This page has been archived and commenting is disabled.
Credit Ratings Offensive?
David Charter and Patrick Hosking of the Times report, Europe launches credit ratings offensive:
The big three credit ratings agencies were threatened yesterday with fines and the creation of a new state-backed competitor, only weeks after European leaders attacked them for exacerbating Greece’s problems with downgrades.
The agencies will be subject to a new European supervisory body with the power to hand out fines and suspensions under plans unveiled in Brussels.
Work on a rival centralised European credit agency is also being carried out by the European Commission, José Manuel Barroso, its President, said.
The Commission’s plans were welcomed by Liberal MEPs but dismissed as heavy-handed by Conservatives, including John Redwood, who called on the bureaucrats to think again.
Mr Barroso, launching the plans yesterday, argued that the big three rating agencies — Moody’s, Standard & Poor’s and Fitch Ratings — should have done more to alert investors to the imminent demise of Lehman Brothers in 2008. “Is it normal to have only three relevant actors in such a sensitive issue where there is a great probability of conflict of interest?” he asked. “Is it normal that all of them come from the same country? Is it normal that such important entities are escaping fundamental regulation?”
Rating agencies have also come under fire in recent weeks after their downgrades of Greek and Spanish sovereign debt rocked markets and led the euro to slide against the dollar. Last month, Angela Merkel, the German Chancellor, and President Sarkozy of France demanded a review of their operations. But Mr Barroso insisted that plans for supervision and regulation were hatched long before the latest row.
Bond investors privately have cast doubt on the credibility of any new body rating sovereign debt if it is bankrolled by those same sovereign nations.
Martin Winn, a spokesman for S&P, said: “We welcome any and all competition, but ultimately investors and the market will determine which ratings are credible and useful.”
The European Commission proposed that an already-planned central European Union regulatory body — the European Security Markets Authority — should take on oversight of the existing rating agencies when it is due to begin work in January 2011.
The new authority would register rating agencies in return for a fee and check that they meet EU rules showing careful research of their rating and no conflict of interest.
The authority will be able to fine individual national offices of rating agencies that cannot or will not justify their methodology, or stop them from issuing ratings temporarily, or even permanently in the worst cases.
The proposal will now go to EU governments and the European Parliament for approval.
Mr Redwood called on the Commission to think again on its plans for supervision and a central European ratings agency. “They are going to find it extremely hard to change the way that credit rating agencies perform ... There is not a foolproof system for saying that certain assets are absolutely guaranteed in all conditions.”
Kay Swinburne, a Conservative MEP, said: “The problems in the eurozone are predominantly as a result of poor fiscal policies of some EU governments, not because of the decisions of ratings agencies to downgrade them.”
Buffett defends Moody’s
Warren Buffett has defended Moody’s, the ratings agency in which he holds a 17 per cent stake, for failing to predict the financial crisis.
Speaking at a hearing yesterday into why the agency had assigned top credit ratings to rotten mortgage products, the billionaire investor said: “They made a mistake that virtually everyone in the country made.” He described rising prices as a “narcotic that affects the reasoning power up and down the line”.
Critics complain that the agencies’ “issuer-pays” business model leads to conflicts of interest, but Mr Buffett said that, as an investor, he would not support a user-pays model, either.
Mr Buffett was forced by subpoena to testify at the Financial Crisis Inquiry Commission hearing in New York, having previously declined an invitation.
The commission also heard from former Moody’s analysts, who alleged that they were forced by their bosses to churn out ratings more quickly than they could properly analyse products, in order to increase the company’s share of the ratings market.
However, Raymond McDaniel, Moody’s chief executive, insisted that an internal investigation had found no substance to the former employees’ claims.
Don't get me started on credit rating agencies. Loved what Buffett said on incentives and how CEOs and Boards of financial institutions have to feel significant pain when their firms fail and the government has to bail them out, but the Oracle of Omaha didn't convince me that the current model for credit rating agencies is the best we can do.
Below, David Einhorn, chairman of Greenlight Capital Inc., talks with Bloomberg's Betty Liu about the outlook for credit-rating companies following yesterday's Financial Crisis Inquiry Commission hearing about the industry's role in the financial crisis.
