Moody's Bank Downgrade: Too Little, Too Late

rcwhalen's picture

Grand Lake Stream, ME -- First let me send greetings to the readers of Zero Hedge from Leens Lodge in Grand Lake Stream, ME.  David Kotok from Cumberland Advisors is leading a small group on four days of fishing and wine appreciation.  As Kotok said in an email tonight:

"Leens lodge. Sunset. Longest day of year.  To hell with downgrade of banks.  Up here, it is a different world.  Peace.  David."

Photo from the first night dinner is in the link below.   Tomorrow when you read this, I will be out on the Big Lake with Jim Lucier from Capital Alpha Partners.  And no, the cell phone does not work.  This is the best small mouth bass fishing in North America, so if that idea gets your attention, contact Charles Driza at Leens (

Watching the latest move by Moody's to downgrade various global banks, one can only be impressed by the lagging nature of the major ratings agencies financial prognostications.  If you have read any or my work or looked at the ratings produced by my colleagues at Institutional Risk Analytics, you have to wonder why Moody's did not downgrade these banks years ago. 

The whole point of ratings is to give investors and their advisors advanced warning to change asset allocations.  The Moody's ratings downgrade does not serve this need.  Indeed, while many of the banks downgraded -- Bank of America, Morgan Stanley, Citigroup and Goldman Sachs -- have deserved a ratings downgrade for several years, the politically conflicted souls at Moody's are just now getting around to telling us what should have been obvious long ago.

So here is the question: Why should investors care a lick about the opinions of Moody's?  The firm has fundamentally failed in its core mission to give investors at least a couple of quarters warning to change asset allocations.  Instead we have an after-the-fact confirmation of the incompetence and lack of courage of all of the major ratings monopolies.  

So what does the ratings downgrade mean?  First, it means that counterparties of the major banks are going to be forced to begin pricing ratings risk into their credit limits for these institutions.  For MS and GS in particular, the ratings downgrade is a major hit because these broker-dealers are not banks, lacking the funding base to survive a major period of liquidity stress.

The second and related issues is that Buy Side counterparties will now start to curtail business with MS and GS, again because they are not banks.  Each firm has a tiny fraction of its funding needs supported by deposits.  Indeed, both GS and MS are ultimately the clients of JPM and the other large banks, which are net providers of funds to the institutional markets.  Buy Side clients cannot tolerate risk exposures with counterparties with sub-prime credit ratings.  Look for some new names to enter the prime broker market at the urgent demand of major Buy Side clients.

Look at GS at A3 and MS at Baa1.  Do these ratings make you feel more secure about doing business with these firms?  The big winners here are JPM, C and to a lesser degree BAC's Merrill Lynch unit.   Wells Fargo is a winner to the degree that they were not downgraded.  But given WFC's crappy disclosure and over-exposure to US housing, maybe Moody's should rethink the refusal to review the ratings for this TBTF bank. 

But, to the third point, don't believe that these downgrades are to  "reflect declining profitability in an industry being rocked by soft economic growth, tougher regulations and nervous investors," as the WSJ reports.  This is called playing "catch up" ball.

Where was Moody's two years ago when the revenue and profits of the major banks started to decline?  Any analyst spending even a few moments looking at the financials of the major banks would have known about these issues years ago.  The truth is that Moody's and the other ratings monopolies blessed by the SEC are incapable of performing the most basic service to investors, namely providing at least a quarter or two warning about a change in the operating performance of an obligor -- especially if the obligor is a bank. 

We all know that there is no visibility on revenue for MS, GS or any of the major US banks. So ask not why Moody's downgraded the big banks yesterday, but instead ask why Moody's did not tell us this important news in 2010.  The reality is that politics, not financial analysis, governs the behavior of Moody's and the other major ratings firms.

Only when the lack of visibility on forward revenue and earnings was obvious to all did Moody's act -- and only because events in the EU provided cover for this after-the-fact downgrade by Moody's.  

Thanks a lot for nothing Moody's.

