Standard & Poor's has broken its relative silence over the US government's $5 billion fraud lawsuit against it in style. Slamming the DoJ's suit as "impermissibly selective, punitive, and meritless," S&P - seeking to dismiss the lawsuit with prejudice - exclaimed that the suit was brought "in retaliation for [their] exercise of their free speech rights with respect to the creditworthiness of the United States of America." The government says there was "no connection" between the downgrade and the filing of the lawsuit which is focused on the S&P inflating ratings to win more fees from issuers and failing to downgrade CDOs. Interestingly, as Reuters notes, S&P noted yesterday that $4.6bn of the alleged losses were from CDOs structured and marketed by BofA and Citi...
September is likely to be dominated by a number of key event risks, in addition to ongoing uncertainty around the US growth outlook, the Fed’s reaction function and heightened EM volatility. We highlight the major events and likely market implications.
It was a quiet overnight session, in which the Nikkei was catching up to USDJPY weakness from the past two days, while China dipped once more despite the NDRC's chief economist stating China may cut RRR or conduct more reverse repos in H2 to maintain stable credit as loan growth slows down (or in other words things go back to normal). In Europe ECB's Nowotny decided to undo some of Draghi's recent work when he said that "good economic news" removes the need for a rate cut which in turn pushed the EURUSD higher (and European exports lower), even as former Cyprus central bank Orphanides said the Euro crisis may flare up after the German elections. In the UK Q2 GDP came in slightly stronger than expected at 0.7% vs 0.6% Exp. letting the GBP outperform since a need for the BOE to ease, at least in the short run, is becoming less pertinent. In amusing news, Moody’s late yesterday put six largest U.S. banks on review as it considers the effect of evolving bank resolution policies under Dodd-Frank and international regulations. As such GS, JPM, MS and WFC may be cut.
Greed; corporate arrogance; lobbying influence; excessive leverage; accounting tricks to hide debt; lack of transparency; off balance sheet obligations; mark to market accounting; short-term focus on profit to drive compensation; failure of corporate governance; as well as auditors, analysts, rating agencies and regulators who were either lax, ignorant or complicit. This laundry list of causes has often been used to describe what went wrong in the credit crunch crisis of 2008-2010. Actually these terms were equally used to describe what went wrong with Enron more than twenty years ago. Both crises resulted in what at the time was the biggest bankruptcy in U.S. history — Enron in December 2001 and Lehman Brothers in September 2008. Naturally, this leads to the question that despite all the righteous indignation in the wake of Enron's failure did we really learn or change anything?
When Standard & Poors is not engaged in "Puffery" (a defense which admits "our entire business model is worthless") it pretends to analyze credits and assign ratings, usually with both humorous and systematically catastrophic results. Just as it has done in the chart below. In the aftermath of the Detroit filing, one may be interested to see just how the rating agency, which had Greece rated at "A" months before the Eurozone's bananaest-republic member had its first bailout, evaluated America's various states since the start of the 21st century through 2012. Among the best: Florida. Worst: California. Michigan, whose main city just went bankrupt: AA-. And with countless cross-default provisions and collateral waterfalls upon a multi-notch downgrade, one can be certain that as reality finally comes to the muni space with roughly a 3 years delay, that this too will have a happy ending.
"In the last week of June, the dollar value represented by ARM applications accounted for 16 percent of mortgage requests, the highest share since July 2008, two months before Lehman Brothers Holdings Inc. collapsed, according to Mortgage Bankers Association in Washington." Oops.
There is more to this Ponzi than meets the eye...
Goldman On ECB's Collateral Shift: "Total Eligible Collateral Of €15 Trillion Expands By €20 Billion, Or 0.1%"Submitted by Tyler Durden on 07/19/2013 08:06 -0500
Yesterday, in a widely leaked move, the ECB announced it was lowering haircut higher rated collateral (and rising haircuts on lower rated collateral) for European banks in a move that is supposed to ease credit channels in Europe and boost lending. But will it? And what is the impact on actual eligible collateral as a result of this move. According to Goldman analysis, the impact of the ECB's move is virtually non-existent (but then why do it?) or 0.1% to be specific. Specifically, what yesterday's announcement does is boost the pool of eligible collateral, estimated at €15 trillion, by €20 billion.