I don't agree with all of Mr. Einhorn's positions, but on this one, he's 100% correct. Let's move past the nonsense of credit rating agencies and realize that the current model is fraught full of conflicts of interest. By allowing this nonsense to continue, we're making a mockery of our financial system and perpetuating the myth that these rating agencies are truly independent entities that have investors' best interests in mind. Nothing can be further from the truth.
- advertisements -



this is our rating agency.
Funny how that jobs number was pumped by GS at 600K the day before. Depending on what data modelling was used, that 700K figure would have definitely appeared possible. I think the issue is that the underlying data is so incredibly rigged/massaged/fucked with that it's pretty much not possible to come up with a good aggregate outlook.
Leo, I'm somewhat curious as to the reasoning behind investing in publically held solars over private investment in stuff like biofuels. I dig your thoughts regarding putting your money towards the betterment of the human condition, I'm just not seeing the benefit of solars over biofuels.
Regarding the article itself, I actually agree with the idea of putting up an alternate ratings agency, particularly if their ratings were substantially different than the big three. Certainly a threat to their hegemony is a positive for free trade. I do have concerns about political influence in such an agency, but still, pretty much anything that hurts Moody's is a good thing in my opinion.
Make the rating agencies liable for poor procedures.
They can not predict the future but check if there is fraud today.
If memory seves correctly someone (Yves Smith or John Hempton) looked into structured debt and found immediately flaws like missing documentation.
So, they failed at doing their job.
The Rating Agencies blamed faulty ratings on faulty computer programs and got away with it.
If liable, they will be more careful.
Leo, I am not a huge fan of your conclusions, but do thank you for your time and effort. This was a good write up as well. I lol'ed (omg, I like, can't believe I just typed that) when you stated your thoughts on the jobs report as I do with many of your other blissful conclusions. I simply disagree but that is besides the point. What I really want to know, as I consider this to standout like a sore thumb, is why you would be "pissed" about the jobs report? Why the emotional attachment? Or do you mean you are pissed that the markets are down (I'll let everyone else decide why they are down, point to the jobs report if you wish)? I ask honestly as I cannot imagine why someone would have an emotional response to the jobs report, or any piece of economic data for that matter.
Well, this whole week Leo was very vocal about how everyone on ZH is too pessimistic. Of course, reality is that most people on here are realistic, and reality is incongruent with Leo's rosy view of the world.
So, Leo's emotional state is reduced to 2 possible options. Either admitting that he's wrong and try to understand why. Or getting angry because of a bruised ego, and then data mining to backup his own original world view. Looks like he's going with the latter. I await to see see his 'new' findings.
I am pissed, and will come back tonight to "Man Up" and look deeper into this jobs report.
Oh No!
I am scared now.
Thanks, Leo.
Look fwd to seeing your thoughts. It's a deeply disappointing
report. CNBC says 430K new jobs, 410K of them from temp census
work.
http://www.cnbc.com/id/37505460
Yikes!
Hey Leo with all the sunshine being blown up everyone's ass maybe your solar play is not far off the target. What do you think about rectal photovoltaics?
Off point but.... Leo what is your take of the developments of the day? There is no employment growth. You were wrong. Europe, via Hungary is again exploding. You still buying dips? This is a risk off market. Nothing is safe.
Oh, wait, wait, wait, there was employment growth in government and unemployment benefits, that counts doesn't it? It is all perception. I am buying the dips, in gold, treasuries and tobacco, I need something to smoke after I get screwed.
Leo,
"You were wrong"
"Buy the dips, short the vix into 2010 and beyond"...."solars will sizzle"
Natgas is perking up, the real deal in clean energy..... and your beat up solars look do for a bounce.
El Hoser,
STFUP and buy solars. I'll even give you a specific stock: Suntech (STP), but there are plenty of other great names to choose from. I will not touch nat gas for now. Still too early.
lol, don't touch nat gas but buy solars! you're brilliant.
Hey Leo,
Thanks for giving everyone heads up on the amazing jobs number this morning. I believe your estimate was 700k++ correct?
The service you provide us is truly appreciated, and you definitely don't speak out of your ass.
Regards.
I received this message this morning:
Hi Leo:
Just in case you missed this really great (imo) 2007 article by Don van Deventer of Kamakura Company (www.kamakuraco.com) titled "The History and Future of the Rating Agencies".
