ratings

SEC Report On Credit Raters Finds Leaks And Conflicts Of Interest

In what is perhaps the biggest face-palm moment of the day, the SEC's summary report on credit raters found 22 pages worth of supervisory failure and conflicts of interest concerns at each and every one of our NRSROs. However, perhaps the most notable headline, via Bloomberg was potentially much more litigiously serious:

*SEC SAYS `LARGE' CREDIT RATER APPEARED TO LEAK PENDING RATING

*SEC DECLINED TO IDENTIFY WHICH RATER MAY HAVE LEAKED DECISION

Now who could it be?

Premature Speculation

Monday afternoon the markets shot straight up after taking a dose of CNBCialis. CNBC was the first to break the story about letting EFSF use leverage or turning the EIB into a vehicle to increase the potency of the EFSF funds.  That was followed up by more leaks to other news sources. Stocks went higher quite happily but failed to drag the credit markets with it to a large degree.  Any analysis of the various plans all lead to the same conclusion - no matter how complex or convoluted the plan, the only way it works is for Germany and France to risk their credit ratings to support everyone else, or to print money.  No miracle solution was at work.  Plans may yet be put in place, but it is clear all they do if shuffle the deck chairs and obfuscate who is picking up the tab, but solve nothing.  It is clear that if it gets implemented, any further problems would become far worse as there would be no Eurozone country strong enough to support the rest.  What wasn't clear, is whether the downgrades would occur even before the plans were launched. As I wrote earlier, I will change my view of the market when something real comes out to make me change it.  I also really believe that in the near term, after a Greek default, SPX is likely to move in a range of 1000-1150, and the next big move will be if the global economies can resurrect growth.

The "EURECA" Moment

As realization settles in that levered EFSF may not be the best solution since it is circular and puts the ratings of every country in Europe at risk, along comes another proposal to save Europe.  The "Eureca" plan which can be found at www.rolandberger.com has made its way around the market the past couple of days. The premise of the plan is that speculators are to blame and that Greece should sell its state assets "such as ports, airports, highways, and real estate". The market seems to be grasping at straws. Plan after plan seems to catch a brief following, but falls apart under any scrutiny.  Why are any plans on how to manage a Greek default completely ignored?  I remain convinced that a Greek default could be dealt with.

Leverage: Yesterday's Problems, Today's Solution

All the markets continue to bask in the glow of the new improved EFSF.  From a low of 1115, the S&P futures are now trading at 1175.  A pretty impressive 5% move.  Stocks in Europe are doing even better and credit is following along.  By now I would have hoped to see some details of this alleged new beast that EFSF has morphed into.  While I search for detail all I could see, so far, are denials by Germany and Spain, some support from Austria, and additional rumors of what is to come.  Every European politician outside of Germany can say this is a great idea, but if the money man doesn’t go along, is there really a deal?  This isn’t a democracy, and only Germany controls German money. There was a brief headline that this new plan could cause S&P to downgrade Germany and France.  As a back-up plan, there is talk about letting the EIB do the heavy lifting.  Just in case the world wasn’t already controlled by enough 3 letter entities, welcome the EIB to the IMF, ECB, and FED party.

Frontrunning: September 27

  • China’s Developers Face More ‘Severe’ Credit Outlook, S&P Says (Bloomberg)
  • Hong Kong’s Tsang Sees ‘Soft Landing’ for Property, Keeps Peg (Bloomberg)
  • SEC Eyes Ratings From S&P (WSJ)
  • Geithner Predicts Europe Will Step Up on Crisis After Chiding (Bloomberg)
  • Big audit firms face Brussels onslaught (FT)
  • Fed Officials Express Doubt About Faster Inflation as Tool to Boost Growth (BBG)
  • Medvedev fires mutinous finance minister (FT)
  • EU urged to probe Hungary mortgage move (FT)
  • Anger rises in India over redrawn poverty line (FT)

"Solidarity Has Its Limits" As German FinMin Snubs Geithner And Downplays Levered EFSF

In a speech given in Berlin, the ever-vocal German finance minister Wolfgang Schaeuble appeared less than vociferous about the new levered EFSF plan and further lambasted Geithner's 'plan' in as politically correct manner as he could. Bloomberg headlines include:

*SCHAEUBLE SAYS `WILL NOT SPEND OUR WAY' OUT OF CRISIS

*SCHAEUBLE SAYS `SOLIDARITY HAS LIMITS,' REQUIRES RETURN EFFORTS

*SCHAEUBLE SAYS `IMMEDIATE FISCAL REFORMS ARE OF THE ESSENCE'

And the kicker in response to questions on Geithner, the pithy response:

*SCHAEUBLE SAYS EASIER TO GIVE ADVICE THAN TAKE IT!!!

