The Pershing Square founder’s Ira Sohn conference presentation on “how to save the ratings agencies (and the capital markets).”
- 13 May 2010 at 2:29 PM
After filing suit earlier this week against Ivy Asset Management for feeding pension fund money to Bernie Madoff, NY Attorney General Andrew Cuomo is turning his attention back to the big banks, which will obviously score many more political points when he runs for governor in November.
The latest probe from Cuomo involves the banks’ efforts to mislead the ratings agencies on structured products. His office is looking into whether Moody’s, S&P and Fitch tinkered with their models so banks could get higher ratings on CDOs and other products.
Subpoenas recently went out to Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and BofA/Merrill Lynch, according to the New York TImes. Read more »
- 2053611 CommentsMore+Subpoenas+for+Big+Banks%2C+This+Time+from+Cuomo2010-05-13+18%3A29%3A16Zachery+Kouwehttp%3A%2F%2Fdealbreaker.com%2F%3Fp%3D20536
You can’t go around rating “shitty deals” AAA and get away with it.
I actually think it would be a good thing for rating agencies if they suffered some consequences for bad opinions.”
“One of the problems is, when you have an institution who is allowed to write opinions that have enormous market impact, but they have no economic – they have an exemption for free speech, it can create some problems. Rating agencies, in my view, during the credit crisis acted effectively as underwriters. Deals could not get done without their primatur.”
- 20 Nov 2009 at 1:02 PM
Somebody is finally doing something about those corrupt, self-serving companies that we all rely on to tell us just how risky this stupid bond is. Ohio is suing the ratings agencies.
With the Feds spitting the bit on regulating an industry that never saw a mortgage-backed security or collateralized debt obligation it didn’t want to give a triple-A rating and that showed the most remarkable propensity for figuring things out right after the credit markets imploded, Richard Cordray, attorney general of the Buckeye State, is following the Andy Cuomo’s lead and attacking Fitch Ratings, Moody’s Investors Service and Standard & Poor’s.
Consider for a moment this quote from Eastman Kodak:
“Any speculation, however informed, suggesting that Kodak is less than financially sound, is irresponsible….”
What’s the message here? That responsible speculators (whatever that means) are universally bulls? That the mere hint of bearishness is some sort of un-patriotic essence of evil?
Kodak was responding, of course, to their recent inclusion on Moody’s “Bottom Rung” list. The Wall Street Journal explains, along with a quick definition of “default,” just in case you needed a reminder:
The Moody’s Corp. unit rates debt of 2,073 companies, sizing up each one’s ability to pay what it owes. The Bottom Rung, which Moody’s will update monthly, represents roughly the riskiest 15% of all companies it tracks.
Moody’s estimates about 45% of Bottom Rung companies will default on debt in the next year. Combined, these companies have more than $260 billion in bond and bank debt. A default ranges from filing for bankruptcy to a distressed debt-exchange to missing a debt payment.
This is, of course, an attempt to dispel the appearance of what, in recently popular terminology, has come to be known as “agency capture.” The slavish reluctance of the ratings agency to offend the firms it rates. Insofar as transparency is universally the enemy of miasma driven rallies, we are interested to see how far any ratings agency gets with a re-branded “credit dead pool” before ratings inflation takes hold again.
There is little public relations up-side in predicting failure right now. (See e.g., John Paulson). Like the business of intelligence, which gets little credit for successes and all the blame for failures, ratings agencies both have a (mostly deserved) badly tarnished reputation and a similar Catch-22 dynamic. What failing firm will not blame the ratings agency (which may well have been spot on in predicting default) for causing an inevitable crash? Who could prove otherwise after the fact?
If nothing else, Kodak has the pulse of the nation at the moment. Even the Journal falls for the trap:
“Yet Moody’s is pushing into a gray zone, singling out some firms that say they’re in decent fiscal health.”
As opposed to firms insisting they aren’t in decent fiscal health? What does that list look like?
Calling a company the walking dead is intensely unpopular right now and the bright-red, freshly burned “Speculator” brand on the forehead is the scarlet letter of the day. Moody’s, indeed any ratings agency, might be between a rock and a hard place here.
Moody’s Aims to Be Ahead on Defaults [The Wall Street Journal]
Yesterday, Banker’s Ball “introduced” us to Mr. Junk Bond, and the poor investment choice that is dating him. Charming, unpredictable, decisive and intense, Mr. JB starts off a Ba/BB, but quickly gets downgraded to Caa/CCC when he fails to remember your name. Due to various other transgressions, a D rating is not too far off. Like looking in a mirror, wasn’t it? Anyway, today we’re giving it to you from the other side. Will, our Senior Man on Woman Correspondent, has categorized the constituents of femalekind according to what instrument they resemble. Enjoy.
