S&P

  • 16 May 2013 at 4:35 PM

Berkshire Hathaway-Treasuries Equivalence Proves Brief

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Warren Buffett bonds are no longer deemed as safe as a T-bills by the sages at Standard & Poor’s. Read more »

  • 22 Apr 2013 at 5:17 PM

Analyst’s ‘Burning Down The House’ Jingle Part of ‘Robust Internal Debate,’ Penetrating Analytic Process, Says S&P

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Standard & Poor’s asked a federal judge on Monday to dismiss a U.S. Justice Department civil suit against the rating agency, arguing the government’s case is based on vague statements that cannot be used to prove fraud. In a $5 billion suit, the U.S. government accused the rating agency of issuing inflated ratings on faulty products to drum up business before the financial crisis, despite company statements that its ratings were objective. S&P has vociferously defended itself in public since the case was filed in February in U.S. District Court in Los Angeles, denouncing the lawsuit as meritless and accusing the government of cherry-picking emails to misconstrue what its analysts did…While the government says those messages, which include one analyst performing a pop song parody about the housing market burning down, paint a picture of a company knowingly slapping inflated ratings on structured finance products, the company’s filing says otherwise. Those messages, instead, the company said, show internal squabbling or even “robust internal debate.” [Reuters]

  • 03 Apr 2013 at 3:18 PM

S&P Cries “Conspiracy!”

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Area 51. The Warren Commission. Watergate. Bush v. Gore. Ben Affleck’s Academy Award. All lead to only one conclusion: The lawsuits against S&P are a vast government conspiracy designed to take down the occasionally inaccurate—but not in a legally-actionable way, it assures—ratings agency by covering up something that does not need to be covered up. Read more »

  • 05 Feb 2013 at 12:54 PM

Some S&P Analysts Weren’t Happy With S&P’s Whole “Trying To Rate Deals” Thing

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Michael Lewis had this to say yesterday about Greg Smith’s criticisms of Goldman Sachs:1

None of this exactly came as news. The news was that a living, breathing Goldman employee had said it. There was also, between the lines, a fresh hope: Goldman had employed an idealist! For a decade!

That was pretty much my reaction to the Department of Justice’s curiously underwhelming complaint against S&P for misrating subprime-mortgage-backed securities in the run-up to the financial crisis. Wait: S&P got paid to rate deals, and wanted to rate more deals and get paid more, so it rated deals favorably? TELL ME MORE. But then it is enlivened by an occasional cameo from a quant truther whom you would not have expected to exist inside S&P. Like Executive H:

Or Senior Analyst C:

Haha what? You can tell that the DoJ is getting its analytical framework for this case from those quant truthers, but that framework is dumb. Read more »

  • 04 Feb 2013 at 5:10 PM

Controversial New Theory: S&P Got A Few Ratings Wrong

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One day – one day soon – the Justice Department will sue S&P for mis-rating a bunch of CDOs, and when that happens let’s all read the complaint and then meet back here to discuss it, okay? [update!] In the meantime we have S&P’s preemptive denial:

A DOJ lawsuit would be entirely without factual or legal merit. It would disregard the central facts that S&P reviewed the same subprime mortgage data as the rest of the market – including U.S. Government officials who in 2007 publicly stated that problems in the subprime market appeared to be contained – and that every CDO that DOJ has cited to us also independently received the same rating from another rating agency.

I submit to you that this is not a great defense, though it has a certain intuitive appeal. If in fact it turns out that S&P knowingly gave terrible CDOs AAA ratings because they were being bribed by investment banks or whatever, then it doesn’t help them much that Moody’s, say, gave the same CDOs the same AAA ratings with pure hearts and empty minds.1 Intent matters; being evil makes you more liable than does being stupid.