With little going on today besides the just reported GE earnings, which beat consensus EPS expectations of $0.35 by the smallest possible increment but, as expected, missed consensus revenue of $35.56 printing at $35.12, and both the Japanese (which experienced a 500 point drop in minutes overnight) and Chinese (which closed below 2000 again) markets sliding, it is perhaps better to summarize the day that just was: Detroit City files for bankruptcy (send in Detroika!), Moody's take the US off negative outlook, Google and Microsoft miss on earnings and the S&P 500 hits a new record high. As DB says, the above certainly made for an eventful close to the US session after what was a fairly dull second day of testimony and Q&A for Bernanke. He has said all that can be said for now and we're left waiting for the data. And the earnings data so far has been abysmal if mostly on the top line, with corporate revenues now assured to double dip and decline for the second quarter in a row. And if the tech bellwethers all of which have been major disappointments to date and have guided down, are an indication of what is coming, Q3 may and will be even worse.
Just in case there was any question if a thousand monkeys armed with iPads could not only give Moody's a run for the money (even without leaking LBO information to the highest bidder) but solidly trash Uncle Warren's rating agency, the following statement should put any doubts to rest: "The bankruptcy filing by Detroit is a credit negative, Moody's Investors Service said on Thursday, because it creates uncertainty for bondholders, will likely interrupt payments on general obligation and limited tax bonds, and begins a process that may span years." That this statement comes from the same rating agency which concurrently with the Detroit bankruptcy raised its outlook on the US (a/k/a established a DOJ litigation reserve) due to, among other things, the "secure status of US dollars" is not surprising at all.
Just more meangingless drivel form a clueless, paid for rating agency (which recently disclosed it would plead "puffery" in its defense against the US lawsuit) now that the ECB is intent on actually lowering the EURUSD, because unlike last year, there is no (immediate) fear of redenomination risk as a result of a sliding EURUSD. Thank you Japanese carry trade.
Tonight out of Bloomberg: ": "China’s money-market cash squeeze is likely to reduce credit growth this year by 750 billion yuan ($122 billion), an amount equivalent to the size of Vietnam’s economy, according to a Bloomberg News survey. The number is the median estimate of 15 analysts, whose projections last week ranged from cuts of 20 billion yuan to 3 trillion yuan"... Two weeks ago from Zero Hedge: "The country is about to undergo an unprecedented deleveraging that could amount to over CNY1 trillion in order to force reallocate capital in a more efficient basis. That's right: a massive deleveraging coming dead ahead in China just in time to shock the market still reeling from the threat of the Fed's tapering." And here is the reason why.
Why did the U.S. government spend 2.6 million dollars to train Chinese prostitutes to drink responsibly? Why did the U.S. government spend $175,587 "to determine if cocaine makes Japanese quail engage in sexually risky behavior"? Why did the U.S. government spend nearly a million dollars on a new soccer field for detainees being held at Guantanamo Bay? This week when we saw that the IRS was about to pay out 70 million dollars in bonuses to their employees and that the U.S. government was going to be leaving 7 billion dollars worth of military equipment behind in Afghanistan, it caused us to reflect on all of the other crazy ways that the government has been wasting our money in recent years. So we decided to go back through my previous articles and put together a list. We call it "The Waste List".
- Global shares pummeled, dollar slumps as rout gathers pace (Reuters)
- Hong Kong to Handle NSA Leaker Extradition Based on Law (BBG)
- Lululemon chairman sold $50 million in stock before CEO's surprise departure (Reuters)
- Companies scramble for consumer data (FT)
- Traders Pay for an Early Peek at Key Data (WSJ)
- When innovation dies: Apple looking at bigger iPhone screens, multiple colors (Reuters)
- Washington pushed EU to dilute data protection (FT)
- Japan-U.S. drill to retake remote island kicks off (Japan Times)
- EM economies in danger of overheating, World Bank says (FT)
- Don't forget the Indian crisis: Chidambaram seeks to quell concerns over rupee (FT)
Obviously with Buffett a major shareholder of Moody's, the only place where a downgrade of Berkshire could come from was S&P. Moments ago, the rating agency that dared to downgrade the US for which it is being targeted by Eric Holder's Department of "Justice", did just that.