Moody's

Congressmen criticize credit rating agencies

Jim Kim — Wed, 22 Oct 2008 16:02:25 -0400

You know a hearing is going bad when a congressman start reading instant messages between two of your employees that goes like this:

          Official 1: By the way, that deal is ridiculous
          Official 2: I know, right. The model definitely doesn't capture half the risk.
          Official 1: We should not be rating it
          Official 2: We rate every deal. It could be structured by cows and we would rate it
          Official 1: There is a lot of risk associated with it. I personally don't feel comfy signing off as a committee member.

A cow? Half the risk? One witness, prosecution friendly so to speak, told how he requested underlying loan data to rate a CDO. His boss at Standard & Poor's responded in an email that the request was "totally unreasonable." Obviously, S&P, Moody's and Fitch have some PR work to do.

For more:
- here's a New York Times write up

Rating agencies sued by Connecticut

Jim Kim — Thu, 31 Jul 2008 05:59:17 -0400

It's no secret that credit ratings agencies rate municipal and corporate debt differently. Moody's has admitted as much. Exactly why they do this vexes some--including Connecticut state attorney general Ralph Blumenthal. He has sued Standard & Poor's, Moody's and Fitch, charging them with unfair practices that cost municipalities millions in insurance and interest. He says the raters earn lucrative fees from bond insurers that sell to municipalities, which can then borrow at lower rates. The raters intend to fight, and may press a First Amendment argument, reports the New York Times. In June, Moody's proposed rating municipal and corporate debt similarly. Fitch Ratings is set to release the findings of a review of its practices today.

For more:
- here's the New York Times article

What is the nightmare scenario for the CDS market?

Jim Kim — Mon, 02 Jun 2008 21:33:30 -0400

The sheer size of the market for credit default swaps makes people nervous. But what is the nightmare scenario? What would bring the market to its knees? You might think it would be wave of defaults. But Moody's argues that the biggest danger to the market stems from the potential for failure of a major investment bank. Financial News Online notes participants tend to run flat books, basically offsetting most of their position risks. But if a big counterparty bank were to fail it would rock the system. Havoc might ensure as people wondered if the contracts were at all binding. The lack of a clearing mechanism certainly wouldn't help if people tried to exit positions en masse.

For more:
- here's the Financial News Online article

Related Article:
CDS market creaking?

Sad tale of a Merrill Lynch securitization

Fri, 16 May 2008 06:59:56 -0400

The New York Times offers an arresting story about an emblematic Merrill Lynch securitization in 2006. The securitized securities were so-called piggyback loans--that is, second mortgages usually for about 20 percent of the value of a home. Borrowers used piggybacks to get away with putting no money down. Did you hear me? NO MONEY DOWN. Just like the commercials scream. Almost all had loans for the remaining 80 percent. The originator was the infamous, now defunct Ownit Mortgage Solutions, in California. The Times notes that the piggyback loan borrowers were quick to default, which rippled through the CDOs that invested in the securities, which hit the investors, including mutual funds, that bought the CDOs. Moody's eventually got around to downgrading the securities from Aaa to Baa2. What a time it was. Merrill Lynch, of course, wasn't alone in packaging and selling such stuff.

For more:
- here's the New York Times article

Moody's makes a few changes, keeps letters

Thu, 15 May 2008 06:59:54 -0400

Moody's surveyed its customers recently, and they apparently were in favor of keeping the ratings agency's time-honored letter ratings, AAA and so forth. To many critics, these letter ratings mean little these days, but that is more rhetoric than reality. Still, the agency has some PR issues to contend with. And it is trying to make some hay with some ratings tweaks that the Financial Times has just written about. Moody's launched two new indices that would indicate how fast a security might lose a top rating if the economy changed. This is an obvious hoped-for corrective to the masses of AAA rated CDOs that suddenly ended up on the skids, resulting in mass downgrades.

