And now, it is revealed that Moody’s allowed investment banks to cherrypick which analysts determined their ratings. Seems to me it is basic common sense that this would be a no-no, no? (more…)

euroarealendingsurvey0408  ←link to full report

The Euro Area lending survey for April 2008 is out, and shows considerable tightening in both lending standards and in loan demand across consumer, enterprise and mortgage credits. 

This follows the recent revelation that the German bund was given a higher credit rating than US Treasuries for the first time in history.  Now, another warning that taking Fannie Mae and Freddie Mac loans onto the balance sheet of the US government will affect the United States’ credit rating.  Obviously, this is not good news if it occurs. (more…)

MINNEAPOLIS, April 2 (UPI) — Fair Isaac, a credit-rating firm with headquarters in Minneapolis, will cut 420 jobs through layoffs and by jettisoning certain units, the firm announced.  The reduction amounts to 14 percent of the workforce at Fair Isaac, known for its FICO credit score, the St. Paul Pioneer Press reported Wednesday. The company will close or consolidate about a dozen offices around the world, with operations in San Diego expected to be hit hardest, the newspaper said.  “We will produce a smaller yet more profitable Fair Isaac,” Chief Executive Officer Mark Greene said.

This is a big issue, and Moody’s tried to explain.  A municipal security apparently will then carry whichever rating is higher (its own or the monoline).

“If a security is wrapped by a financial guarantor, and has a published underlying rating that is higher than the guarantor’s rating, what is the Moody’s rating on the security?

A: The Moody’s rating is the higher of (i) the guarantor’s financial strength rating and (ii) any published underlying rating (i.e., absent consideration of the guaranty) on the security. For US municipal securities, we also consider any enhanced rating based on a state credit enhancement program. For structured finance securities, we also consider any published rating on a pari passu (i.e., at the same level of seniority) non-sequential tranche or more junior tranche of the same transaction.”  Read the entire Moody’s explanation on the Bond insurers/monolines page.

We all know the monolines (bond insurers) are a huge mess.  Although they insure massive amounts of debt, they themselves appear to lack the assets to honor those obligations. How best to fix this mess? 

Bill Ackman’s recent presentation is highly recommended reading.  It has an A to Z analysis of how the bond insurers do business, financial condition, and — go to page 134 of his analysis — a very cogent outline of how the scenario will play out.  Spoiler:  he says downgrades, bankruptcy, receivership.

Here it is:  howtosavethebondinsurers.pdf

Moody’s, whilst maintaining its high ratings of the monolines, issued a stern sounding almost Puritanical caution to the nations of the Arabian Gulf (Kuwait, Qatar,  Saudi Arabia, Bahrain, Oman, and UAE ). 

Moody’s is worried that these nations are making and spending so much money (driving inflation).  Moody’s issued Speccial Announcements on the Governments of the Arabian oil producing countries — implying that if they keep on their path of making and spending lots of money, their national credit rating will be scrutinized and may be downgraded.  And this is at the very same time that the U.S. is deep into deficit spending.  Hmmm.

Excerpt: ”Gulf States’ Spending Hikes Could Have Future Ratings Impact”

 ”Moody’s acknowledges that, over the short to medium-term, the robust creditworthiness of GCC governments is unlikely to be undermined by strong spending growth. This is because oil prices remain at historically high levels, generally wide fiscal surpluses are being maintained despite spending increases, and GCC governments have accumulated large cushions of net assets with which to meet potential future liabilities.”

“However, there could be longer-term adverse implications: the danger is that governments will find themselves dependent on ever higher oil prices to balance their budgets, making it more difficult for them to adjust in the event of a downturn in revenues. Large increases in current expenditure are of particular concern as they are more difficult to reverse than hikes in capital spending in the event of a potential downturn in revenues.” 

Does anyone else think this is a funny way for Moody’s to be spending its time nowadays?

Clayton Holdings, the largest provider of due diligence review of mortgages for the major mortgage bankers, has been given immunity by NY Attorney General Cuomo.  It appears from this news that the mortgage bankers wanted the due diligence reviews to find fewer “lending exceptions” in the subprime loans than actually existed.  It is suggested that the actual figure is 50%-80% of the loans had lending exceptions.  The due diligence reviews may have been limited to small numbers of loans within the portfolios, so that when the loans were bundled and securitized they would appear to be higher quality credits than they actually were. 

This is interesting for a number of reasons, including the question of the rating agencies’ culpability and the monolines’ liability.  Read the NY Times  story here: (more…)

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The risks of CDO meltdowns have been well-recognized for at least the last decade.  CDOs are necessarily dependent on the underlying collateral portfolio because CDOs necessarily separate the performance of the issuing bank from the performance of the issued notes.  The inherent risks of CDO nonperformance have long been known and discussed.  In her November, 1998 analysis, Karen Spinner gives an exceptionally cogent listing and explanation of these risks.  For example, Model Risk dictates that the investor consider the possibility that the rating agency’s models “may not bee 100% accurate.”  Liquidity Risk means that it is hard for an issuer to unwind a closed CDO structure. 

Her excellent piece is entitled “CDOs Under Fire - What will happen to CDOs if credit fears paralyze financial markets?”.  Too bad more institutional investors and other players apparently did not pay enough attention here.  Apparently the credit fears have now virtually paralyzed the financial markets and we’ll have to observe the actual consequences to these derivative instruments. 

Link to Spinner piece here:

http://www.derivativesstrategy.com/magazine/archive/1998/1198fea1.asp