Ratings Agencies 2007 = Equity Analysts 2000 ?

Mr Ritholtz,

I read your website daily and I enjoy your satirisation of the various market players. But today, I really think that you went too far. To equate whores with credit anaylysts is very insulting to whores; and not even slightly accurate.

Whores provide a valuable service to society and my personnal experience is that they are honest professionals. I would rather trust my money, and have done, to a whore, than to a credit analyst.

Whereas credit analyst, plus their close relations investment analyst, stock brokers and investment bankers, are only interested money earned dishonestly. In fact the more elaborate the deceit the better. A whore provide an honest and enjoyable service.

The trillions of dollars wasted on credit analysts and ilk would have been better spent on whores. And I might add, much more enjoyably too!!!

So please stop this slanderous comparision of whores to credit analyst or to any of the other disgusting financial swindlers that dispoil our financial centres.

Yours sincerly
Aldous Oscar Orwell

~~~

BR: My apologies to the ladies of the evening who work in the “comfort” industry . . .

If I understand this correctly: The owner, the handicapper and the jockey were in on the fix. How did they get the horse to co- operate? Oh, now I see. The horse is just a bunch of meat with legs!

This outcome is what we were all prognosticating at least a year ago. Even myself, a non-economist with a smattering of econ classes could see the handwriting on the wall, unlike the lenders, borrowers, and the appraisers who had lemming like behavior.

But I have to agree with the consensus here the comparison to whores is maligning a decent and honest profession which in the US had some respect before the 1920’s. It seems ironic though that when we started stigmatizing prostitution we sarted glorifying economists. (No insult intended toward you Mr. Ritholtz) No I see thenm more as pimps.

Speaking of iBanks, just saw the newswire where Goldman is reducing their fees on the GEO fund now taking only 10% of the profit and eliminating the 2% asset managment fee. They appear desperate for cash inflow given that today is Redemption Day! Sounds like a sucker’s bet to me!!

Everleigh Prostitutes. Sounds like they had a better sense of business than our current crop of analysts.

http://www.nytimes.com/2007/08/12/books/review/Calhoun-t.html?_r=1&em&ex=1186891200&en=88edb9b6c0796421&ei=5087&oref=slogin

the correct spelling is “altar”

Market closes up today…after all you would’nt want to panic people into filling out those redemption papers today now would you?

Market spoke to that yesterday…..

Ciao
MS

With regard to the redemption reckoning day at hand…the actual selling to raise cash would occur between now and the end of the quarter, right?

It’s not like all the hedge funds are going to announce the number of redemptions they received. If they received a lot of redemptions, they are just going to have continue to dump stuff until the end of the Q, no?

But I have to agree with the consensus here the comparison to whores is maligning a decent and honest profession which in the US had some respect before the 1920’s. It seems ironic though that when we started stigmatizing prostitution we sarted glorifying economists. (No insult intended toward you Mr. Ritholtz) No I see thenm more as pimps.

Posted by: Metroplexual | Aug 15, 2007 8:48:05 AM

I agree completely. Whores must actually work for a living, and when it’s over everyone in the transaction is happy. The Ratings Agencies can’t say that same thing.

Re: redemptions

Typically people wouldn’t hear about the size of redemptions taking place. Personally, I expect to hear quite a bit more this time around when the hedgies come out and say that they won’t honor those redemptions for fear of being forced to sell assets at below their “fundamental” value.

All this talk will of course generate additional fear in a weak marketplace causing a downdraft in asset prices ultimately forcing them to sell.

To Mike:

Paulson?!?!

Is that you??

A revelatory example of the difficulties of being an analyst with integrity or a CEO on a marketing alley?
The analyst may well be RIGHT The Russian information recently admitted that 1/3 of the Russian corporations were showing negative operating profits.
All banks are not deemed to lend to the major oil and gas cies.
http://www.bloomberg.com/apps/news?pid=20601109&sid=a0qZdO5WuEnI&refer=home

The title from one of W. C. Fields’s movies says it best:

“You Can’t Cheat an Honest Man”

Barry, here’s another fine read concerning the Rating Agencies:

A ratings charade?

