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:
Continue reading »
Standard & Poor’s Ratings Services has notified the French government of its decision to downgrade the country’s credit rating, a senior French government official said Friday, a move that marks the long-awaited blow to France’s international standing and knocks the country out of the top financial league of the euro zone. S&P has informed the French government that the country’s cherished triple-A rating will be lowered one notch to double-A-plus. S&P has also notified other European governments of looming ratings downgrades, according to people familiar with the matter. [WSJ]
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 »
The Italian government reacted angrily Tuesday to the decision by the credit rating agency Standard & Poor’s to downgrade its debt, describing the move as out of touch with reality…Prime Minister Silvio Berlusconi’s office issued a statement early Tuesday noting that his government had a solid majority in Parliament. It said the government was preparing steps to lift growth and recently passed measures to control public finances through tax increases and spending cuts. “The evaluations of Standard & Poor’s seem dictated more by behind the scenes reports in newspapers than reality and seems influenced by political considerations,” the statement said. [NYT]
Because he really misses it and thinks he could bring a lot to the table. To help make his case, he sat down today for a little chit-chat with the Observer about what he would be doing to the ratings agencies right now had that whole…you know what it is, we don’t need to say it…not happened:
All you need is a common law fraud concept that people—and you go back to the emails, just as we did in the analyst case—and again, I’m not saying “let’s relive the past” This is a more theoretical matter. Go through the emails, and you would’ve seen—“this isn’t a triple-A, but they’re a good client, and we’re gonna…”—that tension between what ratings were put on a product, and one’s belief or recognition that they may not deserve it. There are many theories about what would be there, but you have to get the evidence, to state the obvious. I don’t want to say “gee, they should’ve been prosecuted.” But there should’ve been greater scrutiny over the years, and the structure has always been problematic. It was next on our hit parade, if I had been there for that.
But he wasn’t just going to prosecute the bad apples – he would have cleaned up the whole system. Again, if there’d only been time: Continue reading »
The FT today reports that the SEC is looking into whether there was insider trading based on leaks of S&P’s downgrade on Friday. Which is puzzling – who made S&P insiders?
There’s something going on here that is not quite an insider trading investigation. For one thing, there probably wasn’t insider trading. Continue reading »
The Observer reports that “someone paid for an airplane to fly by the New York City offices of Standard & Poor’s with a banner screaming: “THANKS FOR THE DOWNGRADE. YOU SHOULD ALL BE FIRED.”"
UpdateActually it turns out that the person who hired the plane has no problem with S&P and meant to say “YOU SHOULD ALL BE FIRED” to someone else. Oops!
Fortune has learned that the person who paid to fly the banner is a Midwestern broker, who woke up last night with the need to vent at those who she believes are leading the nation into an economic morass.
“I originally wanted to fly it over Washington, D.C., but learned that you can’t do that,” says the banker, who asked to remain anonymous for job security reasons. “So I chose Wall Street instead, but didn’t specifically intend it to fly over S&P. I’m just a mother from St. Louis who feels the only reason we got downgraded was people in politics.”
About that plane over S&P [Fortune]
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:
Continue reading »
Standard & Poor’s has had a few hiccups recently, locking themselves into pointlessly downgrading U.S. Treasuries, pissing off Jean-Claude Trichet, and blowing up the CMBS market revival because they realized too late that they’d forgotten to carry a two.
But Jana Partners and Ontario Teachers’ think of these things not as problems but as opportunities for growth. Or, at least, they seem to think that future growth is going to come less from teaching children how to read and do math, and more from rating sovereign bonds issued by children who can’t read or do math.
Continue reading »
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 »
