ratings agencies

  • 17 Jan 2012 at 11:58 AM

Europe Needs A Better Blender

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: Read more »

Ratings Agencies Incentivized By Incentives, Part 2

A thing about credit ratings is that issuers pay for ratings, and the issuers who pay more get better ratings. This is a problem that many people want to solve either by the obvious approach of having someone else pay for ratings or by the fancier approach of having issuers pay for ratings but not letting agencies compete directly for that money.

Today a paper by three accounting professors reminds us that the first approach has been tried, and not just by Egan-Jones. In the early 1970s, while Moody’s was charging issuers for ratings, S&P was still charging investors, so there was a period where you could directly compare the ratings of two big established agencies, one of whom had incentives to give actionable advice to investors, the other of whom had incentives to give good ratings to issuers. You will not be surprised at what happened: Read more »

  • 28 Oct 2011 at 3:37 PM

Ratings Agencies Incentivized By Incentives

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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  • 08 Aug 2011 at 11:52 AM

Nothing Will Ever Be AAA Again

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. Read more »