http://seattletimes.nwsource.com/html/businesstechnology/2003832275_subprime12.html

By Richard Tomlinson and David Evans
Bloomberg News

The numbers looked compelling. Buy this investment-grade CDO (collaterized debt obligation) and you’ll get a return of up to 10 percent, Credit Suisse Group said.

That was almost 25 percent more than the average yield on a similarly rated corporate bond.

Investors snapped up the $340.7 million CDO, a collection of securities backed by bonds, mortgages and other loans, within days of the Dec. 12, 2000, offering. The CDO buyers had assurances of its quality from the leading credit rating companies — Standard & Poor’s, Moody’s Investors Service and Fitch Group. Each blessed most of the CDO with the highest rating, AAA or Aaa.

Investment-grade ratings on 95 percent of the securities in the CDO gave no hint of what was in the debt package — or that it might collapse. It was loaded with risky debt, from junk bonds to subprime home loans.

During the next six years, the CDO plummeted as defaults mounted in its underlying securities. By the end of 2006, losses totaled about $125 million. The failed Credit Suisse CDO may be an omen of far worse to come in the booming market for these investments. Sales of CDOs worldwide have soared since 2004, reaching $503 billion last year, a fivefold increase in three years, according to data compiled by Morgan Stanley.

CDO holdings have already declined in value between $18 billion and $25 billion because of falling repayment rates by subprime U.S. mortgage holders, Lehman Brothers Holdings estimated April 13. In many cases, investors don’t even know that values have dropped.

In this secretive market, there is no easy way for investors to find out what their CDOs are worth.

The slide of the Credit Suisse CDO points to the critical and little-understood-role played by rating companies in assessing risk and acting as de facto regulators in a market that has no official watchdogs.

Many of the world’s CDOs are owned by banks and insurance companies, and the people who regulate those firms rely on the raters to police the CDOs.

“As regulators, we just have to trust that rating agencies are going to monitor CDOs and find the subprime,” says Kevin Fry, chairman of the Invested Asset Working Group of the U.S. National Association of Insurance Commissioners.

“We can’t get there. We don’t have the resources to get our arms around it.”

The three leading rating companies, all based in New York, say that policing CDOs isn’t their job. They just offer their educated opinions, says Noel Kirnon, senior managing director at Moody’s.

“What we’re saying is that many people have the tendency to rely on [the ratings], and we want to make sure that they don’t,” says Kirnon, whose firm commands 39 percent of the global credit-rating market by revenue.

S&P, which controls 40 percent, asks investors in its published CDO ratings not to base any investment decision on its analyses. Fitch, which has 16 percent of the worldwide credit-rating field, says its analyses are opinions and investors shouldn’t rely on them.

The rating companies apply disclaimers about their analyses. S&P says in small print: “Any user of the information contained herein should not rely on any credit rating or other opinion contained herein in making any investment decision.”

Joseph Mason, a finance professor at Philadelphia’s Drexel University and a former economist at the U.S. Treasury Department, says the ratings are undermined by the disclaimers.

“I laugh about Moody’s and S&P disclaimers,” he says. “The ratings giveth and the disclaimer takes it away. Once you’re through with the disclaimers, you’re left with very little new information.”

Credit raters participate

When it comes to CDOs, rating companies do much more than give them letter grades. The raters play an integral role in putting the CDOs together in the first place.

Banks and other financial firms typically create CDOs by wrapping together 100 or more bonds and other securities, including debt investments backed by home loans.

Credit-rating companies help the financial firms divide the CDOs into sections known as tranches, each of which gets a separate grade, says Charles Calomiris, the Henry Kaufman professor of financial institutions at Columbia University.

Credit raters participate in every level of packaging a CDO, says Calomiris, who has worked as a consultant for Bank of America, Citigroup, UBS and other major banks. The rating companies tell CDO assemblers how to squeeze the most profit out of the CDO by maximizing the size of the tranches with the highest ratings, he says.

