Rating Agencies

Just like in the US, where we had our very own Treasury Secretary telling us there is "no risk" the US would get downgraded, about 3 months before America did in fact get downgraded, the cognitive dissonance between reality and fantasy is fully exposed today, this time in Europe. And whereas patriotic chauvinism has its good and bad sides, listening to politicians explain away how the impossible has just happened is always very amusing. Especially when translated by Google. Such as in this case, where we have grabbed the following article from Les Echos and dumped it into the modern version of the babel fish.

Life goes on, so does the stock market. 

I go schizoid.

We dont' need any water, let the mo@#$#%ker burn!

The Fearful Flight To Quality Trade stuffs global capital into US treasuries once again, negative yields forthcoming! As Bernanke, et. al. gambled, Europe collapses first - suppressing our gambling costs to record levels. Hey, it was either Europe or China, and our bet was Europe too! Kudos Mr. Bernanke for kicking the can down the road once again.

And so the war against the rating agencies is now official as a floundering Europe does anything in its power to scapegoat anyone and everyone, starting with its natural sworn enemy of course, the rating agencies. According to Reuters, "Italian prosecutors have seized documents at the offices of credit rating agencies Moody's and Standard & Poor's in a probe over Suspected "anomalous" Fluctuations in Italian share prices, a prosecutor said on Thursday." Ah yes, it is Moody's fault that Unicredit, Intesa, Fiat and pretty much all other Italian companies now close limit down at least once a day. Either way, this is sure to end well. We will bring you more as we see it.

The schizophrenic EU once again confirms it has forgotten to take its daily dose of Geodon. Reuters reports that banks in the European Union face curbs on how much they can depend on ratings from credit agencies to calculate the size of their capital safety cushions. Michel Barnier, the EU's financial services chief, said he will make the proposals as part of his reform to bring EU bank capital requirements in line with a global accord known as Basel III that will increase the size of capital buffers. "To limit overreliance, we will be strengthening the requirement for banks to carry out their own analysis of risk and not rely on external ratings in an automatic and mechanical way... We will also make other concrete proposals before the end of the year to limit over-reliance to deal with insurance, asset management and investment fund sectors," Barnier also told the European Securities and Markets Authority (ESMA). Translation: banks will be told to .... police themselves. As for the basis of this move, it is all too clear: remove the influence of the ratings agencies on the fact that the European ponzi is unravelling faster than Lady Gaga's costume at next year's VMA. But wait, what about that AAA rating on the "CDO at the heart of the Eurozone." Oh, well, since that's an AAA, they are fine with that. Of course, if the CRA's say enough, and actually slap a rating that is truly appropriate with this reverse synthetic debt contraption, it's game over.

Well this was unexpected: the rating agencies, for years and years patsies of their highest paying clients, have suddenly found their conscience, if not religion, and adamantly refuse to bend long-standing rules which qualify the proposed Greek MLEC/CDO type rescue as an event of default. Per Bloomberg: "The rating companies have signaled the plan would trigger because it is being done to avoid default, so couldn’t be considered voluntary, and because investors would be worse off than by holding the new securities." The ECB is so confused by this intransigence and unwillingness to bend to the will of the criminal cartel that earlier today the ECB's Novotny was complaining to Austrian TV about this unexpected demonstration of independence: "Debt rating agencies are being much tougher on potential private-sector contributions to Greece's debt woes than in past bailouts, European Central Bank Governing Council member Ewald Nowotny said on Monday. "We are conducting a very difficult conversation with the ratings agencies," he said."This is what we have to try to find: a way that on the one hand certainly involves banks without having this lead to a default as a consequence," he added. "I also must say it strikes me that the ratings agencies are being much stricter and more aggressive in this European matter than they were, for example, in similar cases in South America. I think this is something we will have to think over." As a result of all this sudden uncertainty, Bloomberg now speculates that the ECB will have no choice than to flip flop on its own adamant position of isolating defaulted collateral, and accept Greek bonds even in an event of default: “The ECB cannot remove liquidity from the big Greek banks,” said Dimitris Drakopoulos, an economist at Nomura. “This discussion is a waste of time. The ECB is going to back down in the end -- what can they do?” he added."

A few days ago, when we explained that the current iteration of the European bailout plan is nothing but a repeat of the failed MLEC off-balance sheet plan, which was supposed to prevent the subprime bubble from exploding, we wondered just why Europe has settled on this plan. Now we know: it appears that it was the rating agencies, arguably well-padded with $100 bills to compensate their collective conscience, who suggested that this is the only format of perpetuating the global ponzi without Greece being declared an Event of Dafault. Per Reuters: "The whole charm of the French model is that it was worked out in a such way that it will be fine with the rating agencies." There it is: expect headlines to slowly start leaking from S&P et al that the MLEC part deux will actually not be an Event of Default, and so Europe has the all clear to continue kicking the can down the road for several more years courtesy of money that is literally created out of thin air, and pledged by assets that no longer generate virtually any cash flows.

Just a ROFL-inducing headline from Bloomberg for now:

• PORTUGAL OPENS CRIMINAL INQUIRY INTO RATING AGENCIES

Are blogs next?

Never have so many, said so much, that's so wrong. It seems like a combination of deficits and rating agency action have sparked a myriad of comments, many of which are just plain wrong....First, on the deficit. NEITHER party is reducing the existing cumulative deficit nor amount of debt outstanding. They are NOT creating surpluses anytime in the next few years (decades)! They are cutting the projected deficit...Secondly, after getting wrong what the deficit reduction really is, they get wrong the likelihood. Talks about 2030 being balanced. Excuse me???? In November the talking heads thought we might see tax cuts expire. They didn't see new spending. In December, we got both! Why do we assume things will be better 15 years from now when we can't predict a few months out very well? Probably, the obvious reason. IBGYBG. I'll Be Gone, You'll Be Gone. Stocks have rallied from 900's to 1,300 as the smart money bet on unwavering and unlimited government support. Tepper was spot on. He called it for what is was. Now, smart money may be realizing that game is over... The pundits can continue to be wrong about their budget commentary, can scream til they are blue in the face that the rating agencies don't get it, but we have moved one more step towards that slippery slope where government support for stock prices is getting more difficult to implement.

Naming names ...

Here's the scary part ...

The Financial Crisis Inquiry Commission has started its hearing on the worthlessness of Rating Agencies. As was previously reported, Warren Buffett was subpoenaed to participate in this hearing after the refused to testify voluntarily. Interested readers can watch the full hearing live and commercial free at the following C-Span 2 site.

I was clearly able to see the Greek bank downgrades coming, but there was one bank that was left out, as I expected it to be. If or when that bank gets downgraded, it is a strong chance that Greece will go down with it.