“Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone,” but every banker also seems to forget the modern corollary, which is that, if you have to prove you are worthy of credit, however good may be your arguments, don’t do it over email. Here’s someone who forgot that and does it surprise you to find his name in the same sentence as “House Financial Services Subcommittee on Oversight and Investigations”?:
A week before MF Global Holdings Ltd. collapsed, its chief financial officer told Standard & Poor’s in an e-mail that the futures broker had “never been stronger.”
S&P provided the House Financial Services Subcommittee on Oversight and Investigations with an excerpt of the e-mail from MF Global CFO Henri Steenkamp. S&P also informed the panel that Jon Corzine, then MF Global’s chief executive officer, met with its analysts on Oct. 20 to reassure them that his $6.3 billion bet on European sovereign debt was no threat to the firm, according to a Jan. 17 letter obtained by Bloomberg News.
U.S. lawmakers will turn their attention to the role of the ratings companies in the failure of MF Global at a Feb. 2 hearing after summoning Corzine, the former governor of New Jersey and Goldman Sachs Group Inc. co-chairman, to two hearings in December. S&P ranked MF Global as investment grade until its failure, while Moody’s downgraded it to junk status four days earlier.
“MF Global is in its strongest position ever,” Steenkamp told S&P on Oct. 24, according to the letter to Representative Randy Neugebauer, a Texas Republican, from Craig Parmelee, a managing director at S&P in New York.
Who can understand the workings of an MF Global? Not me. Apparently they had a money vaporizing device, which in its final days was being manned by employees not wholly familiar with its proper operation, and which caused some unpleasantness when it was aimed at clients’ money. Still to a first approximation it seems reasonable to think that poor foolish-sounding Steenkamp was basically right. MF Global had some assets and some liabilities and its assets exceeded its liabilities. It had a short-term reasonably safe bet on some European government bonds that proved reasonably profitable, and that bet was funded with matched-maturity funding that was reasonably stable until it wasn’t. Then everything went south, that matched-maturity funding was pulled, MF Global needed to sell assets and post more collateral to remain in business, and in the confusion someone accidentally turned on the vaporizer. Continue reading »
I guess we should talk about Europe and credit ratings. Now France isn’t AAA and Italy isn’t A and Portugal isn’t investment grade and here is something that someone at S&P actually said:
Our role is to give timely information to investors and if you give them timely information, if you give it to them in modest increments, then we think that they can make their own judgments about how they are going to allocate their portfolios.
Really! That could be S&P’s motto, “timely information, but in modest increments. Also not really that timely.”
If you’re into this sort of thing, though, the action is not in France so much as it is in the European Financial Stability Facility. The EFSF is basically, France and Germany and the other eurozone countries issue a bunch of debt*, put it into a blender, pulse until smooth, and then issue it as “EFSF debt.” The EFSF gets the money and uses it to prop up Greece, buy Italian bonds, etc. Because all the things are also all the other things, people saw this and were like:
1. Hey, that’s a CDO!
2. CDOs suck boo etc.
Here’s what the EFSF had to say about those claims:
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Maybe this is just an effect of distance or translation, but one thing I really like about reading the fulminations of European politico-financey types is that they are savvier than their American counterparts about who to pick on. I never see a European politician or central banker quoted in the FT attacking poor children. They’ve got better scapegoats. Any time anyone says anything bad about European financial governance, they can go back to the well of “really this is all the fault of eeeevil financial speculators and ratings agencies.” And nobody likes those guys, because they’re eeeevil and dipshits, respectively.
So lots of European politico-financy types are very publicly very not amused by S&P’s threats to downgrade all of Europe, though I suspect that deep down a lot of them are excited to be able to spend today making fun of S&P rather than fielding serious questions about whether rising Italian yields are going to lead to trench warfare. So Christian Noyer of the Banque de France:
“The rating agencies were one of the motors of the crisis in 2008,” Mr Noyer said. “One can ask if they are not playing that role again today.”
Or: Continue reading »
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 »
Back when “Meredith Whitney says all your munis are belong to default” looked like it could be more like her bank calls than, say, Harold Camping’s apocalypseseses, muni issuers and bankers liked to point to the fact that municipal bonds actually defaulted much, much less often than corporate bonds at the same ratings category.