The High Yield Debt (“Junk Bond”): The untamed and often uncontrollable vixen, commonly referred to as the mistress. She’s not looking for any long term investment, but she could offer a mind-blowing weekend in Maui, as long as she doesn’t pick up the tab. There is no middle ground with these types–they enjoy either the high flying adventure or nothing at all; they come with a price. If their partner slips up in any way or ceases to perform, she will immediately default, leaving a trail of broken hearts in her often destructive path. The Junk Bond is perfect for the young and the immature–those who have not experienced the ups and downs of the dating world and simply want to reap the benefits of lust and adventure. They won’t stick around to raise your children, but they will give you a great escape from them.
The Investment Grade Security: The 1950′s housewife. She’s quiet, calm, sweet, and patient; she’ll never get too riled up and will stick with you even in the worst of times. Considered by many to be the ideal wife and future mother of one’s children. Perfect for the well seasoned and experienced individual–one who has seen the highs and lows of the dating scene and is ready to settle down into a stable, committed relationship. They’ll never make you rich, but will also never let you down.
- 03 Mar 2008 at 10:50 AM
The municipal bond ratings debate made the front page of the New York Times this morning, no doubt giving succor to fans of the Eisinger Thesis and its correlative, the Radically Inefficient Markets Hypothesis. By way of background, in the last issue of Portfolio senior writer Jesse Eisinger argued that ratings agencies were being burdened with ratings that are too low and therefore forced to pay higher interest rates or buy bond insurance to raise their ratings.
The evidence for the Eisinger Thesis is that municipal bonds default at much lower rates than similarly rated corporate bonds. But to suppose that this means that their interest rates get set too high requires a belief that investors have ignored the evidence of lower default rates in favor of blind adherence to ratings. The evidence of low muni default rates has been available for close to a decade, so this conclusion amounts to a belief that the muni market is radically inefficient. Hence the term Radically Inefficient Markets Hypothesis.
At the heart of the matter is the claim by the ratings agencies that muni investors demand a ratings scale that rates the ability of muni issuers to repay loans on a relative scale that compares them against other muni issuers, rather than other types of debt issuers. Some, like Felix Salmon, have doubted that such market demand for finely-tuned ratings exists. He even issued a challenge to DealBreaker to name at least one bond investor who wants this type of ratings system.
This morning the NYT does the job so we don’t have to.
Some sophisticated bond investors say that if municipalities were rated on the same scale as corporations, it would be harder to distinguish the relative riskiness of various cities, states and school districts, and mutual fund companies would have to evaluate bonds issue by issue.
“If you rate 95 percent of the issues the same, the ratings cease to be useful, and investors need and utilize these ratings to differentiate credits,” said John Miller, chief investment officer at Nuveen Asset Management in Chicago, which manages about $65 billion in mostly tax-exempt bonds.
Salmon, faced with such evidence, just rejects it out of hand. “I still don’t see why tiny differences which would be comfortably absorbed within the AAA range were they in the corporate arena suddenly become hugely important when they’re in the municipal arena,” he writes.
Well, we’ve explained all this before, so after the jump, we’ll simply quote ourselves.
States and Cities Start Rebelling on Bond Ratings
- 28 Feb 2008 at 9:09 AM
Felix Salmon is skeptical that there is a market demand for bond ratings the differentiate between various issuers. His skepticism, however, is built on a simplistic image of who invests in bonds. To Salmon, it seems that muni bond investors are mostly old ladies in tennis shoes who buy bonds when they aren’t protesting water fluoridation. With this image in mind, he simple can’t believe that there would be a market demand for muni bonds to be rated relative other muni bonds rather than corporate bonds.
Our response begins with the observation that the alternative is simply implausible. If there is no market demand for the relative rating of muni bonds, why on earth is it happening? Jesse Eisinger hints at some kind of grand conspiracy between the ratings agencies and bond insurers but doesn’t really have any evidence for this conspiracy other than the fact that because he rejects the idea—on some principal that’s never been articulated—that there’s a market demand for relative ratings, he think there must be a conspiracy. This is question begging and violates Occam’s razor.
What’s more, Salmon’s image of bond investors is inaccurate. They are a heterogeneous lot made up of households, mutual funds, pension funds and banks. Even if a good deal of the investors are uninformed, the demand by sophisticated investors at the margin is enough to create the demand for relative bond ratings. Many of these investors have been so sophisticated that they created a demand for services which provide them with the underlying ratings of muni bonds regardless of bond insurance. In short, muni bonds are not the simplistic retail customers Salmon thinks they are.
It may help to take a look at why muni investors require such granular credit analysis. The reason is relatively easy to understand: municipalities have far less and less consistent financial transparency than corporations, especially public corporations. We can see this in the different ways bond prices respond to ratings downgrades. In the publicly held corporate sector, bond prices often don’t move much after a ratings change because the ratings are late to the game. The information driving the ratings change is typically already reflected in the bond prices (as well as the stock price). But for municipalities the situation is very different. Without an equity market and free from many financial disclosure rules governing public companies, muni investors are dependent on the ratings agencies to discover information about the financial health of muni issuers. This makes muni investors far more focused on ratings showing small gradations in issuers health than corporate bond investors.
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