“It’s important to understand that unlike in the corporate bond market, in the securitization market, the rating agencies run the show,” Calomiris says.

S&P charges as much as 12 basis points of the total value of a CDO issue compared with up to 4.25 basis points for rating a corporate bond, company spokesman Chris Atkins says. (A basis point is 0.01 percentage point.)

That means S&P charges as much as $600,000 to rate a $500 million CDO. Fitch charges 7-8 basis points to rate a CDO, more than its 3-7 basis point fee to rate a bond, based on the company’s fee schedule. Moody’s doesn’t publish its pricing for any ratings.

“CDOs are the cash cow for rating agencies. They’re clearly a gold mine,” says Frank Partnoy, a former bond trader, now a University of San Diego law professor and author of a book on the financial markets.

That euphoria has blinded investors — and the rating companies — to the true risk of CDOs, Partnoy says.

The subprime connection

As homebuyers and investors grapple with the subprime-mortgage crisis, many haven’t yet realized the extent to which that turbulence is spilling into CDOs.

Foreclosure filings in the U.S. surged to 147,708 in April, up 62 percent from April 2006, as subprime borrowers stopped making mortgage payments.

As foreclosures increase, the subprime-backed securities in CDOs begin to crumble. Subprime-mortgage securities make up about $100 billion of the $375 billion of CDOs sold in the U.S. in 2006. Investors have little idea how toxic some of these CDOs are, Drexel’s Mason says.

“We compose CDOs with a bunch of this stuff,” he says. “Now we just jack up the risk, jack up the misunderstanding. We’re throwing our money to the wind. We now know the defaults are in the mortgage pools and it’s only a matter of time before they accumulate to levels that will threaten the CDO market.”

Hearst invests in Fitch

Ask Victor Ganzi, chief executive of The Hearst Corp. (and owner of the Seattle Post-Intelligencer) why the private New York-based media company bought 20 percent of Fitch Group last year for $593 million and he talks about collateralized debt obligations.

“That’s where the opportunities lie for Fitch,” Ganzi said.

Fitch has shot ahead of smaller competitors in the past decade to become the world’s third-largest rating firm.

Fimalac, the company’s owner, has bought up smaller rivals. Ganzi and Stephen Joynt, Fitch’s chief executive, say structured finance, such as CDOs, is the fastest-growing source of credit-rating revenue and gives Fitch the chance to compete on level ground with its two rivals, Standard & Poor and Moody’s.

Hearst eventually wants to buy control of the rating company, Ganzi said. But it won’t be easy. Ladreit de Lacharriere, the French investor who controls Fimalac, said he has no plans to sell any more of Fitch.

“We’re very patient in that regard,” Ganzi said.

The first CDOs

Michael Milken, the junk-bond king, created the first CDO in 1987 at now-defunct Drexel Burnham Lambert, says Satyajit Das, a former Citigroup banker who has written 10 books on debt analysis.

Until the mid-1990s, CDOs were little known in the global debt market, with issues valued at less than $25 billion a year, according to Morgan Stanley.

Drexel and other investment banks realized that by bundling high-yield bonds and loans and slicing them into different layers of credit risk, they could make more money than they could from holding or selling the individual assets.

Investment-grade CDOs that include subprime assets offer debt returns that exceed yields on junk bonds. In May, BBB-rated portions of CDOs — the lowest investment grade — paid 7-9 percentage points above the London interbank offered rate (Libor), according to Morgan Stanley.

That amounted to an annual return of about 13 percent, based on May bank-lending rates. Most CDO tranches promise returns at a fixed spread over Libor.

That means their value isn’t affected by changes in interest rates the way the value of a fixed-rate bond would be, says Arturo Cifuentes, a managing director at R.W. Pressprich, a New York-based fixed-income brokerage that buys and sells CDOs.

“CDOs offer you a possibility to invest in risk which you cannot do in any other way,” he says. Cifuentes says CDOs have been good for investors and financial markets.

Former banker Das wonders why few people are probing the potential dangers for CDO investors. “I think the regulators seem to be fairly sanguine about all of this. The thing that I find quite bewildering is the lack of urgency and focus.”

He says subprime-mortgage defaults have just started to soar.

“The fuse has been lit,” Das says. “Somebody should be trying to find where this wire is running to.”