Rating Agencies

USSAAA - S&P Reconsiders Downgrade After White House Challenge

McGraw-Hill: meet Chicago-style negotiations. And there, in one sentence, is all that is broken with this country. The reason for the beyond ridiculous horse trade, according to CNN: S&P analysis of U.S. revenue, deficit picture was questioned. Presumably S&P ignored to add the $10 quintillion dollars that were saved by America not declaring war on Tatooine and its most infamous Hutt resident: Larry Summers. Indeed, again according to CNN, S&P acknowledged some errors in its analysis. Isn't it amazing what being threatened with having your NRSRO license can do for motivation to double check your work, eh you pathetic sellouts? Who would have thought that last week's farce debt ceiling would continue and develop into a national pastime. Below, for the sake of S&P's non-existent conscience and incompetence, are their own guidelines for what constitutes an AAA-rated credit. Readers can decide if the US is one. In other news, in USSAAA, government downgrade rating agency.

Reggie Middleton's picture

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.

The War Against The Rating Agencies Begins: Italy Prosecutor Seizes Moody's, S&P Documents

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.

Guest Post: EFSF - Too Small? Too Big? Or Just Wrong?

The EFSF plan to let countries buy bonds at a discount is a true Catch-22 proposition. If they don’t source many bonds, the benefit to the country is too small to make a difference at the sovereign level, and sovereign contagion risk remains in play. But if they are able to buy a meaningful amount of bonds, those bonds will be coming from banks that had been desperately avoiding taking the mark to market hit, potentially triggering contagion among the banks. The narrow window where this program might stop sovereign contagion without triggering bank contagion is too small to think that a bunch of politicians or economists will be able to steer the course accurately and that some other unintended consequence won’t rear its ugly head.

Daily US Opening News And Market Re-Cap: August 1

Markets reacted positively to news that the White House and senior Congressional leadership had agreed, in principle, a deal to raise the US debt ceiling, which provided support to European equities, and weighed on Bunds, whereas the Eurozone peripheral 10-year government bond yield spreads narrowed across the board. A renewed appetite for risk provided strength to WTI and Brent crude futures, and spot Gold prices came under pressure. Elsewhere, commodity-linked currencies, including AUD, NZD and CAD, remained the prominent beneficiaries at the cost of safe-haven currencies, such as CHF, JPY and USD. In other forex news, GBP came under extensive pressure after manufacturing PMI data from the UK demonstrated a contraction, and reached its lowest level since Jun'09. Moving into the North American open, the economic calendar remains thin, however markets look ahead to the ISM manufacturing data from the US. With regards to the US debt debate, focus now shifts to whether the US debt ceiling deal can go through the House and Senate before an August 2nd deadline, and any reaction from major rating agencies pertaining to US's sovereign ratings.

Highlights From This Morning's "Meet The Press"

Below are the key clips from this morning's Meet The Press which is devoted exclusively to proponents of the status quoTM, whose entire argument boils down to the syllogistic: "cut spending yes... but not today...never today" In fact, it is best to make any cuts the next administration's problem. So assuming Obama gets reelected, and there is another debt ceiling hike, which there will have to be, it means about $7 trillion on top of the currently debated $3 trillion, whoever inherits this mess from Obama (who in turn inherited his mess from Bush, who in turn inherited his mess from Clinton, and so on), will have $24 trillion debt to deal with on day 1, with about $16-17 trillion of GDP. And that person will have to cut spending? What idiot would want that job? Anyway, we fully expect the paid government workers from the rating agencies to shortly upgrade the US to AAA+ on renewed growth prospects courtesy of 140% debt to GDP in 5 years...and that excludes the $7 trillion in off balance sheet GSE debt.

Guest Post: Whack-A-Mole

Bernanke and the Fed have to re-evaluate the grade they gave to QE2. How we have such a massive revision in Q1 GDP is hard for me to understand. Seriously, we need to find a way to get better data, but with a 0.4% quarter right in the heart of QE2, it is clear it did nothing to help the real economy. And yes, it is getting old, but I will say it again, the market is not the economy. I am now cutting all my short. I had cut some coming into this week, as I was scared of the rally, but kept enough on that I can't complain too much. I am flat and tempted to go long. We've had a big move, and government resolution is likely to come, but it feels like that is a crowded trade. No one seems really afraid, and everyone seems to expect a bounce. Just because everyone expects it, doesn't make it wrong, but I'm concerned that all the longs will pop out of their holes the second a deal is announced. They will look around for someone to panic and take them out of their positions on the debt ceiling news. Then they will look some more, and then realize that no one is caught short or surprised and they will scurry to get out of their positions. Well, I just convinced myself to go back to putting on a small short.

