Monthly Archives: April 2008

Ratings Schmatings

This headline from Bloomberg says enough to explain the content of the article.

Moody’s Is Least Accurate Subprime-Bond Rating Firm

Moody’s assigns Caa2 or lower ratings to just 12 percent of the 292 bonds underlying benchmark Markit ABX indexes that UBS analysts expect to default. Both Fitch and Standard & Poor’s tag 57 percent of the bonds with equivalent rankings, according to a report from the New York-based analysts yesterday. A rating of Caa2 or CCC is eight levels below investment grade.

“Moody’s trails badly,” UBS analysts including Laurie Goodman and Thomas Zimmerman wrote.

The crazy piece of this to me is how this can to continue to persist given all of the recent public acknowledgment of the obvious fact that the rating agencies were a central character in the credit debacle we have been experiencing for the past 9 months.

The recent report by the President’s Working Group on Financial Markets is worth a read if you have not yet. (The press release and link to the report can be found here: President’s Working Group Issues Policy Statement To Improve Future State of Financial Markets)

The report walks through a number of causes for the crisis, with the rating agencies playing a central piece in the puzzle.

As their credibility continues to be undermined it remains to be seen what implications will arise. Hopefully this will create more discipline in the initial underwriting of investments, which to be fair, should not fall on the shoulders of agencies but rather should be conducted by the individuals being compensated to make investment decisions.

In the mean time, the story continues to play out with estimates of total expected losses now ranging from:

the ~$150 Billion written down to date by S&P (Subprime Writedowns: Is the Worst Over?)

…to $600 Billion by UBS Financial Firms Face $600 Billion of Losses, UBS Says)

…to $1Trillion by commentators (Brace for $1 Trillion Writedown of `Yertle the Turtle’ Debt)

Judging from the Rating Agencies’ performance to date, one would likely have to side with the more conservative scenarios of other estimators if taking sides…or maybe they have learned their lesson?

Avoiding Moral Hazard

Let’s hope this article from the Brits is more than speculation:

Fed eyes Nordic-style nationalisation of US banks

Apparently Fed officials have been consulting with their Scandanavian central banking counterparts to learn how the Nordics were able to save their own economies through seizing some of their domestic banks in the early 1990s.

Unlike Bear’s bailout, which looks like it is giving equity holders $10/share and Bear management a seat at the table, the Scandanavian efforts “purged” management and ensured equity golfers received nothing.

While perhaps further failures can be avoided recent speculation of losses approaching 1 trillion makes such an optimistic scenario unlikely. It seems the fed is pragmatically asking what to do “when” rather than “if” another shoe drops.