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Guest Post: Look At Me - I'm A Junk Rated Bank

Tyler Durden's picture




 

Submitted by Alexander Gloy of Lighthouse Investment Management

Look At Me - I'm A Junk Rated Bank

Everybody hates rating agencies. They missed Enron (balance
sheet fraud), the sub-prime crisis (using models provided by banks) and
sovereign debt crisis (concealed by foreign currency swaps). They have
been wrong – so what? Stock market analysts are wrong all the time, and
investors still read their worthless reports. And what would you expect
from a stock recommendation if you knew it was paid for by the company
the report is about?

(People – you really need to switch off that Consumer News and Business Channel and put on your thinking caps.)

Anyway. I came across this Weekly Market Outlook from Moody’s
Analytics. They do something remarkable. They compare their own ratings
with the rating implied by CDS (credit default swaps). Usually the
rating agencies are a little bit behind the curve, so the CDS can give
more of a “real-time” view of where the rating should be.

In this week’s report we find the following table:

Source: Weekly Market Outlook, June 16, 2011, Moody’s Analytics, page 27

Look at Bank of America and Merrill Lynch (now, of course, owned by
BoA). Their implied rating is junk! JPMorgan Chase, Well Fargo and HSBC
Finance Corp are not far behind in the BBB category.

I know, there is some rating uplift from assumed government support,
but still – who wants to do business with a junk-rated financial
institution with a leveraged balance sheet and funky accounting
principles (FAS 157)?

“Come and I’ll take you for a ride. I am a junk-rated bank.”

Over in Europe, it probably doesn’t come as a shock that Rabobank
actually isn’t really AAA. The ratings of BPM, RBS and Lloyds shouldn’t
be part of the investment-grade club. And BNP-Paribas, merely the
world’s largest bank by assets, is one step away from an implied junk
level:

Source: Weekly Market Outlook, June 16, 2011, Moody’s Analytics, page 28

With industrial companies, rumors of
bankruptcy often become self-fulfilling prophecies. Suppliers, anxious
to be left with outstanding receivables, begin asking for cash on
delivery. This further aggravates the liquidity situation of the already
troubled company. Banks usually shy away from extending credit (or
offering new credit lines). And so the company goes bankrupt.

Large banks have the adorable habit of
bankrupting entire nations (Ireland was financially healthy before it
was forced to bail-out its banks). In the last round (2008/2009),
governments still had financial leeway to bail-out their banking
sectors. Three years later, this is not the case.

The last card up the banks’ sleeve remains
mutually assured destruction: if you (governments / tax payers) let us
go down, everybody goes down. Banks bail-out governments, governments
bail-out banks. Until the rope slips:

 

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Sat, 06/18/2011 - 12:56 | 1380301 oogs66
oogs66's picture

all the talk about what banks need to do by 2015 is silly, they should be raising capital now!  they should have been raising it last year!  if (when) we get another downturn in the economy with sovereign debt problems everyone will wish the banks had raised money when they could, but instead people want to complain about a couple extra % of capital the banks are supposed to get in a few years?  that is why we have not seen the bottom of this crisis

Sat, 06/18/2011 - 13:16 | 1380372 wanklord
wanklord's picture

The sooner the US economy collpases the better, so the brute and ignorant American populace will finally learn NOT to live beyond their means.

Sat, 06/18/2011 - 13:47 | 1380485 Monedas
Monedas's picture

What makes you think a collapse will spoil our lust for the unearned and living beyond our means ??? Monedas 2011 Elizabeth, "Stop snacking Freddie....you'll spoil your appetite !". Freddie, "Elizabeth, sometimes a complete meal doesn't spoil my appetite !".

Sat, 06/18/2011 - 19:08 | 1381268 Rynak
Rynak's picture

Article: "Banks bancrupt nations"

Neo-Republican: "Didn't read the article, but let me say everything should go to hell, to teach the socialist population a lesson."

