Moody's Bank Downgrade: Too Little, Too Late
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 (http://www.leenslodge.com/)
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.