More interesting, though, is the claim that “S&P reviewed the same subprime mortgage data as the rest of the market.” First of all, that’s an almost magically ridiculous statement. (Though, also: true!) S&P’s credit ratings not only had the force of quasi-law in 2007 when they were bopping around misrating CDOs: they still have the force of quasi-law today, and there’s no plan to change that. Basel III regulations rely on ratings-agency ratings all over the place. And yet S&P has no actual advantage over anyone else in deciding what’s a good credit risk.

So why would you rely on S&P to tell you what’s a good credit risk? Read more »

  • 05 Dec 2012 at 6:03 PM

Greek Bonds Now Defaulted, Also Extra Attractive

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You can see why no one likes rating agencies. It’s not exactly a surprise to anyone that Greece’s debt situation is Not Good, so the fact that S&P just downgraded Greece to selective default is (1) not particularly helpful to anyone attempting to make an investment decision re: Greek bonds and (2) not particularly helpful to anyone else either.

That said, I admire S&P’s role as a stickler for the rules of a game that it invented and no one else is playing. Greece is conducting an essentially non-coercive exchange for its bonds at above their all-time high prices. Is that a “default”? Well, for what purposes? Legally, mostly no. For CDS, no. But for S&P, yes. (Yes, it is.) They’re paying off their debt for less than par, so default it is. And since those are the rules, S&P must pointlessly note that Greece is in selective default.1

Nobody else seems to care much. What do you make of this? Read more »

  • 30 Nov 2012 at 11:36 AM

Skeptical Investor Puts Trust In Ratings Agency

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You may be aware that noisy Asia-focused short-seller Muddy Waters is in a fight with Singaporean agricultural commodity trader Olam. Muddy Waters thinks that Olam is “an extreme example of an increasingly important conflict in modern finance: the clash between accounting and business reality,” and that “it is instructive to view Olam through the lens of failed US trader Enron Corp.” Olam disagrees, vehemently and litigiously. You can read all about it at your leisure (pro, con); I am not an idiot so I will carefully avoid taking any position on who is right and by how much.

Our question today is instead: are S&P idiots? Here is Muddy Water’s latest offer:

We hereby make a bona fide offer to pay for Olam to have one of its public debt issues rated by S&P. … The Company has never before had a debt rating, and having Olam’s debt rated by S&P would be an important step toward improving the Company’s transparency. Because we will pay the expense, Olam has no good reason not to have a rating.

I love this move! On its surface this is a pretty straightforward proposal. Muddy Waters thinks that Olam is – to use simple words – a big fraud, but the only way to really know is to have inside information,1 which Muddy Waters lacks. Olam has plenty of inside information but (1) has a vested interest in persuading people it’s not a giant fraud, whether or not it in fact is, and (2) can’t reveal every piece of inside information to everyone for reasons both practical and competitive-secrecy-y. Read more »

  • 06 Nov 2012 at 3:36 PM

This Election Day, Remember Your Constitutional Right To Carelessly Misrate Structured Credit Products

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Have you finished reading Judge Jayne Jagot’s 43,000-page opinion in the Australian CPDO case yet? Good, because we’ve got to move on to other things.1 Like: what does it all mean?

One obvious thing that it could mean is “nothing,” or at least not very much. The case involved $30 million of damages, and there seems to be an Australian class action coming that might involve more damages, but it seems unlikely that CPDOs are going to track S&P across the globe to haunt its bovine dreams. Euromoney points out some of the many barriers to suing, though it adds:

In the case of CPDOs, however, of which around $5 billion were issued, there might be impetus for investors to follow the Australian councils’ lead. The firm that funded their litigation, IMF Australia, is believed to be examining the viability of further claims in Europe (CPDOs were largely arranged by European banks and sold in Europe).

Here in America, though, S&P seems safer. Here’s the FT:

Floyd Abrams, an attorney for S&P, says: “It is highly unlikely that this Australian court opinion will have any significant impact elsewhere. The case does not involve mortgage-backed securities. And the ruling does not recognise – as courts in the US and elsewhere generally have – that ratings are opinions which are not actionable unless disbelieved by those that issued them.”

