Spanish Swoon Taking Germany Down

Jul 24, 2012

It’s one thing for the bond market vigilantes to try to skin the people of Spain. But, uh oh, Germany is another issue — and you should care about this little new twist because it will reverberate around the world.

I’m not a fan of Moody’s, largely because it sat around rating as AAA all those bad mortgages that ended up creating the Global Financial Crisis. But, the ratings agency still has sway so, shudder hard at this report:

The ratings firm Moody’s Investors Service late Monday dimmed its outlook on Germany, the euro zone’s dominant economic power and political force, further exposing the currency bloc’s fragility on a day that also saw markets drop around the world on fears about Europe.

Moody’s cited the huge potential cost of a euro breakup and, alternatively, the steep bill that would be paid to hold it together.

The warning to Germany followed a dramatic flight by investors from Spanish bonds Monday, leaving the euro zone’s fourth-largest economy at grave risk of needing a bailout and sparking a selloff on global markets.

Remember the recent story. China is slowing. The mining boom will not last forever. If you add to that Germany — Germany!!! — at risk…cover your eyes from the unfolding disaster.

A Smoking Gun on Corruption of Ratings Agencies: The Bankers Friends’ Scam

Jul 3, 2012

One of the things we rely on, as regular citizens, is supposedly independent agencies. We don’t have time to keep up with everything because we have lives to lead. But, what happens when an agency is not independent and lets corruption seize the day? A financial collapse, for example.

Although Australia avoided the worst of the 2008 financial crisis, some of what we worry about today–the possible collapse of the Eurozone, austerity imposed on Spain, Greece and other countries who must now pay for the bankers’ incompetence and greed–comes straight out of the lack of independence on trusted organizations. So, it’s relevant for us to look across the ocean at this story from  Gretchen Morgenson, one of the few denizens of the traditional press who questioned the worthiness of the securities, in the New York Times:

For years, the ratings agencies have contended that the grades they assign debt securities are independent opinions and therefore entitled to First Amendment protections, like those afforded journalists. But newly released documents in a class-action case in Federal District Court in Manhattan cast doubt on the independence of the two largest agencies, Moody’s Investors Service and Standard & Poor’s, in their work with a Wall Street firm on a debt deal that went bad as the credit crisis began[emphasis added].

And:

When Cheyne issued its various securities in 2005, Moody’s and S.& P. rated them all investment grade. Even though Cheyne’s portfolio was bulging with residential mortgage securities, some of its debt received the agencies’ highest ratings, a grade equal to that assigned to United States Treasury securities. About two years later, as mortgage losses began to balloon, both agencies downgraded Cheyne’s debt below investment grade, to what is known as junk

.

And what happened when a top rating was at risk?:

For example, when the primary analyst at S.& P. notified Morgan Stanley that some of the Cheyne securities would most likely receive a BBB rating, not the A grade that the firm had wanted, the agency received a blistering e-mail from a Morgan Stanley executive. S.& P. subsequently raised the grade to A.And when a Morgan Stanley colleague asked for information about the Cheyne deal, Rany Moubarak, an analyst at Morgan Stanley on the deal, wrote in an e-mail: “I attach the Moody’s NIR (that we ended up writing)” referring to the new issue report published by Moody’s in August 2005.[emphasis added]

The court filings also demonstrate a lack of methodology for analyzing the Cheyne debt. For example, in an e-mail before the deal was sold, S.& P.’s lead analyst wrote to a colleague: “I had difficulties explaining ‘HOW’ we got to those numbers since there is no science behind it. The documents show that the lead analyst at Moody’s noted there was “no actual data backing the current model assumptions” for segments of the Cheyne deal.[emphasis added]

This is really not a surprise. It is startling, given their role in the financial crisis, that the ratings agencies are even taken seriously anymore.

Understand this, as the bottom line: the ratings agencies are about making money. They are not independent. And that still matters today to every person across the nation because what Moody’s and Standard and Poor’s do echos across the globe. When they do the bidding of the bankers, we get hurt.


@jonathantasini

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