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diogeneslaertius's picture

nothing theoretical about this conspiracy

ATM's picture

Best smallmouth fishing in North America? Not even in the top 10!


pmm009's picture

Goldman should have purchased Commerce Bancorp after its successful entry into the Manhattan Market.  Small enough that they would have had a chance of approval and big enough to make a funding difference.  Think of the PR, Commerce was shrinking their book, while successfully moving into the largest East coast markets,  prior to 2007/2008 and of course the Feds didn't like that...GS could now be pointing to their lending to small business etc.  I am sure Jamie and his masters would have gone ballistic though.  Commerce told me their first Manhattan store had a billion in deposits in 1 weekend.

Arnold Ziffel's picture

Citi just told everyone to 'ignore those ratings.....'


So I guess everything is ok, right?

Blue Dog's picture

Good bank ratings are meaningless. The laws were changed so banks don't have to show toxic mortgages on their balance sheets. The Fed lends the banks money at artificially low interest rates. They use the money to buy Treasuries. Nobody in their right mind should buy bank stock when everyone of them is on life-support.

spanish inquisition's picture

but instead ask why Moody's did not tell us this important news in 2010.

Important phrase, Moody's just told us what the ratings of all banks should be in 2010. MS was able to get a notch back because they argued the third level of downgrade will not be there until Moody's 2011 downgrades scheduled to happen next year.

digitlman's picture

You're only about 100 miles from whre I grew up - Bangor.


And how about that last minute stick save to only downgrade MS by 2 and not 3?

williambanzai7's picture

You misunderstand the whole point of the big three ratings agencies. It is to lube you up for entry.

Everybodys All American's picture

Maybe he can step out of his lodge and talk to the real people before he goes back to NYC and see what damage has been done to the nation by the banks and lack of prosecutions from this administration. That's right this administration is the guilty party. They are the ones who are running the clock out on the fraud. Moody's sucked today, yesterday, and the day before on rating banks. Duh. I remember everyone complaining when Moody's would raise slightly any red flags on subprime institutions before the debaucle and now they complain because they are too late. Which is it?

What about an attorney general who does not prosecute? What about a president who coddles these banksters in order to gain his next election? Oh no. That's too political and you risk not getting invited to that fucking lakeside lodge. What a joke you are Whalen.

deerhunter's picture

can anyone in the insurance game explain to me why my homeowners insurance premiums have almost doubled in 4 years with no claims and a home worth 40% of what it was 5 years ago,  just wondering?  thanks

Pee Wee's picture

My guess is people just complain, they dont walk.

Cancel it, what are they gonna foreclose on those that pay their mortgage?

Its all racketeering, same with utilities. Natural gas, anyone??

GubbermintWorker's picture

Well, you are aware of the roots of "insurance", right? Protection money paid to a mafia and "insurance" never becomes cheaper.

GubbermintWorker's picture

They didn't downgrade Wells Fargo because Wells is in bed with Fannie/Freddie as a servicer for all the mortgages that Fannie took over. Which is a bunch!

terryfuckwit's picture

hi folks bit of tangent this . I would love to see Banzai do his art work on Jamie Dimon's version of the hugely popular childrens toy "Polly Pocket's"

but as politicians designed to fit in his pocket with faces/heads not much bigger than his preidentail cufflinks . I would find this hugely amusing. I would certainly buy the uk versions for friends.

1. Designed for easy fit in bankers pockets.

2. Limited edition , once bought one lifetime owner.. no resale allowed.

3. feel free to add more features folks

Hurdy Gurdy Man's picture

Dudes - even the Better Business Bureau has given an appropriate grade to the New York Fed - check out their website

falak pema's picture

thats sums it up as far as these crony shills called ratings agencies are concerned : too little too late.

Shills expressly paid to be behind the wave, never in front; 'cos that takes courage and independence. Don't ask that from a paid, kept woman! 

