Wednesday, August 03, 2011

Moody's moody incompetence still reigns

It is baffling that the major rating agencies still are seen as being relevant. More than that they have once again become fundamental to the media and generic investors. These same agencies were thoroughly discredited during the '08/'09 financial crisis, yet they live on.

European countries seem to be hanging on these agencies every pronouncement. Having been stung by their incompetence in judging mortgage securities, the agencies are hyper-conservative, judging every sovereign in the shortest term possible and overlooking the residual strength of some major economies, notably Italy and Spain. They have reflexively become tools of the credit default swap market, and the bond vultures have the same backing that the sub-prime mortgage securities issuers had until 2008.

In the corporate market they have become provocative as well, in a completely destructive manner. Today Moody's put JPMorgan Chase and Bank of New York Mellon on negative watch for a ratings downgrade. These are two of the strongest capitalized as well as most profitible banking concerns in the U.S. The reason - since they received TARP money they are dependent on the U.S. government to avoid a default. That both banks were pressured to take TARP money and paid it back promptly is not stated.

Moody's, S&P, and Fitch are now in a race to see who can be the most defensive and the most sanguine in terms of short term events. Is that what rating agencies are for? Is the short term what there focus should be? That was never their mandate, but now it is their m.o.

In the 80's, 90's, and into 2003, when I was aware of these firms and had slight interactions, they were never viewed, even remotely, as having especially sharp people on the ratings side. Bizarrely, SEC rules lets rating agencies come into firms and receive confidential information that regular securities analysts have no access to, as if they are somehow the Fort Knox of corporate secrets. Companies just hand over their analysis to these folks, and the "analysts" type it up, and some senior person makes decisions. It's not much in the way of real research.

To digress further, I once worked on a banking team with a fellow business school graduate who dressed better than any of us and certainly looked the part. Unfortunately he just sat at this desk like a deer in headlights. He could not produce any work, and he could not communicate about anything other than social events. He was fired for good reason. His next stop, it was Moody's as an energy analyst. For some years he was successful there as they obviously just needed suits to fill places. I don't think that institutions change their cultures at anything other than a glacial pace unless they are shaken up by mergers or radical management change. My guess it that the Moody's that I knew is the same lightweight place with a few senior managers calling the shots to save the franchise.

One could say that these firms should have gone down with WAMU, Bear, Lehman, and Countrywide. Somehow they live on, and they are complicit now in undermining market confidence and any hints of optimism.


Anonymous JR said...

I never understood how the rating agencies could believe that if you bundled high-risk mortgage loans the bundle would become AAA.

8:34 AM  
Blogger John Borden said...

The short answer is that the rating agencies drank the kool aid like most of the market, they were greedy, and in fact rating agencies are mostly clerks who weren't capable enough to be hired at real Wall Street firms. There is a history to this that is much more interesting that I hope to share here when I'm not pressed for time.

9:07 AM  

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