*SCHAEUBLE SAYS INCREASING EFSF WOULD DAMAGE SOME AAA RATINGS

The Spirit Is Willing, But The Flesh Is Weak

Look at what they are talking about doing.  Look at how unsuccessful any of the previous, poorly thought out plans have worked.   Contagion has spread.  European bank shares are down 50% from a year ago.  European stock indices are down 20% from a year ago.  Portugal and Ireland are in deep trouble, and Italy and Spain are on the cusp of trouble.  Will more bogus plans that don’t really ever get implemented, that fix nothing, but make the system more convoluted really do anything?  Wouldn’t we be better off letting some defaults occur and picking up the pieces.  Maybe more time and energy should be spent on how to pick up the pieces while some are still independent, rather than further linking everyone to the anchor?   Maybe more time should be spent determining if Lehman was “solely” responsible for the problems in late 2008 and early 2009?  Maybe the problem wasn’t Lehman defaulting and it was just another piece of a bigger uglier puzzle and we are so busy trying to avoid another “Lehman Moment” that we have lost sight of whether it is that important to avoid a default?

S&P Reminds Europe Of Its Toxic Catch 22, Warns EFSF Expansion Will Lead To More Sovereign Downgrades, Rendering EFSF Itself Useless

Finally, little by little, the fog of toddler-like euphoria over any and every most recent European bailout plan is starting to lift, this time with the S&P finally speaking up and reminding everyone of what they already know: namely that an expansion of that now-daily deux ex machina, the EFSF, will "potentially trigger credit rating downgrades in the region, a top Standard & Poor's official warned. David Beers, the head of S&P's sovereign rating group, said it is still too soon to know how European policymakers will boost the European Financial Stability Facility, how effective that will be and its possible credit implications....But he said the various alternatives could have "potential credit implications in different ways," including for leading euro zone countries such as France and Germany." Get that? As Zero Hedge said back on July 21, the European bailout Catch 22 is now once again front and center, namely that any expansion in the EFSF will lead to a downgrade in one of the two Eurocore countries, France or Germany, and should France get cut from AAA (which it will), the entire burden of footing the European bailout bill will fall on Germany. And if Germany is also downgraded to AA, kiss your SPV CDO goodbye, and with it Europe. Which means that while we will hear many more threats by both and against S&P, more posturing that the EFSF will be enhanced to tens if not hundreds of trillions with virtually unlimited leverage, however idiotic those may be, the end result is just one: whether or not Germany risks a full blown government collapse by instituting the only thing that has a chance of containing the crisis - EuroBonds. Of course, shoul those come to be, the German Pirate party will very soon have an absolute majority in the German parliament... and shortly thereafter in various previously unheard of beer halls.

From "Buy The Rumor" To "Buy The Rumor Of The Rumor"

We have now moved from buying the rumor, to buying the rumor of the rumor. Is this another reason for stocks to bounce?  Or just admitting that EFSF is too confusing in its present form, and cannot do enough, and has so little support that we might as well move to ESM?  Maybe the EU members have decided that if anyone was going to spend more money in Europe, it should be something they control directly and not this super CDO? Maybe they finally realized that the EFSF was supposed to be replaced by ESM in 2013, but EFSF was going to issue 30 year bonds?  Maybe the German approval vote is more questionable than we are being led to believe? Who is this employee who left his briefcase open at a bar with a Bloomberg reporter? Or is someone sending out leaks, waiting to see how the market, responds, and if it's not good enough, they send out another leak?  It sounds bizarre. There is no longer any point watching this.  Those that are bullish will be cheered by each and every step, and believe it is a sign of more to come.  Those that are bearish will view each headline with derision, until something big and real happens one way or another.