credit rating agencies

Debbie Downer S&P Crashes European Denial Party

debbie downerHere comes S&P, throwing their opinions around with threats of a credit downgrade. I guess nation-states now know how Americans feel, being FICO scored over whether they shop at Walmart, literally being denied a job.

By now you're heard S&P has whipped out their weapons of mass destruction on 15 European countries. It's like the entire Eurozone just had war declared on them by Standard and Poors.

It's quite the bloodbath with Germany, France, Austria, Belgium, Ireland, Italy, Spain, Portugal, The Netherlands, Slovenia, Estonia, Malta, Slovakia, and even the frugal, we actually paid our WWII debt Finland being place on negative credit watches. A negative credit watch is a flip of a coin chance of being downgraded in the next 90 days.

The two other Eurozone countries, Cyprus and Greece are already downgraded, hammered by S&P.

What makes this political, is S&P has some policy prescriptions, they want to see, a new fiscal compact, or a fiscal union, i.e. Euro bonds. S&P has further requirements to come out from under their sovereign credit ratings thumb:

Moody's Gives Negative Outlook on U.S., Keeps AAA

Moody's keeps the United States AAA credit rating but gives a negative outlook.

From their press release:

Moody's Investors Service has confirmed the Aaa government bond rating of the United States following the raising of the statutory debt limit on August 2. The rating outlook is now negative.

Moody's placed the rating on review for possible downgrade on July 13 due to the small but rising probability of a default on the government's debt obligations because of a failure to increase the debt limit. The initial increase of the debt limit by $900 billion and the commitment to raise it by a further $1.2-1.5 trillion by yearend have virtually eliminated the risk of such a default, prompting the confirmation of the rating at Aaa.

In confirming the Aaa rating, Moody's also recognized that today's agreement is a first step toward achieving the long-term fiscal consolidation needed to maintain the US government debt metrics within Aaa parameters over the long run. The legislation calls for $917 billion in specific spending cuts over the next decade and established a congressional committee charged with making recommendations for achieving a further $1.5 trillion in deficit reduction over the same time period. In the absence of the committee reaching an agreement, automatic spending cuts of $1.2 trillion would become effective.

Guess What Portugal, You're Junk

Portugal was just downgraded by Moody's to junk status:

Moody’s cut its rating on Portugal’s long-term government bonds to a non-investment-grade rating of Ba2 from Baa1 and said the outlook was negative, suggesting more downgrades lie in store.

The ratings agency cited the risk that Portugal will need a second bailout before it can tap the bond markets again, and that private sector lenders will have to share the pain.

It also warned that Portugal might fall short of the financial targets it worked out with the European Union and the International Monetary Fund under the terms of its bailout because of the “formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system.”

Greece was told by S&P that their new bail out plan, simply because they are rolling over debt to a longer term repayment schedule, is a sovereign default de facto.

Even the United States has been scolded and threatened by credit rating agencies.

One of the big fears is the European crisis spreads and creates contagion. Seems the credit ratings agencies are determined to make that happen.

Ratings Arbitrage - Letting the Credit Ratings Agencies off the Hook

An amendment just passed the Senate which allows regulators to assign a credit rating agency to evaluate asset based securities. To date, the ones hiring the credit rating agencies are the ones making up these fictional derivatives.

That said, we have this New York Times article reporting more investigations of banks, but this time trying to find evidence the poor little ole' credit ratings agencies were just played as suckers by the banks (cough, cough):

The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.

Since ratings models were available to the ones creating the structured finance product, in this case, credit default obligations (CDOs), issuing firms could analyze the ratings methods to figure out where to hide the toxic, worthless crud contained within, yet still land a AAA rating.

UPDATED: Whistleblower: Moody's is Still Committing Fraud

Wow. These are some serious allegations that Eric Kolchinsky, a Moody's analyst, has made to the Wall Street Journal. Here is a link to the story on Huffington Post. Mr. Kolchinsky is prepared to testify in front of the House Committee on Oversight and Government Reform on Thursday that Moody's is still issuing artificial high ratings to complex debt securities.

Here is what Mr. Kolchinsky told WSJ:

Kolchinsky said Moody's "gave a high rating to a complicated debt security in January 2009 knowing that it was planning to downgrade assets that backed the securities. Within months, the securities were put on review for a downgrade.

What Did SEC Chair Shapiro Say at Yesterday's Hearing?

SEC Chair Shapiro gave testimony in Congressional hearing SEC Oversight: Current State and Agenda

Parsing over the testimony, which EP readers should also scan via the link, some interesting sections.

Firstly it appears the SEC will monitor credit ratings agencies, and appear to be going after paid for ratings requests, which was at the heart of financial crisis. This Friday Night Video has some detailed video interviews, clips on credit ratings agencies and how they enabled the financial meltdown.