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Are S&P and Moody's simply outsourced marketing departments for Wall Street bond salesmen?
If we're making Enron comparisons, is there a possibility the rating agencies are the Arthur Andersons of the current mess?
Stock market up = Dollar down
What is more important these days to the treasury and the fed?
From the ISM survey
:
The 12 industries reporting growth in June listed in order are: Petroleum & Coal Products; Chemical Products; Plastics & Rubber Products; Food, Beverage & Tobacco Products; Nonmetallic Mineral Products; Computer & Electronic Products; Paper Products; Fabricated Metal Products; Primary Metals; Miscellaneous Manufacturing; Textile Mills; and Machinery.
Employment -.8%
Manufacturers inventories -.8%, customer inventories -1%
New export orders 56, -3%seq
imports 54.5, -3%
Most insiders think AA was brought down by one rogue partner (although the fact that they didn't rotate partners in itself, did them in). This seems to be more systemic.
In the unedited version, Krugman says something like "the pessimists were right" about the whole mortgage and debt industry.
Hmmm. If a pessimist is correct, doesn't that make him a realist? And what does that make the optimists? Someone who believes whatever's in the best interests of their salaries and bonuses?
"What is more important these days to the treasury and the fed?"
A banana republic isn't characterized only by a rotten political system, ruled by a small, wealthy, and corrupt clique usually put in power or supported by foreign interests (in the 20th century, in the case of several Central and Latin American countries, by the US), but also by huge wealth and income inequities, poor infrastructure, backwardness in many sectors of the economy, low capital spending, a reliance on foreign capital, money printing and budget deficits, and of course a weakening currency.
A banana republic is also characterized by a ruling class that curtails people's personal freedoms and is moving towards a heavy-handed military dictatorship under the excuse of fighting guerrilla (or terrorist) opposition groups or enemies. Moreover, the fact that the ruling class or the elite comes from different political parties isn't a relevant factor in classifying a country as a banana republic; what is relevant is the determination of the elite, irrespective of which party its members belong to, to shift wealth from the majority of the people (the masses) to themselves, usually through simply printing money and incurring chronic budget deficits, and frequently also through senseless warfare.
Dr. Marc Faber
Alec - I looked over the ISM PR release too (though did not dig deep into the 'data'). The thing that grabbed me was that the bulk of the industries reporting an increase were 'heavy' into materials, commodities and capital intensive and 'light' on value added & labor content. Exceptions being 'machinery' & 'computers & electronics'.
In short most of those on the active list move lotsa stuff & dollars but not much of those dollars stick to peoples fingers (workers, supplers, etc.).
Not a terrible report but no cause for jubilation.
The next "SarBox" will regulate subprime and the rating agencies. It will be interesting
NY Times has a nice article on home equity and equity extraction, and how the middle class has hollowed out its equity through home-equity loans. A good quote:
"The culture of own your home free of debt as soon as possible had endured for decades. Through the 1960s and 70s, owners equity ranged from 65 to 70 percent. As recently as 1983, some 52 percent of American homeowners who were 55 to 65 years old owned their homes without any mortgage debt allowing them to be free of monthly installment payments during their retirement years. By 2004, however, that percentage had dropped to 36 percent, according to Federal Reserve data."
Scary. Also:
"Even if prices continue to fall, homeowners are likely to cut their borrowing only slowly and reluctantly, if the last years behavior is a guide. Using ones home as an A.T.M., as economists like to say, has become so easy since the 1980s that it is hard to kick the habit."
Digging themselves an event deeper hole in the meantime.
ECONOMIC VIEW; A False Sense of Security? You Must Own a Home - NY Times
Digging themselves an event deeper hole in the meantime.
Bob - most folks aren't going to retire as we know it today certainly not boomers & gen-Xers. Most will die with their boots on.
People need to remember that if we have some sort of major credit crisis it all could have been avoided with a couple of rate hikes earlier in the game.
The Fed has taken a deliberate "black box" approach where they keep their motives and analysis to themselves.
If this approach leads to a financial crisis, then the Fed and their foreign counterparts need to be held accountable as an institution.
The Mafia were a bunch of Boy Scouts compared to these guys! In my opinion the dons of old were not interested in destroying the livelihoods and savings of millions of Americans.
