Continue reading Pimco's Gross: Ratings Agencies Lack Common Sense

Pimco's Gross: Ratings Agencies Lack Common Sense originally appeared on BloggingStocks on Wed, 05 May 2010 17:40:00 EST. Please see our terms for use of feeds.

Insurance

Continue reading Insurance Company Upgrades Beat Downgrades by 50% in 2009

Insurance Company Upgrades Beat Downgrades by 50% in 2009 originally appeared on BloggingStocks on Mon, 22 Feb 2010 10:00:00 EST. Please see our terms for use of feeds.

Let's go back to financial crisis. Do you remember that it was the rating agencies that gave AAA ratings to a slew of investments that turned out to be worthless. This created a panic in world markets. Trading in derivatives came to a virtual standstill and the world was on the verge of collapse. Do you remember this?

The Securities and Exchange Commission (SEC) was asleep at the switch when all this happened and did nothing. Instead of doing the right thing and shutting all these rating agencies down, The SEC is forming a new group to investigate potential fraud cases.

Continue reading Is the SEC really clamping down on rating agencies?

Is the SEC really clamping down on rating agencies? originally appeared on BloggingStocks on Tue, 14 Jul 2009 15:40:00 EST. Please see our terms for use of feeds.

Continue reading Pearlstein: Who to blame for the financial crisis

Pearlstein: Who to blame for the financial crisis originally appeared on BloggingStocks on Tue, 14 Oct 2008 12:35:00 EST. Please see our terms for use of feeds.

Any smart gambler, amateur or professional, knows that you only risk what you can afford to lose. That may be $1, $100, $500, or even a million dollars in a real estate or other major transaction. But only a fool bets the farm. Only a fool risks all.

What made so many bright minds all around the world foolishly bet the farm? One after another, that is what they did. Now we are all paying for it, some more than others. It was not just greed. It was something else.

How did this happen? I call it 'The Great Disconnect'.

When the managers of public companies do not suffer the same fate or consequences as their shareholders you have a disconnect! When politicians give lip service to understanding the pain of their constituencies but accept huge contributions from the enterprises they are supposed to regulate and oversee creating gargantuan conflicts of interest, you have a great disconnect.

When investment houses create financial instruments that are so complex that they cannot fathom the risk and the ratings agencies put candy coated frosting on them, you have a great disconnect!

I would propose that legislators not be allowed to accept any contribution creating a conflict of interest based on the committees they sit on. $700 billion reprise: Conservative bankers? Surely you jest!

I might even consider creating an independent committee of citizens selected from the willing, be placed in a position to review such matters.

Continue reading The great leadership disconnect: I bet the farm and you lose

The great leadership disconnect: I bet the farm and you lose originally appeared on BloggingStocks on Fri, 26 Sep 2008 16:45:00 EST. Please see our terms for use of feeds.

The Wall Street Journal (subscription required) has obtained a draft version of the SEC's report on bond-rating firms and their role in the credit bubble, and some of the stuff is pretty scary.

In one e-mail, a staffer at Standard & Poor's, which is own by McGraw-Hill (NYSE: MHP) told another that "we rate every deal," and that "it could be structured by cows and we would rate it."

Another wrote that "rating agencies continue to create" an "even bigger monster -- the CDO market. Let's hope we are all wealthy and retired by the time this house of cards falters. ;O)"

Yes -- complete with the smiley face. If this seems reminiscent of disgraced analyst Henry Blodget's e-mails bashing stocks he was publicly pumping during the dot-com bubble, that's because it's exactly the same. The lesson here, once again, is this: e-mails ever really get deleted permanently and, if you're being shady or doing something unethical, make a phone call, talk with the person in a dark alley, or send them a letter that they can promptly discard. Don't send an e-mail!

Of course, S&P's investment-grade ratings on CDOs stuffed with dodgy loans turned out to be wildly optimistic, and the house of cards has done more than falter -- it's brought down Bear Stearns and wreaked havoc on the economy.

S&P rated deal 'structured by cows' according to SEC report originally appeared on BloggingStocks on Sat, 02 Aug 2008 14:40:00 EST. Please see our terms for use of feeds.

Analysts at some of the large credit ratings agencies may have had their eyes on the cash register instead of paying attention to the quality of their work. So says the SEC.

According to The Wall Street Journal, "The 10-month examination uncovered poor disclosure practices, a lack of policies and procedures guiding the analysis of mortgage-related debt, and insufficient attention paid to managing conflicts of interests."

That revelation all but buries the already damaged reputations of the ratings firms.