Frontrunning: July 29

Amid Debt Battle, More Americans Say Economy Getting Worse (Gallup)
Treasury Faces Pressure to Detail Backup Plan (WSJ)
Debt-Increase Dispute Tests Boehner’s Power (Bloomberg)
U.S. Economic Growth Probably Slowed (Bloomberg)
IMF Board Holds Informal Board Meeting On EU's Greek Financing Deal (WSJ)
Why are we in this debt fix? It’s the elderly, stupid (WaPo)
France Seeks Rapid Adoption of Greek Bail-Out (FT)

Treasury Leaks Worst Case Contingency Plan: Creditors Get Priority In Case Of Technical Default

Things are getting real. After all the bluffing, huffing and puffing by Geithner, the rating agencies, and anything with a pulse and a TV or radio pulpit has failed, the last trump card is coming down. While yesterday the Treasury informed that it would not disclose any details of its contingency plan, Bloomberg has just learned via a Treasury leak that the US government will give priority to bondholders. From Bloomberg: "The U.S. Treasury will give priority to making interest payments to holders of government bonds when due if lawmakers fail to reach an agreement to raise the debt ceiling, according to an administration official. The official requested anonymity because no announcement has been made. The Treasury has said about $90b in debt matures on Aug. 4 and more than $30b in interest comes due Aug. 15. Overall, more than $500b matures in August." And so it begins: while the Treasury has not yet pushed the big red flashing button, this leak is nothing but it latest and greatest bluff. It also means that America will, indeed default, next week, as the absence of a contractual payment is a default. And then we get into the fine print with the rating agencies whether or not X is default but Y is not. At that point however it won't matter: every form of intermarket liquidity will be permanently gone as Lehman will be a cherished walk in the park. Thank you Tim Geithner and your total lack of contingency plans.

Goldman On What A US Downgrade Will Bring: Spoiler Alert - Nothing Good (And Why It Is Nothing "Like Japan")

When it comes to sellside research ideas (no matter how wrong) being mysteriously converted into official policy nobody, and we mean nobody in the world, is more effective at this "task" than Goldman. In addition to being a herd leader of all the other momos on Wall Street (with Deutsche Bank being dead last), what Goldman wants, whether it is QE1, QE2, or the final layout of the eurozone bailout package #2, Goldman gets. Which is why people actually do care about Goldman's research: not because it is right, it rarely if ever is, unless of course one gauges its success with the bonus pool for Goldman Sachs itself in which case it has been a massive success without fail, but because everyone in DC reads it as gospel, and whatever is advised is eventually implemented. Which is why even as we have skipped numerous analyses of what would happen to the US should its rating be cut, Goldman's is a must read, not the least because Goldman finally puts all those economic illiterates who compares a US downgrade to that of US and assume off the bat that nothing bad can possibly happen. Wrong. Just ask Jan Hatzius: "It bears repeating that no two episodes are alike – nor is any historical episode a close parallel to current US circumstances." And while even he admits he has no idea what will happen, he doesn't get paid by the blank piece of paper so the Goldman economist did have to supply 4 summary conclusions of what will happen when the US is downgraded, sometime over the next 3-4 weeks: 1. A drop in equity markets, but probably a modest one, 2. Some weakening in the currency, 3. A steepening of the yield curve and a cheapening of Treasuries relative to OIS, 4. Some weakness in the financials sector. In other words, "we have no idea, but it won't be good." We totally agree. The full note is below for those whose brains aren't petrified enough to assume that the Japanese downgrade is in any way remotely comparable to that of the US.

ISDA Issues Q&A On What Happens To US CDS In Case Of A Default

ISDA is getting nervous, or rather the same contingent of clueless "asset managers" who listen to ISDA as religiously as they listen to the rating agencies, is getting nervous. The boilerplate: "The following are responses to the most frequently-asked questions that ISDA has received in connection with a potential CDS Credit Event on US sovereign debt. The following does not constitute legal advice, and is subject in all respects to any determination that the ISDA Americas Credit Derivatives Determinations Committee may make in relation to CDS referencing the United States.  ISDA makes no comment on the likelihood of the events described in this Q&A." True - for the likelihood of any event happening, your best bet is to ask Turbo Tax Tim, and then multiply the answer by -1.