eyeing your board fees, how will you ever convince the shareholders you’ve been screwing to keep you on?

Casting aspersions about the other guys probably won’t work, because, well, people who live in glass houses and all. And there isn’t enough time to make a few token moves to show that you’ve learned a thing or two from the ordeal—and even if there were time, well, you and the cronies just don’t feel like. And now those bastards at the proxy advisors are calling for your head.

Well, thanks to the infallible folks at Moody’s, you’ve now got a whole new argument to trot out: If Carl Icahn or Dan Loeb or one of their protégés take over, we’ll be downgraded, and then the activist trash who take over will have to pay way more to leverage the hell out of the company to pay themselves off, and will leave you the long-term shareholder holding the bag. And it won’t be my fucking problem anymore, because you’ll have kicked me out. So there. Read more »

  • 23 Aug 2013 at 4:04 PM

Too Big To Fail Is Pretty Much Over, Says Moody’s

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.”

It’s a boring cliché at this point to point out that credit ratings are a lagging-to-contrarian indicator, but still: Read more »

Retail clients are not typically paragons of rationality or possessors of Black-Scholes calculators so a good way to make money is to bamboozle them with mispriced derivatives. The classic way banks do this is with structured notes, where you combine a bond worth $75 and an S&P option or whatever worth $15 and sell the combination for $100 because who has time to check your math, really. In the early years of this century life insurance companies came up with a clever variation on this idea. The variation was:

  • Combine a bond worth $75 and an S&P put option worth $15.1
  • Sell the combination for like $80.
  • Hope everyone forgets about it.

This was an amazing plan. You can see why it sold well? You can also see why it did not really work, for the insurers? It totally totally did not work, for the insurers, and yesterday Moody’s issued a report about it saying basically “a lot of life insurers are kind of fucked because of this,” which, sure, but what were they expecting?

Here’s what they were expecting: Read more »

  • 21 Jun 2013 at 5:01 PM

Congressmen Have Some Advice For Ratings Agencies

The ideal financial regulatory regime would go like this:

  • Regulators would tell market participants not to screw up.
  • Market participants would not screw up.
  • Peace and harmony would reign throughout the land.

This is ideal not only because of the peace and harmony but also because it omits any work by the regulators. Why choose whether to set capital ratios based on risk-weighted or total assets when you can just tell banks not to lose any money? If they never lose money then it doesn’t matter how thinly capitalized they are.

These guys know what I’m talking about: Read more »

Bloomberg has a delightful story today about a new JPMorgan RMBS transaction, its first non-agency deal since the crisis. Specifically about this:

The bonds are made riskier by the New York-based bank and other originators of the mortgages offering weaker promises to repurchase misrepresented loans than those on similar deals, Fitch Ratings said today in an e-mailed report. Lenders and bond sponsors have been seeking to trim potential liabilities in such deals as the market revives after suffering billions of dollars of losses from debt sold before the collapse in home prices.

The value of the so-called representations and warranties in the JPMorgan transaction is “significantly diluted by qualifying and conditional language that substantially reduces lender loan breach liability and the inclusion of sunsets for a number of provisions including fraud,” New York-based Fitch analysts including Roelof Slump wrote in the presale report.

So naturally the deal is limited to an Aa rating, as it would be at Moody’s based on those sort of rep and warranty weaknesses, right? Errr not so much:

The classes of the deal expected to receive top credit ratings carried loss buffers of 7.4 percent as Fitch said it adjusted its analysis to reflect the greater investor dangers created by the weaker contracts, according to the report.

So 92.6% of the deal will be AAA rated at Fitch and Kroll, the other rating agency on the deal. Here’s the cap structure from Kroll’s report: Read more »