Making money is OK, but the practices may have lost investors billions of dollars. The big credit rating shops like Standard & Poor's have the job of evaluating the risk of products like mortgage-backed securities. Investment banks and their clients thought this paper was fairly safe. It did not turn out that way, not by a long shot.

Continue reading SEC: Ratings agencies cheated, a little

SEC: Ratings agencies cheated, a little originally appeared on BloggingStocks on Wed, 09 Jul 2008 13:36:00 EST. Please see our terms for use of feeds.

If an enemy sworn to the destruction of the global economy was given free reign, it would follow the strategies of its current leaders.

One key to destroying an economy is to break its pricing mechanism. What does an effectively functioning pricing system do? It creates a market of buyers and sellers who can meet, agree on a price, conduct the transaction, and create an information trail that permits future market participants to judge what might be a fair price for their transactions.

Another key to destroying an economy is to put too low a price on risky behavior. Why is it important to price risk accurately? Because if decision-makers do not assess the risk at the time of their decision, the economy will end up paying for the under-priced risk long after those decision-makers have left office.

So how have current leaders broken the pricing mechanism and under-priced risk? Here are three ways:

Continue reading What wrecked the global economy

What wrecked the global economy originally appeared on BloggingStocks on Tue, 01 Jul 2008 08:45:00 EST. Please see our terms for use of feeds.

Reuters reports that Warren Buffett, whose Berkshire Hathaway (NYSE: BRK.A) controls 19.6% of Moody's Corp. (NYSE: MCO), is saying that he thinks Moody's will be around a long time. Even though Berkshire Hathaway's $188 billion market capitalization is more than 20 times that of Moody's -- Buffett's $1.8 billion loss -- the 50% drop in the value of his 19.6% Moody's stake from its February 9, 2007 peak -- has to sting.

Moody's was already under fire over the U.S. mortgage market crisis when it took a fresh blow on Wednesday -- launching an investigation into a report that it had wrongly assigned triple-A ratings to about $4 billion of complex European debt products -- Constant Proportion Debt Obligations (CPDOs), funds that used borrowed money to bet on credit-default swaps -- and had then not downgraded them. Buffett's comment: "I don't think one day will permanently change the franchise value of Moody's."

As I posted, the ratings agencies competed for lucrative fees from investment banks that created and sold these asset-backed securities. Moody's took in $3 billion for such structured finance ratings between 2002 through 2006. The agencies that offered the best ratings won the business.

Continue reading Can Buffett's Moody's survive?

Can Buffett's Moody's survive? originally appeared on BloggingStocks on Thu, 22 May 2008 10:00:00 EST. Please see our terms for use of feeds.

Moody's (NYSE:MCO) made a mess of rating subprime debt and other risky instruments. It also said that some bonds help by municipal bond insurers was safe and that these companies should have "Aaa" ratings. Most of that turned out to be wrong and it helped cost investors, banks, and brokerage firms tens of millions of dollars.

Everyone from Moody's customers to Congress wants to know how the ratings could have been so wrong.

Now, the rating company has come up with a novel excuse for another series of mistakes. According to the FT , "Moody's awarded incorrect triple-A ratings to billions of dollars worth of a type of complex debt product due to a bug in its computer models." Several Moody's executives may have known about the mistake some time ago.

Comments from Moody's downplayed the problem. The company said that it adjusted its models from time to time.

The news may get the ratings agency into some real trouble, and it should. If the company was aware of the problem, why wasn't the information passed along to customers who rely on the ratings to make purchases?

Moody's ought to be dragged before regulators and be forced to give an entire accounting of the problem. Perhaps it should pay back customers who made bad decisions because of the errors. Of course, Moody's does not have that kind of cash.

Douglas A. McIntyre is an editor at 247wallst.com.

Moody's (MCO) next excuse: Computer bugs originally appeared on BloggingStocks on Wed, 21 May 2008 10:00:00 EST. Please see our terms for use of feeds.

CNNMoney reports that McGraw-Hill Co.'s (NYSE: MHP) Standard & Poor's (S&P) forecasts the possibility of a $1 trillion bailout of Federal National Mortgage (NYSE: FNM) and Federal Home Loan Mortgage (NYSE: FRE) -- government sponsored purchasers of pools of loans which package them into securities. Specifically, S&P forecasts that a bailout of these two -- known as Fannie Mae and Freddie Mac -- would cost -- in a worst case scenario -- between $420 billion and $1.1 trillion of taxpayer's money. This would represent several times the $250 billion Savings & Loan bailout by the first President Bush.