Sat, 06/18/2011 - 13:02 | 1380331 AgShaman
AgShaman's picture

Hohoho....Hehehe....Hahaha.....Fucking Walrusesesez....Coo Coo Ka Choo

I wish I believed in Hell....then I could envision Ratings Agencies having their own private level dedicated to their ilk....one floor either up or down from the Banksters

Sun, 06/19/2011 - 11:19 | 1382434 ibjamming
ibjamming's picture

Wouldn't that be something?  A "personalized afterlife".  The Jeffrey Dohmers of the world have their skin peeled inch by inch...forever.  Bankers and politicians become Poor lepers.  Mother Teresa's get to be waited on hand and foot.  And people who just wanted to smoke weed all day...get to smoke weed all day.

Sat, 06/18/2011 - 13:03 | 1380333 zeneta
zeneta's picture

I have no doubt these "banks" are prepared to break apart into any number of "publicly traded" entities.

 

A self-imposed Glass-Steagall, to confound Dodd-Frank, and keep the Regulators behind the curve.

 

 

 

Sat, 06/18/2011 - 13:12 | 1380350 gmrpeabody
gmrpeabody's picture

+Baa2

Sat, 06/18/2011 - 16:36 | 1380938 fxrxexexdxoxmx
fxrxexexdxoxmx's picture

Sat, 06/18/2011 - 13:32 | 1380388 Monedas
Monedas's picture

Look at their silly rating system ? Baaaaaaa ? Why not rate 1 to 100 or 1 to 1000 ? Only using the first three letters of the alphabet implies that all paper is in the upper 3/26ths per centile ? It's like Comex warehouse stats......not nearly as clear as they should be ! It's like public employee pay stats and Ft. Knox inventory report ! Monedas 2011 My bathroom leaf blower Xcelerator is ready to blow down this house of cards and keep my male "taint" kissin' sweet ! Edit : The leaf blower motor is so powerful it starts to heat up the air flow ? No perceived benefit for leaf blowing....but a great advantage over those cheap bathroom hand dryers that are weak winded and put out cold air ???

Sat, 06/18/2011 - 13:56 | 1380504 Careless Whisper
Careless Whisper's picture

If those ratings were converted to FICO socres, some of those banks wouldn't meet their own lending standards.

Sat, 06/18/2011 - 13:38 | 1380443 Extremist Tan
Extremist Tan's picture

Brilliant post.  If you could get the legacy media to report credit-default spreads (much easier to understand and more meaningful than, say, S&P futures and the like), you might see fewer bubbles, smaller banks, and safer lending practices.

Sat, 06/18/2011 - 13:45 | 1380464 Careless Whisper
Careless Whisper's picture

I give props to Moody's for disclosing this info and informing everyone that the market has a very different opinion of what the ratings should be.  Hidden in plain view, as they say.

Looks like Mister Market has given Mister JP Morgan a spanking. Ouch.

 

Sat, 06/18/2011 - 13:53 | 1380502 williambanzai7
williambanzai7's picture

I wouldn't say so what about the rating agencies. There are plenty of pension funds and insurance companies that still go through the empty motions of fiduciary responsibility based on what those douche bags say.

Sat, 06/18/2011 - 14:28 | 1380612 LawsofPhysics
LawsofPhysics's picture

You are correct Banzi, but mostly because of old policies left in place from the stone age that say these fund managers have to.

Sat, 06/18/2011 - 14:50 | 1380683 max2205
max2205's picture

Someone needs to do a performance statement on a hypo $1 mill portfolio from 2001 to now based on rating agencies buy/upgrade sell/downgrade.

I bet it goes to zero by 2003

Sat, 06/18/2011 - 14:13 | 1380575 Dick Darlington
Dick Darlington's picture

Could well be that even those implied ratings might be too optimistic for some of those banks. Jun(c)ker is panicking in public and warning that the debt crisis might tip Italy and Belgium over the edge even before Spain. Usually this muppet lies and denies all the problems and talks abt "confidence" and other nonsense. Is he finally starting to get that the eurofanatics have lost the game? And when Italy, Spain and Belgium finally tumbles, there won't be many of those banks left.

http://www.afp.com/afpcom/en/taglibrary/thematic/economy

Sat, 06/18/2011 - 14:28 | 1380613 xamax
xamax's picture

+ 1

 

Sun, 06/19/2011 - 07:29 | 1382171 Dick Darlington
Dick Darlington's picture

Here's an article in El Pais abt the spanish "hidden debt". I just wonder how much the local savings banks (cajas) are on the hook for all this... EU willingly looks the other way when it comes to creative accounting.

http://www.elpais.com/articulo/english/Hiding/debt/in/hundreds/of/agenci...