Which is kind of weird since ratings categories are meant to predict default. Moody’s explanation was “All of the revenue-producing power of a municipality can be brought to bear to service the debt,” but, y’know, if you knew about all that revenue producing power, maybe you should have rated the thing higher? If, as the agencies claim, ratings are meant to be comparable across different types of credits, that’s not a very satisfying explanation.
Bloomberg today discusses a study with a plausibly better explanation: munis get worse ratings for the same expected default because they pay ratings agencies less.
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Michael Feroli at JPMorgan had an interesting note this morning (via ZH) on the Republican letter to Bernanke, pointing out that this sort of saber-rattling against easing might actually make it more likely as a way for the Fed to assert its independence.
Moody’s downgrade of BAC/WFC/C, on the other hand, may have the opposite effect, precisely because the government hasn’t yet been able to declare its independence from the ratings agencies. Moody’s cut the banks’ credit ratings because they think the government is less likely to bail them out if they run into trouble. And that downgrade itself may have the effect of making the government less likely to bail out the banks if they run into trouble.
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We assume that you, like everyone else, have been madly dumping Treasuries now that S&P has downgraded them. Smart! And presumably in your flight to safety you’ve been buying AAA rated corporate bonds, from let’s say XOM or MSFT. Which are obviously safer than Treasuries because, while sure the U.S. Treasury can print dollars and Microsoft and Exxon can’t, Microsoft can always send out a secret electronic signal that makes your Windows crash 100% of the time instead of the steady-state 20%, which will force you to upgrade to the next version, which is pretty much the next best thing to printing money. And if XOM is short on cash it can just start a war in the Middle East (that’s how it works right?).
So you think you’re in pretty good shape right? Not so fast – your shit is still really AA+.
The problem is that S&P this morning downgraded Depository Trust Company to AA+ in sympathy with the sovereign downgrade:
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Off by $2 trillion? NBD. Continue reading »
The Times today has a long piece about companies that lost their AAA ratings, with the number of nonfinancial AAAs going from 60-ish in the 1980s to four (JNJ, ADP, XOM, MSFT) today. Why did they lose the AAA rating? Well, “it became seen in board rooms as more of a straitjacket than a path to riches. Just as many consumers relied on their credit cards to finance a higher standard of living, companies took on more debt to reap bigger returns.” Or, in UPS’s case, “the ratings agencies started knocking down the company’s credit rating to AA because of the new pension arrangement” that it struck with its unions in 2007.
So … know anyone else who is borrowing to try to juice economic growth and/or dealing with ballooning retirement-and-medical obligations? Oh, right, those guys. America. Which Moody’s and Fitch reaffirmed at AAA (negative outlook) yesterday and which S&P is going to moan about for a while longer. The Times again:
But the truth is, even as the government maintained its AAA grade, the markets suggested long ago that the United States was no longer deserving of such a high rating.
The credit-default swap market provided one clue. … Even today, the price of insurance on a government default has been higher than that for Colgate Palmolive, the global toothpaste giant, which has a rating two notches below AAA.
Which is weird, right? Because sovereign ratings mostly overpredict default – that is, default rates on sovereigns at a given rating are below those on corporates. Here’s somewhat old S&P data: Continue reading »
S&P has made it so enticing to get involved in U.S. debt politics that the other agencies are jumping on the bandwagon. And Washington can’t win: while S&P continues to talk a big game about downgrading the U.S. for not cutting enough spending, Fitch is pinning its ratings outlook to GDP growth, which some economists will tell you is not going to come by cutting government spending in a recession.
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DealBook is reporting that “S.E.C. Removes Credit Ratings From Regulations” but that’s a bit of an overstatement. The SEC today issued final rules on short-form registration of debt securities. The old rules allowed certain investment grade issuers to use Form S-3 to register debt rather than the more time-consuming Form S-1; the new rules delete reliance on investment grade ratings and just allow issuers to use the short forms if they’ve issued enough debt ($750mm outstanding or $1bn in issuance over the last three years) or are qualifying subsidiaries of big public equity issuers.
This only sounds boring because it is. Continue reading »
