According to MarketWatch "Moody's said it will continue to review Bear Stearns debt for a possible upgrade." Separately, and yet completely related, Bear Stearns shareholders begrudgingly approved the firm's sale to JP Morgan Chase yesterday. Despite the close of the sale, Moody's thinks it might possibly be a good idea to upgrade the debt, but it's not entirely certain so for now, it's just going to put it on review. Whatever shred of credibility may have remained after the Financial Times reported that Moody's accidentally awarded AAA ratings on billions of dollars of derivatives because of a computer bug, has officially evaporated. In the statement released today Moody's claimed that it would like to wait until it receives more clarity on the ultimate legal structure of the Bear Stearns and JP Morgan deal. Seriously, who cares? The merger is a done deal. How can any further analysis of legal issues possibly be of use to any investors? Anyone who is trading Bear's debt at this point is probably far more in tune with the legal issues than Moody's. Wanna work on some useful analysis? Here's my top four list of things Moody's can investigate that would actually help investors:
1.) Ask for a detailed list of Level 3 assets and their prices from every highly leveraged institution. Then tell me what they are actually worth. Make sure to downgrade those that refuse to offer the information, particularly any institution with an implied government guarantee.
2.) Go through GE's balance sheet and force them to describe the $25 billion in assets that it has labeled as "other" on its balance sheet. Then tell me what they are actually worth.
3.) Take another peek at the monoline insurers. Do everyone a favor and downgrade them from AAA BEFORE they go out of business.
4.) Take a look at all the assets being used as collateral against the Fed loans being offered to primary dealers. Tell me what they're really worth and if the Fed is using an appropriate haircut.
Anyone else want to add to the list?
Showing posts with label MCO. Show all posts
Showing posts with label MCO. Show all posts
Friday, May 30, 2008
Wednesday, May 21, 2008
Moody's Awards False AAA Ratings on CPDOs Due to Computer Error
According to the Financial Times, who conducted an independent investigation, Moody's awarded incorrect Triple A ratings to billions of dollars worth of CPDOs. Apparently, the Financial Times discovered a computer glitch in Moody's models that would have awarded ratings up to four notches lower than the original AAA rating. Moody's is now investigating the "computer bug" after reading FT's report. Isn't it great when one of the largest ratings agencies outsources its computer modeling to a bunch of financial reporters? It should give comfort to all of those investors out there who purchase securities solely based on AAA ratings granted by the rating agencies. How reliable are those models anyway? Apparently, betting on Naomi Campbell to show up on time and not throw a phone is a safer bet.
Sure we can blame the AAA rating on a computer bug, but intuitively, it's amazing that investors ever thought that CPDOs were "safe" investments. CPDOs, Constant Payment Debt Obligations, were structured products that were supposed to yield a nice steady income of Libor + 200 ( a fabulous return at the time in 2006.) The yield was generated by selling credit default swaps, or insurance, on the main investment-grade indices in the US and Europe, and collecting a premium. Anyone with even a cursory knowledge of derivatives can tell you that a structure that is designed to sell volatility and then sell some more when volatility goes higher, has a fairly decent shot of losing boatloads of money. Selling volatility is always a high risk proposition, particularly when you do it when premiums are at record lows, right before they spike to record highs. This is not a case of "hindsight is 20/20," as several astute investors and commentators criticized the structure when it was initially introduced. The bigger question here obviously is not about the computer bugs found in these particular structures. The question is: How much more reputational damage can the ratings agencies suffer before investors start to call Warren Buffett instead?
Sure we can blame the AAA rating on a computer bug, but intuitively, it's amazing that investors ever thought that CPDOs were "safe" investments. CPDOs, Constant Payment Debt Obligations, were structured products that were supposed to yield a nice steady income of Libor + 200 ( a fabulous return at the time in 2006.) The yield was generated by selling credit default swaps, or insurance, on the main investment-grade indices in the US and Europe, and collecting a premium. Anyone with even a cursory knowledge of derivatives can tell you that a structure that is designed to sell volatility and then sell some more when volatility goes higher, has a fairly decent shot of losing boatloads of money. Selling volatility is always a high risk proposition, particularly when you do it when premiums are at record lows, right before they spike to record highs. This is not a case of "hindsight is 20/20," as several astute investors and commentators criticized the structure when it was initially introduced. The bigger question here obviously is not about the computer bugs found in these particular structures. The question is: How much more reputational damage can the ratings agencies suffer before investors start to call Warren Buffett instead?
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