Sat, 06/18/2011 - 14:15 | 1380578 LawsofPhysics
LawsofPhysics's picture

Nothing changes so long as "mark to unicorn" accounting is in play.  Do your own homework, fuck these agencies.  The battle to loose the least has begun.  I am now long all things physical and short all things paper until the perpetual QE (bond maturing and bond buying within forced parameters) begins, then I will have another look.

Sat, 06/18/2011 - 14:26 | 1380616 zeneta
zeneta's picture

How about an audit of DTCC?

If you want to expedite the eventual collapse, the DTCC holds one of the keys.

They seem to have been untouched by everyone.

I have no confidence they are immune from corruption.

 

 

 

Sat, 06/18/2011 - 14:56 | 1380690 max2205
max2205's picture

DTCC is quietly delisting and voiding penny stocks. A bailout to naked short marketmakers. Couple of billion here.....

Sat, 06/18/2011 - 17:21 | 1381033 zeneta
zeneta's picture

Bottom line:

 

They cannot balance their books !

Penny stock, short positions among Market Makers are sent to Canada.

Naked shorts of US listings are only part of the problem.

I used to trade equities with Spear leeds, and I can tell you, even as a somewhat (10 to 15 Million intra-day) a small player, I was never told or even discouraged from any of my trading activities.

Both, Spear and later Goldman, just want transactions.

Nothing has really changed.

I could short a new issue and as long as I covered before the close, there was never an issue.

I did on many occasions have to deal with the "up-tick" rule, but that was easily overcome with the help of Susquehanna, they are all to willing to facilitate whatever you want to do. For a fee, of course.

 

I love HFT's and Dark Pools, because their seemingly unpredictably is predicable. 

You must always ask the question: What would you do if you were in their shoes?

It's capitalism exploiting the ignorant.

Because they CAN.

Nobody can blame anybody for taking advantage of the less informed.

If so, we must outlaw calculators.

 

 

 

  

 

 

 

Sat, 06/18/2011 - 14:38 | 1380651 zeneta
zeneta's picture

And BTW, I agree with you.

It is a simple question of risk.

As I posted earlier, I fully expect a flood of IPO spin-offs from GS, JPM, MS and B of A, to be in the news very soon.

What better way to create shareholder value and diffuse the risk from both regulators and market conditions.

And a big payday in the process.

btw, did you see that "The Carlyle Group" has prepared an IPO?

 

 

 

Sat, 06/18/2011 - 14:19 | 1380597 Sudden Debt
Sudden Debt's picture

CITI and BAC should bot be trading at a 95% discount. Just look at the div. they pay and do the math.

You just don't buy a bank below a 10% div.

Sat, 06/18/2011 - 14:22 | 1380607 LawsofPhysics
LawsofPhysics's picture

Question;  When Russia imploded in ther 90's and the ruble crashed, the mafia reasserted itself. mainly because these guys understood raw capitalism in unregulated form.  Since the mafia in the U.S.  has long been castrated by the NWO (think of what vegas used to be-  now propped up by junk bonds for 20+ years),  who fills this void when the dollar collapses?  Is our diversity our strength or weakness?  Big differences between Russia and the U.S. on this front, but the feeling of "entitlement" is frighteningly similar.  I'll be back in a few hours to see how the discussion went.

Sat, 06/18/2011 - 14:48 | 1380678 Careless Whisper
Careless Whisper's picture

I'll be back in a few hours

Oh, I get it, you're gonna play the back 9.

Well, when and if the dollar collapses, there will probably be a push to use the NWO/IMF preferred currency which is the Bancor. It's no secret that the IMF wants that. They other choice would be to follow the Constitution and issue currency that is in some way backed by gold or silver. Then there may be some who want to go down the road of Bitcoins but that seems rather fringe at this point.

Since the mafia in the U.S. has long been castrated by the NWO

seems like self-mutilation.

Is our diversity our strength or weakness?

maybe everyone should just STFU and follow orders?

 


 

Sat, 06/18/2011 - 14:50 | 1380684 jm
jm's picture

So CDS reflect newsflow in real time and ratings are updated much less frequently.

Ratings agencies are essentially poor journalist with a pro-cyclical bias... they make good times look better and bad times look worse.