Here is the link to the article:
http://www.riskcenter.com/story.php?id=15308
JESUS FUCKING CHRIST; WHATS GOING ON.
Sovereign Wideners Entity Name 5 Yr Mid Change (%) Change (bps) CPD (%) Austria 95.44 +23.33 +18.05 7.96 France 102.11 +22.19 +18.54 8.48 Germany 52.04 +18.70 +8.20 4.41 Belgium 130.33 +18.27 +20.13 10.71 Sweden 43.32 +15.89 +5.94 3.70 Spain 295.47 +15.25 +39.09 22.39 Ireland 297.60 +14.51 +37.70 22.45 Finland 34.28 +13.87 +4.17 2.94
Something bad just happened; Yerp took up cliff-diving just now.
The sell side thought the ratings agencies did a great job and more importantly, they created a guilty party that's helped move the spotlight off them.
How desperate - or clueless - do the Eurocrats have to be to criticise Standardless Whores and their brethren (and sistren) for being too strict? These messengers will say anything you pay them to. No need to shoot them. Sheesh.
Sovereigns appear to believe that no one and nothing can be allowed to interfere with their God-given right to roll over infinite amounts of debt in perpetuity at whatever coupon they believe is "fair."
When a bond vigilante calls them on their bullshit, their first reaction is to criminalize him.
The west is addicted to debt and it is going to seriously suck when rates rise to a level commensurate with the risk of money.
What better way to continue Public Employee ripoff pensions for a few more years than to outlaw evaluations of obligations of Soverign nonsense?
Some people have decided that we are NOT all in this all together and that they should have preferences on incomes. No production, guarantee prosperity for a lifetime, vote for increasing wages and benefits. Geometric progression gurantees a failure,
Leo The Cut and Paste Specialist
You liar.
Deep. STFU. Give credit where credit is due, and stop posting the same damn thing on every one of Leo's threads. If you've got something better, lets see it ok. I'm not his biggest fan by a long shot, but this was a good read, a good write up, and a solid post. Thanks Leo.
keep licking his balls
No, probably not; since NA rating agencies will still be the go-to guys when it comes to debt ratings [globally]; but ESMA evaluating the quality of EU debt and thus ascribing the coupons, yields and ultimately second market dynamics could work for European debt in European markets.
Me thinks EU is headed towards Japanese economic environment; and most the debt will be held not by outsiders but big PF and other institutions. ESMA could work, with respect to what I just said, if and only if it is structured as an auxiliary/proxy institution of the ECB or EC.
Nice article Leo. Good job.
Greetings from Strasbourg.
Yeah thats our view too. Interest rates low, screw down wage advances and control inflation expectations.
Anything to keep the public sector gravy train moving in France.
Good afternoon Artful_D. Its always nice to hear from you. Now, if you would allow me to be so impolite; I have a little request I would like to send your way. Could you, if its not a big problem for you, be so kind and drop me some insights once in a while. Its really difficult putting things into perspective just by extrapolating the moves in the Inter-Bank lending market [which is a worthless indicator due to the unusual pricing mechanism] and Credit Derivatives [ditto IB markets], and the usual sources are not saying much [or not knowing much]. I do not want to take your precious time, but it would be of great help.
Perhaps. Although I think lots of things are possible in Japan that wouldn't (can't) be possible in other political states that don't have a similarly homogeneous population and a universally accepted (and ancient) culture.
More importantly...apparently I have to find my remote underneath 72 ancient deli sandwich wrappers because not only has Bloomberg TV lost it's Soviet cable news look but Betty Liu is hotter than Maria ever was in her prime. I mean... Holy Cow!
And just slightly less significant is the likelihood that we may be witnessing the passing of the Investor God torch from Warren Buffett to David Einhorn. Buffett is and has been a great value investor. Don't take my word for it, look it up. Einhorn is also a great value investor but his bam-bam-bam presentation just plays better these days and seems more convincing than Buffet's "trust me, I'm folksy" shtick. Plus Einhorn is young, has much less baggage and...oh, yeah...he's been fucking right a lot lately (and otherwise seems to have his head screwed on straight).
Oh how charming. Why don't they just declare any rating less than AAA a "hate crime?"
By the by...before today have there been any European credit rating agencies with any clout? ...or is this just me-too NRSRO-ism? (hey, that scam worked great in the US for this long...)