For more:
- here's the Financial Times article

Economy hitting portfolio companies of big private equity firms

Tue, 29 Apr 2008 06:59:58 -0400

As if private equity firms didn't have enough problems. Investment Dealers' Digest suggests that the rocky economy may be a problem for restaurant-chains, home furnishing companies and others whose fortunes are tied to the consumer economy. Linens Holding Co., owned by Apollo Global Management, recently asked its lenders for--and received--forbearance. Kohlberg Kravis Roberts' Sealy Corp., a maker of mattresses, may see problems as consumers restrain spending, the magazine notes. Moody's issued a negative outlook on the company, citing worsening economic conditions, among other things. Also, Sun Capital's Real Mex Restaurant chain was downgraded and hit with a negative outlook; it runs El Torito, Chevys Fresh Mex and Acapulco Mexican restaurants.

For more:
- here's the article from Investment Dealers' Digest (for FierceFinance readers)

Related Article:
Consumers could turn to bane of banks

Credit ratings agencies unmasked?

Thu, 24 Apr 2008 06:59:55 -0400

Just when you thought the credit rating agencies could not be more demonized comes a New York Times magazine piece that wraps it all up in one lengthy article--with a focus on Moody's. And I do mean lengthy. Much of the substance was known. And there is no need to rehash the litany of reasons why the credit ratings agencies were so willing to assign AAA ratings to all those subprime-related CDOs. No need to get into default risk vs. investment risk and all that.

But the article finds a big think sort of concept: "Thus the agencies became the de facto watchdog over the mortgage industry. ... Effectively, they did the job that was expected of banks and government regulators." The issue is what to do about the agencies. And for all the controversy, no one has come up with an alternative model, except maybe pay for ratings.

For more:
- here's the article

ALSO NOTED: Deal news; Will Bear Stearns CEO Alan Schwartz take job at JP Morgan; Goldman Sachs offloads some debt; and much mo

Tue, 15 Apr 2008 06:59:50 -0400

Company News:
> S&P lowers Wachovia outlook. Article
> Fitch, Moody's affirm Wachovia. Article
> J.C. Flowers will not boost bid for Friends. Article
> Bear Stearns to take impairment charges. Article
> Wachovia CEO defends capital raising plans. Article
> Will Bear Stearns CEO Alan Schwartz take job at JP Morgan? Video
> Goldman Sachs offloads some debt. Article

Deal News:
> Circuit City scorns Blockbuster's hostile bid. Article
> Delta and Northwest ink $3 billion deal. Article

Industry News:
> Financial ETF trading to be heavy. Article
> Homeowners stuck in unfinished projects. Article

Regulatory News:
> Henry Kaufman says Fed action was lacking. Article

And Finally... Should you say something about that office affair? Article

ALSO NOTED: Merrill Lynch estimates cut again; Financial stocks soar after Bear Stearns-JP Morgan deal; and much more...

Fri, 04 Apr 2008 07:59:50 -0400

Company News:
> Merrill Lynch estimates cut again. Article
> Soros: More products should be regulated. Article
> Goldman Sachs bonds sizzling. Article
> B of A gets corporate purchasing card patent. Article
> JP Morgan Chase's stake in Bear Stearns at 45 percent. Article
> Moody's lowers financial strength rating of Countrywide. Article

Industry News:
> Credit crisis hits Q1 earnings. Article
> Since Bear Stearns/JP Morgan deal, financial stocks soar. Article
> Hedge funds move to cash. Article

Regulatory News:
> Are firms too interlinked to fail? Article
> Regulators defend Bear Stearns deal. Article
> Primer on housing sector aid plans. Article

And Finally... How not to win over the media. Article

ALSO NOTED: Lehman initiatives Blackstone coverage with buy; KBW initiates coverage of Fortress with outperform; and much more.

Wed, 08 Aug 2007 06:59:50 -0400

Company News:
> KBW initiates coverage of Fortress with outperform. Article
> Lehman initiatives Blackstone coverage with buy. Article
> IPO market driven by large deals recently. Article
> Evercore beats estimates, not including charge. Article
> Evercore hikes dividend. Article
> Morgan Stanley invests in U.K. retirement homes. Article

Industry News:
> Moody's reorganizes. Article
> Are your customers restive about the markets? Article
> Deals and code names. Article

Regulatory News:
> First BanCorp. to pay an $8.5 million to settle mortgage related charges. Article
> SEC inspector general steps down amid controversy. Article

And Finally... China embraces tournament poker. Article