It's a bit ironic for S&P to be issuing this report. After all, it was among the ratings agencies that contributed to the problem in the first place. As I posted last August, the ratings agencies competed for enormous fees from investment banks to put their AAA ratings on issues of mortgage-backed securities (MBS). Those AAA ratings caused naive MBS buyers to skip the kind of detailed analysis of their purchases that might have stopped the flow of dumb money into the MBS bubble that is now putting Fannie and Freddie at risk.

How did S&P arrive at this scary conclusion? Both companies are forecast to report more losses this year due to declining home prices and rising mortgage defaults. And according to Yale professor, Robert Schiller, "The real fundamental problem is real estate prices have been falling and they might fall substantially more. The Office of Federal Housing Enterprise Oversight (OFHEO) and Fannie and Freddie never considered the possibility of a massive real estate correction."

Continue reading Is a trillion bailout of Fannie/Freddie imminent?

Is a trillion bailout of Fannie/Freddie imminent? originally appeared on BloggingStocks on Tue, 22 Apr 2008 09:57:00 EST. Please see our terms for use of feeds.

SEC requested to ramp up ratings regulation originally appeared on BloggingStocks on Wed, 16 Apr 2008 08:50:00 EST. Please see our terms for use of feeds.

The good news is that MBIA (NYSE: MBI) saved its S&P "AAA" rating, meaning bonds it insures will not lose their value. A drop in the rating could have caused write-offs at banks that own paper covered by the bond insurer.

MBIA also announced yesterday that it will, sometime in the next five years, break its muni-bond insurance business from its structured finance operations, forming two companies. Structured finance bonds have lost much of their value because they include CDOs and mortgage securities.

The move may have helped save the company, but it comes with a huge cost. MBIA is eliminating its dividend to save $174 million a year. For investors taking advantage of the company's 10% yield, the news could hardly be worse.

MBIA may have bought itself some time, but it put the wood to shareholders to stay afloat.

Douglas A. McIntyre is an editor at 247wallst.com.

MBIA (MBI) cuts dividend originally appeared on BloggingStocks on Tue, 26 Feb 2008 08:15:00 EST. Please see our terms for use of feeds.

S&P looks to fix credit rating problems -- too little, too late? originally appeared on BloggingStocks on Fri, 08 Feb 2008 09:50:00 EST. Please see our terms for use of feeds.

Moody's (NYSE: MCO) is thinking of releasing a new ratings system that does not use letters, but has numeric ratings and "warning labels" for securities that may be difficult to analyze.

According to The Wall Street Journal, "one of the most significant changes being considered by the parent of Moody's Investors Service: a new, 21-point numerical scale to rate structured securities." The new system would also help investors look at CDOs and other risky investments differently from corporate bonds.

The whole exercise is bogus. Moody's could have employed a similar system long ago. Why are numbered ratings any different from those that use letters? Why didn't the firm have a systems that indicated the risks in complex securities such as CDOs and other structured investments?

The Moody's move is simply an attempt to try to hide and rectify the substantial flaws in the system that exists now. And, it is a feeble attempt to boot.

Douglas A. McIntyre is an editor at 247wallst.com.

New ratings system for Moody's (MCO) is cover-up of past errors originally appeared on BloggingStocks on Tue, 05 Feb 2008 08:40:00 EST. Please see our terms for use of feeds.

Moody's Corp.

Moody's CEO blames liars for subprime mess originally appeared on BloggingStocks on Mon, 28 Jan 2008 08:15:00 EST. Please see our terms for use of feeds.

Ratings agencies go before Congress originally appeared on BloggingStocks on Wed, 26 Sep 2007 18:46:00 EST. Please see our terms for use of feeds.

Ratings agencies have tremendous power in the financial markets because their ratings determine if a certain credit is "own-able" by funds, depending on their covenants. For example, low-risk pension funds can't own poorly graded credit simply because it increases the likelihood of losing money. When ratings agencies change their position on companies or sectors, the market listens. A perfect example of this was the recent subprime fall that resulted from S&P announcing it could downgrade some of the credit from the group.

Now the opposite has occurred -- Fitch announced that it has positive outlook for Doral Financial Corp. (NYSE: DRL). Fitch justified its optimistic outlook for Doral by mentioning the company's sale of a 90% stake in the company to Bear Stearns (NYSE: BSC) Merchant Banking, among other things.

Even though this upgrade was on the company's debt, the stock traded up as well. I think Doral is too speculative to play with, and the future of this company, especially the stock, is extremely up in the air at this point.

Fitch upgrade sends Doral flying originally appeared on BloggingStocks on Sat, 21 Jul 2007 09:40:00 EST. Please see our terms for use of feeds.