Eurozone is right in dumping these three stooges from their official roster. But they have to find an honest replacement, not another set of central bank shills! 

blueridgeviews's picture

Well put RC. The ratings agencies lost my confidence years ago.  They are useless.  Eagan Jones is the only one I pay attention to for insight.

justsayin2u's picture

Smallies fight hard and fry up nice out of those cold North lakes.  A little salt, lemon, and pepper - yum.  I have to believe the ratings agencies dont want to bite the hand that feeds them mainly although they may also be concerned that the Feds and bank loving politicians will loose the dogs on them for disrupting this great economic recovery we are in.  Thoughts?

janus's picture

another excellent piece, CW.

yeah, i've been burdended of late by a sneaky suspicion.  janus thinks he's been had.  looks like JPM may be setting up the biggest, most comprehensive take-over of capital markets since, well, since ole john pierpoint himself engineered an eerily similar scheme nearly a century ago.  gotta give the devil his due, i suppose.  will they pull it off?  no.  

their most important client, the federal reserve, has really wedged themselves into a jam.  this ain't the late 70's/early 80's; you know, back when they had the latitude to raise rates and firm up the dollar.  they're all in on this one...the dollar is everything; and while it will establish primacy in the near-term, its days are very much numbered.  

just because you stop publishing m3 doesn't mean the math is suddenly irrelvant, bernak -- even this ole country boy can count...and, btw, so can soverign/institutional/savy-retail.

so, bernak/ will kill the casino-economy if you print & and you will kill it if you don't -- and your hapless handmaidens in congress have hamstrung your ability to raise rates (as any increase will bankrupt the nation).

ah, what a tangled web we weave when at first we practice to deceive.

got gold, bitchez? 

so, for an ephemeral hour, dimon will look like the majestic savior of commie-capitalism; and then begins the great unwinding.

BTW, did you see the most hilarious news item of the still early news day?  suddenly spanish banks are okay...and we're gonna have some real-deal stress tests to prove it.  BWAHAHAHAHA!  if this isn't the most blantant case of gamin the algos, i don't know what the fuck is.  what semi-sentient being believes ANYTHING that comes from ANY central authority?  lying rat-faced, swine-fuckin mutant-freakO bastards...oh, well, just don't blame janus when the natives come to pillage at your doorstep. 

have you seen the little piggies/

with their piggie wives/

plunging forks and knives...,


PS. CW, best of luck on the lake...and i'm not talkin about the small-mouth bass.  my uncle used to own a marina, and his t-shirts read, "women want me/ fish fear me" you can see, it runs in the family.  anyway, feel free to steal his slogan; not half bad, i say.

Jack Sheet's picture

Chris, sincere thanks for the post, but  I don't give a tinker's toss which lake you are on and with which high-powered associates. And I won't be calling your cell phone.

boeing747's picture

Now become more clear Elites (since JPM event), already abandoned Obamao, who had to ask amigo for help. The rest becomes understandable.

dreadnaught's picture

hmmmmm   I think i may be ddd3 negative sell

michael_engineer's picture

Suspect they had to let European banks get their downgrades first is why it took so long.

potlatch's picture

Whenever people tell me any details about their personal life, like vacation destinations, and they use the word "best," I know I am dealing with a blowhard.


just sayin.  We all like you.  You do not need to impress us.  Just tell us useful things, and I won;t start calling you just another self-satisfied average man who knows a few things and is blissfully unaware of lots of others things.

But: simple analysis, old news.  The ratings agencies failed!  Oh yes, what next, a note on the failure of the major accounting firms too?


The whole system is colluded.  That's the basic premise here.

Now go fuck a duck.  I'm stuck in the heat in a depressed US city, asshole.

Jack Sheet's picture

I think the term is "avuncular". Sort of makes me puke too. He probably attended a creative writing course.

BandGap's picture

I need a Biderman fix. Just that shitty, awkward laugh. Goodnight.

yourfather's picture

I got a good anecdote for you!

In Austraila, the regulator, ASIC required that the rating agencies get an Australian Financial Services Licence to provide ratings to retail clients in Australia.

Instead of doing this, and getting an AFSL, they decided to pull out of the market (providing ratings which may be used by retail clients) rather than having to comply.

