Ratings Agencies

rcwhalen's picture

The debt ceiling debate that has dominated the headlines over the past month has been thoroughly infused with a string of unfortunate misconceptions and a number of blatant deceptions. As a result, the entire process has been mostly hot air. While a recitation of all the errors would be better attempted by a novelist rather than a weekly columnist, I’ll offer my short list. 

ilene's picture

Deadlocked

Considering how enormous the U.S. debt load currently is (roughly $14.5 Tn), higher interest rates would add a crippling burden to an already high burden.

SocGen On The Three "11th Hour" Debt Ceiling Scenarios, And Their Respective Market Reactions

As we enter the overnight futures market open, there is still no resolution on the ongoing debt ceiling open question. Which is why we present SocGen's handy summary of the three scenarios that are currently in the running for a consensual resolution, together with the possible market reactions to each. The three plans are the McConnell-Reid plan, which as per latest news is in the frontrunning currently, not least (and probably only) due to the immediate beneficial impact it would have on stocks. The 2nd plan is a large deficit reduction plan, whose primary impact would be a significant drag on GDP. Stocks, and bonds, are likely to both rally on the news of this plan, at least in the short-term until the market realizes that some economic growth is actually necessary for the hopium illusion to continue. Lastly, the worst case outcome is no increase in the debt limit, which, logically, would mean that every illusion collapses and the emperor is finally exposed to be naked.

The Bond Vigilantes Are Here: US Net Notional CDS Outstanding Surpasses Greece For The First Time

While the CDS market for various insolvent European names whose credit default swaps are trading 10 or more points upfront has become more or less nothing but noise, and the only true way to hedge risk exposure, courtesy of ISDA's advance warning that no matter what a CDS will never be triggered, is to sell cash bonds, the market for default risk is quite active for those names which still trade in a reasonable range: such as between 50 bps and 200 bps. And while the Bloomberg chart below demonstrates on an absolute basis the US is due for a two notch downgrade by S&P based on the recently observed spike in US default risk, it is DTCC data that is more troubling. As most revel in the latest nonsensical Group of 6 plan, the bond vigilantes are already quietly setting the trap.

Guest Post: Doing The Global Currency Shuffle

In mainstream financial circles, the concept of a global currency is often spoken of only with an air of caution. It is approached always in hypothetical terms. It is whispered of as some far off dream; a socio-economic moon landing in the far reaches of fiscal space. Perhaps in 2015, or 2020, or maybe 2050, but certainly never just over the horizon, or right around the corner posing as an innocuous trade asset created over 40 years ago and used only on rare occasions. Unfortunately, the development of a centralized global security representing the creation of a supranational economic body is much closer than many would care to admit…

Why The Latest European Bailout, Aka "The Debt Buyback" Plan Is Also DOA, And Why The CDO At The Heart Of The Eurozone Is About To Become Extremely Toxic

Over time many have wondered why the ECB, in order to "extend and pretend", does not simply do an episode of QE and monetize bonds outright? Well, in addition to Germany's flashbacks to hyperinflation which have so far kept Trichet from pursuing an all too aggressive bond buyback program in the primary market, the ECB does have the Securities Market Programme (SMP) which however since inception has bought only €74 billion (this week the number is expected to rise, or, if it doesn't, it confirms that now China is directly buying European bonds in the secondary market). The problem with the SMP is that it was conceived as a modest marginal debt buying program, never intended to surpass much more than a few dozen billion in debt. Alas, by now it is becoming all too clear that the ECB will need to monetize hundreds of billions of insolvent PIIGS debt in order to extend and pretend forcefully enough so that a new bailout is not needed every other week. But how to do it without monetizing debt on the ECB's books? Enter the EFSF, or the off-balance sheet CDO "at the heart of the eurozone" which according to the latest iteration of the European rescue package (Remember that most recent DOA plan to rollover debt? Yep - that's dead) is precisely the mechanism by which Europe's own open market QE is about to take place. "European Central Bank Executive Board member Lorenzo Bini Smaghi suggested the EFSF be allowed to provide funds for a buy-back of bonds from the market, where prices have in some cases fallen 50 percent from levels at which the debt was issued. "This would allow the private sector to sell bonds at market prices, which are currently below nominal value. At the same time, the public sector could benefit monetarily," Bini Smaghi told Sunday's To Vima newspaper in an interview." Translated: another market clearing perversion courtesy of the same structured finance abominations that brought us here. The problem, unfortunately, is that Moody's announced nearly two and a half years ago that the whole distressed debt buyback approach is... a dead end, and will lead to the same "event of default" outcome that all the prior bailout plans would have achieved as well (we correctly surmised that Bailout #2 was DOA, about a month before the "efficient" market did). Here is why.

Reggie Middleton's picture

I have found what looks like the next TWO (That's right! Two as in number 2) Lehman Brothers and Bear Stearns sitting right there smack in the middle of plain site in Europe. The meltdown should occur just as it did here in the US, save the world 2nd largest hedge fund probably will not have the resources to pull that funny little, furry financial creature from the family Leporidae out of their hat like the world's largest hedge fund did in 2008.

China's Bailout Of Europe Has Started, As The PBOC Joins The SNB

As of this morning China has migrated from a purely symbolic European White Knight to an actual one. While overnight trading action was set to recreate the panic from September 15, 2008, suddenly something changed. That something? China. Per Dow Jones: "Bunds give up nearly all of Tuesday's early gains with the September contract just 12 ticks higher on the day at 129.26 after making a spike at 130.91, a gain of 177 ticks from the open. The latest, unconfirmed, rumor pushing bunds lower is that China is behind the supposed ECB enquiries for peripheral debt prices. As yet no official confirmation from market sources of any central bank buying. In the cash space, the 2-year yields 1.235% and the 10-year 2.65%." As China has been actively buying up EURs over the past two months and is now massively underwater on a cost position that may be in the hundreds, but is certainly in the tens of billions of dollars, the ongoing collapse in the EUR currency will now force the PBOC to resort to increasingly more drastic measures to protect its strategic investment. The irony of this is that the Swiss National Bank, which this morning had to watch in horror as the EURCHF plummeted to 1.15 and for the longest time has been fighting the Fed (which loves a strong EUR) has been joined by the PBOC, which is now also trading on its behalf. The First Central Bank War is now officially on.

EU Prepares Law To End Influence Of Rating Agencies, Tells Banks To Police Themselves

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.

Reggie Middleton's picture

I invite, if not challenge those who question the utility of the higher end of the blogoshpere to compare this opinion/analysis (as biting, cynical and hard hitting as it may be) to that of the mainstream media and the sell side analyst community of Wall Street to determine if independent, proprietarry research in the form of a blog is something that this country and the global investment community is in need of... or not!

Italy's Finance Minister Threatens To Quit If He Is Forced To Leave

It was only last week when rumors that Italy's Finance Minister Giulio Tremonti was about to step down due to irreconcilable difference with the man who puts DSK's (alleged) sexual exploits to shame, pushed down Italian bank stocks. Today, The Guardian picks up where last week left off, and brings us the following scene from a real life version of The Office, wherein we learn that Tremonti, who now is hated in Italy and will soon join the Greek Finance Minister in being the target of a massive scapegoating campaign that will likely end in his termination, has just threatened to quit if calls for his resignation don't subside. Yes, it didn't make much sense to us either but whatever.