JP Morgan Securities said its recommendation to short ABX 06-2 "BBB" and ABX 06-2 "BBB-" performed well, given last week's multi-point selloff. "We recommend holding these core short positions, and still see further price declines in the index," it said.
Business & Financial News, Breaking US & International News | Reuters.com
ac wrote If this approach leads to a financial crisis, then the Fed and their foreign counterparts need to be held accountable as an institution.
How's this?
House Resolution 2755
HR 2755 pdf
That is an uninformed and unfair statement on Krugman's part. The rating agencies do not claim to make forward-looking assessments, so they should not have changed the ratings on Enron (as in the example) until the facts led them to that action. At least fault them for not doing something that they are supposed to be doing, or for advertising that you should use their analysis for investment decisions but disclaiming that on every report.
How's this?
House Resolution 2755
I'm not against the Fed pe se. I don't know that it's necessarily doomed to failure by virtue of it's nature.
I think we have a more specific problem of a predisposition toward easy money policy and a failure to communicate (or perhaps understand) that economic growth at any cost or purely for political motives can have very severe long-term consequences.
Contained, eh?
Nice info DotC. Sixty cents on the dollar- this should be fun to watch over the next couple of months.
Residentail demand is dropping like a stone, kinda the mirror image of the crazy days of 2005.
Stale inventory combined with the new guidance is a recipe for disaster.
Oh well, as long as my paycheck isn't subject to a BBB tranche mark to a fading market;-}
Someday this war's gonna end...
Paulson sees U.S. housing downturn near end
Paulson sees U.S. housing downturn near end
| Reuters
So is it time for hign inflation and low interest rates? Are they going to try to crash the dollar now?
From shadowstats.com
Recession Signals Deepen as Inflation Pressures Mount / Help-Wanted Advertising Falls to New Cycle and 50-Year Lows / May's help-wanted advertising index plummeted to 27, from 29 in April, hitting new cycle and 50-year lows. After allowing for the Internet's siphoning meaningful volume away from the print media, the renewed plunge in the current data still signals a sharp weakening in current economic activity and could be a harbinger of weaker-than-expected June employment data due for release on July 6th.
Pumping Paulson back at it again. Notice in the article how he blames the suprime problem on borrowers and lenders.
No mention of Wall Street involvement. The silence is deafening.
Ministry of Truth, Nice find!
I was wondering when Paulson would call the bottom again. We have been at "near bottom" since the end of '06. Funny how increasing inventory and continuing deteriorating prices are a good signal for a near bottom, according to the Secretary.
Silly me - I would expect a several month reversal in seasonally adjusted inventory numbers would be an indicator. The mortgage rate resets picking up steam in the second half, abysmal reports out of all the HBs, increasing mortgage rates... all seem to suggest the worst isn't likley to hit until late '08 at the earliest, but Treasury Secretaries know better.
What a buffoon.
Bush commutes Libby prison sentence
WASHINGTON - President Bush commuted the sentence of former White House aide I. Lewis "Scooter" Libby on Monday, sparing him from a 2 1/2-year prison term that Bush said was excessive.
Yahoo! 404 - Page Not Found
Banana repulic indeed.
Bush, Cheney, Rove and the whole gang should be removed from power immediatly.
i read krugman on the train thismorning and think that he misstates the case.The damage wrought here by the rating agencies is not to mom amd pop in peoria or hicksville but to huge instituional investors and hedge funds.the problem as i see it is that these buyers acted sloppily by purchasing a rating(whatever it was) rather than a security.I think it is incumbent on the portfolio manager to understand the structure and the cash flows.excessive reliance and trust in any of the rating agency is akin to buying a put on your career.the shoddy work of many portfolio managers will lead to many unanticipated career change.i think that regarding sophisticated professionals that the buyer should beware.we are not speaking of widows and orphans and to aid the professionals who acted unprofessionally is to deny mr market a chance to do his harsh cleansing work.JJJ
Bush commutes Libby prison sentence
You gotta give Bush credit. He sure knows how to move negative news like 'subprime' and 'Bear Stearns' way deep into the paper.
jsquaredone - good thing those widows and orphans back in Peoria don't rely on savvy institutional investors to manage their money else they'd be in real trouble.