They are the biggest unmanaged conflict of interest in the financial industry and substantially responsible for this mess. 

Here it is from 2009 - and the upshot was, they thought "eff it", lets leave

tony bonn's picture

moody's is a bought and paid for whore of wall's opinion about anything financial is about as insightful as baghdad bob's about saddam hussein....moody can go fuck itself...except petr tchir would get his feelings hurt.

RockyRacoon's picture

So, all those guys who squeezed thru the door and got bank charters are now wishing they hadn't.

Serves 'em right.

Everybodys All American's picture

Thank Paul Krugman, Ben Bernanke, Alan Greenspan, etc. for the stupidity of creating more debt when debt is the problem. Bankruptcy is clearly a better option. Clear the debt and start anew with the banks that did not involve themselves in stupid loans and derivative contracts that add nothing but bs to the equation.

bigkahuna's picture

Thank all Americans for not having the forsight to comprehend when their freedoms and their livelihoods were being threatened and not having the personal courage to make a stand (and continue with this ignorance even). 

Banksters: Thanks America!  

disabledvet's picture

I know i downgraded them years ago. And of course "their stock price has failed to disappoint." Now that Moody's has "pig piled Wall Street" they're starting to look up to me. Was the risk we all knew was coming already priced in? I say yes.

disabledvet's picture

oh, and "rumors abound that this is how you actually make money on Wall Street." (by making contrary calls to whatever Moody's et al. are doing.) Tis a risk of course. But what is their job in that Wall Street town again? Go "100 percent into cash"? And "STAY THERE, DAMMIT!"???

Mark123's picture

Complain about rating agencies all you want Chris, but unless you attack the root of the problem - the Federal Reserve - all you do is attack the symptoms.


Sound money is important.

azzhatter's picture

Chris- one favor, drown that fucking Liesman prick

Lionhead's picture

Yes & when you're done, cut of his head & place it at the top of the lodgepole. Then send us a picture to confirm his demise as the black flies procede to eat what's inside his bald skull.  A fitting tribute to one of the biggest shills in financial reporting history.

Matt's picture

Who pays Moody's? 

Who owns Moody's?

What else do the owners and payers own and pay for?

Once you answer these questions, you will have a better understanding of how and why they operate the way they do.

Thisson's picture

Yes, obviously one Buffett affiliate (Moodys) is going to be hesitant to downgrade another Buffett affiliate (Wells Fargo).  It's a conflict of interest.

El Oregonian's picture

Matt, That Ol' Ice cream eating, Becky Quick loving,"Crony Capitalist" himself, Warren Buffet. Now if someone would grab one of those ice crean "Drumsticks" and shove it up his kester far enough that he'd get a faint aftertaste of the mocha.

Now, I'd pay to watch that right there, tha'd be funny right there.

Precious's picture

More lagging indicators, please.

Cursive's picture


I have to second Matt's point here, Chris.  Why doesn't Moody's take a long look at Moody's?  Hmm.  Who owns WFC and MCO?  Yeah, that Warren.  And why now the timing on the other banks?  It's hard not to buy into conspiracy theories here.  Maybe the conspiracy theories are false, but they make much more sense than anything else I've heard.  You could lament the fact of Moody's late timing (and you have in the post) or you could just buy into a very cynical conspiracy theory.

disabledvet's picture

"never hurts to give your boss a heads up." what the media calls a conspiracy is in actuality "the bulk of people just doing their job." that's why in the good ol' USA "the presentation devolves down to simply winning." In other news "Larry Ellison buys an Hawaiian Island." Word is "he's always wanted to be The Voice in Magnum P.I. who pays for all the secret crime fighting."

Manthong's picture

As long as a few of the beaches and that incredible Jeep mountain trail stays open, he can have the rest of that rock.

GCT's picture

Sad they only downgrade BOA one notch. I wonder if that is because Warren is heavily invested in BOA.  Most of the rating agencies are a joke or when an agency actually makes the correct call the Fed and their enforcers are all over them.