They also point out that the statute of limitations will protect most crisis-era ratings at this point. And here’s John Carney: Read more »

S&P Gets In Trouble For Giving AAA Rating To Obviously Terrible Thing

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Oh man, CPDOs. CPDOs! Why was I not aware? This Australian court decision is like 3,000 pages long but it is riveting; if you built a CPDO, email me, I will buy you a drink and you can tell me all about it. My God it’s so beautiful.

The story is that ABN Amro invented a structured-credit monstrosity called a constant proportion debt obligation, got it rated AAA by S&P, and sold it to some people; it ended up in the hands of some Australian regional councils, and then it chewed their hands off. As well it might have! It was monstrous. Anyway the councils sued S&P (and others) and today they won their lawsuit, which is bad news for S&P, though they kind of deserved it.

To simplify enormously the CPDO deal was:

  • You are a ten-year pool of money
  • You make a levered investment in some 5-year investment grade credit indices
  • Every six months you roll that investment into the next 5-year index
  • If credit has widened, you have lost money and therefore lever your investment more, to try to make your money back
  • If credit has tightened, you have made money and therefore ratchet down your leverage, hoping to get out in one piece
  • If you keep winning you take more money off the table until you end up with your money in Treasuries for the remainder of the 10 years
  • If you keep losing you run out of money and just give up, with your investors losing everything

This is obviously a martingale gambling strategy and the analogy is made extensively in the opinion but don’t worry about that now. Worry about the purity of the ratings arb here. It is breathtaking. Here is the core trick of it: S&P rated structured credit products based solely on the probability that they would pay off less than 100% of their principal plus interest, and not at all based on the expected loss if that happened. A triple-A rating required a <0.728% probability of defaulting. What this means is that: Read more »

  • 22 Oct 2012 at 7:36 PM

S&P Doesn’t Want Banks To Be Too Safe

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What is this S&P paper on how the Volcker Rule could force S&P to lower ratings on banks? One basic intuition you could have is that the earnings you get from prop trading are not particularly stable so shouldn’t count for much in your credit ratings; on this intuition things like highly levered hedge funds and Berkshire Hathaway should be bad unsecured credits so, y’know, shows what I know.1 But really if you had to choose purely from a credit ratings perspective between:

  • Thing A makes $1 billion a year on like investment banking fees and stock trading commissions, versus
  • Thing B makes $2 billion a year on prop trading some stuff, but it won’t tell you what stuff, but it’s all financed with repo,

You’d pick Thing A, right? To lend to? To some approximation the guys who’ve blown up their creditors are the guys with risk positions on their balance sheets (Lehman, MF Global); the guys who just run out of fee-based business mostly wind up their debts before expiring. Or don’t have many debts to begin with, because why would you incur massive unsecured debts to just execute client orders on commission?2 Anyway here’s S&P: Read more »

  • 03 Jul 2012 at 1:32 PM

Banks Sell Products That Make Them Money. So Do Ratings Agencies

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The role of the hero who has been in the belly of the beast and emerged to slay it seems to be psychologically rewarding,* because people keep trying to claim it for themselves. Like this Geoffrey Tomes gentleman, who bared his soul to tell DealBook that he “was selling JPMorgan funds that often had weak performance records, and I was doing it for no other reason than to enrich the firm.” You imagine him racing to tell DealBook about this revelation, imagining his welcome into the Greg Smith Hall of Heroes, and being a little disappointed that everyone was all “wait, what, did anyone on earth not know that was exactly what you were doing? Why did they think you were pushing JPMorgan products? That’s what banks do.”

Similarly there is a certain amount of “duh, obvs” to the recently unsealed documents in the lawsuit over the Cheyne SIV. But they’re still funny. Cheyne was a conduit stuffed with mortgages and home equity loans that exploded in the face of some people, who are now suing Morgan Stanley, who built it, and the rating agencies, who did sort of a not-so-great job of kicking its tires. From their filing unsealed yesterday: Read more »