"That is an uninformed and unfair statement on Krugman's part. The rating agencies do not claim to make forward-looking assessments, so they should not have changed the ratings on Enron (as in the example) until the facts led them to that action. At least fault them for not doing something that they are supposed to be doing, or for advertising that you should use their analysis for investment decisions but disclaiming that on every report."
Well...um...if ratings are not to be used for any prediction, is it not completely pointless to rate anything? Is it not being suggested that something that deserves the rating "AAA" has a lower probability of becoming a complete disaster? If I understand this point correctly, all the rating agency does is look at past performance and stamp good or bad making no judgement on the soundness of the investment. I can write a mindless program to do this. These people are less than useless.
Well...um...if ratings are not to be used for any prediction, is it not completely pointless to rate anything?
Red Pill - it isn't pointless at all. I mean how else are the rating agencies going to charge fees for rating these instruments if they don't rate them?
If your goal is to charge fees for rating stuff then it all makes perfect sense from a rating agency perspective, no?
ONE partner at Andersen was responsible for Enron, WorldCom, Sunbeam & Arizona Baptist?
Must have been SuperAuditor.
When I was in public, the saying was you're one blown audit from out of business. Andersen ran through more chances than any firm deserved.
Its just a race between whether Yield Spread Premiums or bogus ratings will get the big stick first.
dryfly....my point is that they werent so savvy.....they didnt do their homework,they abrogated their responsibility and took the word of the rating agency which should carry very little credibility
.do your homework and you wont get burned.....separately(and maybe it has been touched upon here)but the investment banks who do deals pay the rating agency for the rating.that is a prima facie case for not trusting rating agency because they arent about to severely bite the hand that feeds them.
The rating agencies are not as sophisticated as people assume them to be. I have met with (formally and informally) many rating agency analysts during my career. While smart people, they are at a severe disadvantage in trying to understand a companys numbers. I have often been surprised by what they did not know to ask. And their data limited, and often spun by the company. It would be naïve to expect them to be infallible.
Certainly some highly rated companies do fail. But this does not prove the ratings to be poor. The true test of the rating system is not the absence of failures among highly rated companies It is whether they fail at a lower rate than do lower rated companies. On this score the rating agencies have a very good record.
Certainly some highly rated companies do fail. But this does not prove the ratings to be poor. The true test of the rating system is not the absence of failures among highly rated companies It is whether they fail at a lower rate than do lower rated companies. On this score the rating agencies have a very good record.
Z - you got data backing that up? Not an in your face challenge but an honest request - I've heard that said many times but never seen proof. You got some you want to share?
I have the stats in paper form. A report with 100 years or so of defalt rates by every rating level. And evaluated at various intervals post rating. For example, the percentage of AA companies that default within five years of the rating, 10 years of the rating and similar measures.
The defaults rates are very strongly correlated with the ratings. As one would expect the better the rating the lower the default rates.
Dryfly,
Look here at table 15 found on page 18:
http://www2.standardandpoors.com/spf/pdf/fixedincome/AnnualDefaultStudy_2005.pdf
Thx - I'll read it.
OK so the ratings agencies are incompetent. But given their track record, so are the people who believed their ratings. C'mon. These CDOs were paying a much higher rate than standard paper with the same rating. If that's not a red flag, then I don't know what is.
Keep in mind that rating a corporation and a REMIC or a CDO are two different things.
At the risk of oversimplifying it, the rating agencies take a look at the collateral, compare it to models on historical collateral data on similar pools, then they tell the dealer how much subordination is needed to obtain what rating level on each class. For example, they might say there needs to be 4% subordination to rate the BBB tranche (i.e. the structure has to be able to withstand 4% losses before the first $1 of the BBB gets hit), and 10% for the AAA. So the bank sizes the tranches to fit. They only change the ratings after there is a reason to do so - let's say the pool is 20% comprised of homes in Montana and there is a big flood in Montana, the rating agencies will put the tranches on review (maybe for a downgrade). Several weeks later, it is confirmed that 100% of the homes in the pool were destroyed and will not be covered by insurance resulting in a substantial anticipated loss upon disposition; then the tranches are downgraded. Its all very reactive.
They also publish research describing the deal and the rating levels, and they disclaim it all (making it theoretically useless) by saying that their research should not be used for investment decisions; while, at the same time, advertising that their research is the premier stop for investment decision making.