Sat, 06/18/2011 - 14:57 | 1380694 buzzsaw99
buzzsaw99's picture

risk on bitchez!

Sat, 06/18/2011 - 15:30 | 1380742 Monedas
Monedas's picture

How about "Never on a Sunday !" from Zorba the Greek or "Money makes the world go 'round !" from Cabaret ? For the risk biscuits ? Monedas 2011 Musical Comedy Jihad World Tour PS My bitch Sandy is pregnant again ! Puppy food ! It will be a good change up for Lucky and Dorado ! They can't survive on just kibbles and kittens....need a little variety in their diet ! They bagged a full growed (grown) cat yesterday in my woodpile ! I love resourcefulness in people and in pets !

Sat, 06/18/2011 - 15:44 | 1380827 WeekendAtBernankes
WeekendAtBernankes's picture

Can anyone suggest a link to some less opaque evidence?

I have a family member with a lot of money tied up in WF and I want to be able to make an effective case about moving some of it into safer banks.

Sun, 06/19/2011 - 09:49 | 1382289 ebworthen
ebworthen's picture

"Tied up?"  As in, deposits or stock?

They shouldn't have over $250K for the FDIC guarantee.

You don't need anymore than common sense to tell someone to not have more than 33% of their junk in any one venture.

Sat, 06/18/2011 - 17:02 | 1380967 cowdiddly
cowdiddly's picture

Thats what I thought when I was reading the article. That bad ass army tank of a truck was the most desirable asset of the lot. LOL

Would make a killer SHTF vehicle with a 50Cal mounted in the back Libya style.

Sat, 06/18/2011 - 17:26 | 1381053 Stuck on Zero
Stuck on Zero's picture

What would the translation be between a rating agency rating of say B1 and a personal credit score?  Would AAA be 780 and B1 a 300? 

Sat, 06/18/2011 - 21:30 | 1381498 Monedas
Monedas's picture

Welcome to the digital, metric Socialist world of Planet Fiat ! They promised me 10 hour clocks, 10 eggs to the dozen, 10 months to the year, Spain and Russia would narrow the guage of their railway tracks to conform to the rest of Europe and centralized command controlled economies ! Then I found out that the 25 shit poorest countries in Planet Fiat were still hoping for the marvelous metric miracle to kick start their economies ! LOL Monedas 2011 "It's economic freedom, stupid !"....Things James Carvel never said.  http://trololololololololololo.com/

Sat, 06/18/2011 - 18:02 | 1381157 Cognitive Dissonance
Cognitive Dissonance's picture

They missed Enron (balance sheet fraud), the sub-prime crisis (using models provided by banks) and sovereign debt crisis (concealed by foreign currency swaps).

Sorry.......but they missed nothing. They deliberately looked the other way and whistled through the future graveyard. To say that they 'missed' anything is to enable their own self victimization.

You can't find what you're not looking for. Period. Full stop.

Sat, 06/18/2011 - 18:15 | 1381175 citta vritti
citta vritti's picture

until it whacks you upside the head when you weren’t looking

Sun, 06/19/2011 - 11:22 | 1382432 TexDenim
TexDenim's picture

Excellent point: why use static or linear models when the markets themselves provide you with an implied rating which is more timely and more accurate? Rating agencies might have made sense when daily newspapers were the primary vehicle for conveying financial news. Today, they make no sense at all. They are like buggy whips. Ready for the Smithsonian.

Sun, 06/19/2011 - 12:33 | 1382583 JustACitizen
JustACitizen's picture

Geez - they were bankrupt - and notwithstanding the rapine going on in the commodities markets - the float from the gubmint - the bullshit criminality at the trading desks - they are still bankrupt.

I am more amazed that anyone listens to them - trusts them with their assets - or buys (financial) products from them.

They are lousy business men - look at their track record...parasites - they make nothing and consume much...convinced they possess some unique insight and are "productive members of society". The truth is that they aren't even decent human beings.

An f'ing physicist may be a genius in physics and not be able to negotiate a car deal. Bankers think that being able to master the math behind compounding interest sets them apart - the truth is - they couldn't even change the oil on a lawnmower.

Sun, 06/19/2011 - 14:38 | 1382785 DrunkenMonkey
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Day-ummmm !

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