you fuck one sheep

Yesterday we talked a bit about this lawsuit bubbling around where some investors are suing Moody’s and S&P for doing a not so great job rating some asset-backed SIVs called Cheyne and Rhinebridge. I said then that the rating agencies were probably pretty keen to avoid going to trial for negligence, because, well

Because … look, maybe the ratings agencies weren’t negligent in rating these things, maybe their models made sense at the time and were falsified by unexpected future events that no reasonable person could have predicted, but … I’m gonna guess that if this goes to trial they will look bad. I mean, they look bad already, no?

A reader helpfully pointed to a preview of what a trial would look like for S&P and Moody’s, in the form of this interview report,* filed by the plaintiffs in February, of former S&P senior quantitative analyst Kai Gilkes, who among other things says that their models made no sense at the time and he predicted that they’d be falsified by expected future events: Read more »

  • 30 Jan 2012 at 6:25 PM
  • Credit

MF Global Was Doing Great Until It Wasn’t

“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. Read more »

Carrick Mollenkamp is a great reporter who currently owns one of my favorite niches: finding insider moles to bring to light behavior at big financial companies that is ambiguously squicky. Today he’s got one that’s close to my heart, and here it is: a junior analyst at Deutsche Bank disagreed about a technical modeling question with his VP.

Wait, what?

Well, here:

At a time when mortgage-backed securities were imploding and customers were fleeing the market, a junior analyst at Deutsche Bank AG protested when he was asked to alter the numbers in a spreadsheet to make a Deutsche security look less risky to ratings agencies, according to a person with knowledge of the matter.

The analyst, this person said, was asked by a mid-level Deutsche executive in late 2007 to make it appear that the investment would produce more cash than the bank actually expected at certain time points. …

[Ajit] Jain had studied at the Indian Institute of Technology in New Delhi and joined Deutsche in June 2006, according to employment records kept by the Financial Industry Regulatory Authority. He joined the New York office in September 2007, when the CDO Group was struggling to find investors.

Within a short time of his arrival, according to three people familiar with the matter, Jain raised questions about whether spreadsheets were being improperly altered. His complaints went to senior levels within Deutsche, including its legal and compliance departments, according to people familiar with the matter.

These spreadsheets were cash flow models for some of Deutsche’s CDO deals, which Deutsche gave to ratings agencies to rate those CDOs. They were complicated. How complicated? Here is a lovely detail: Read more »