http://www.zerohedge.com/contributed/2012-06-21/moodys-bank-downgrade-too-little-too-late
Submitted by rcwhalen on 06/21/2012 21:57 -0400
Submitted by Tyler Durden on 06/21/2012 08:46 -0400
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.
and.......
http://www.zerohedge.com/news/ponzi-comes-full-circle-ecb-will-rate-sovereign-bonds-it-accepts-collateral
Ponzi Comes Full Circle: ECB Will Rate Sovereign Bonds It Accepts As Collateral
Two days ago we noted with muted disgust that Europe has legislated to scrap the use of rating agencies, who were everyone's best friend during the up-phase in the global ponzi, but now that deleveraging is accelerating and ratings downgrades are coming, are like the drunk guest who refuses to leave the insolvent party at 4 am. Sure enough, the time has come to enact rules to kick them out. But wait, there is much more. Moments ago Reuters reported that the European Central Bank is discussing a medium-term plan (as in indefinite) toscrap rating rules on euro zone sovereign bonds and instead set their value when used as collateral in lending operations on its own internal assessment, central bank sources said. You read that right: the ECB itself will decide what the collateral value is of pieces of paper it accepts, in exchange for other pieces of paper with the faces of famous dead people on one side (even if technically the whole operation takes place electronically). And to think that for some odd reason allowing drug addicts to write their own prescriptions is illegal. Apparently all is fair in love and breaking all rules of sinking monetary systems.
More from Reuters:
With the ECB not yet ready to take over the technical but highly political responsibility for rating sovereigns, the bank's policymakers will also discuss more immediate ways to help Spain and its banks at their meeting on Thursday, such as further widening the types of collateral Spanish banks can use.The discussion come as Spain braces for a downgrade from small rating firm DBRS, which without a change in ECB rules will trigger an extra 5 percent penalty on Spanish bonds when used to get ultra-cheap ECB funding.ECB members have heavily criticised the actions of rating agencies during the euro zone crisis and have vowed to reduce reliance on their assessments."In the case that the ECB Governing Council decides this, it would reduce the widely criticised influence of Standard & Poor's, Moody's and Fitch," one euro zone central bank source who spoke on the condition of anonymity said.And the punchline:"On the other hand, this could also expand the shrinking pool of collateral which banks in troubled countries have available."Bingo. Only not "expand" it, but make it worth whatever Goldman ex-banker Mario Draghi decides it is worth. In other words, the last remaining market test of even the faintest credibility, the one backstopping roughly ten trillion in deposits, has just become worthless.There is still some hope:
Opposition, in particular from the Bundesbank, has been strong, however. The German central bank has argued that the dramatic loosening of the rules has increased the risk of lending to banks for the ECB and the national central banks.It is still unclear what criteria the ECB would apply in the future if it ditches the use of rating agencies in the area of sovereign bonds.One central bank source said there would continue to be a sliding scale of haircuts (charges) that would be applied to the different countries' bonds."It is clear that the ECB will continue to make reductions depending on the creditworthiness of the country whose bonds are submitted to it as security," said the insider.
Sadly, at his point not even Germany can turn the ponzi choomwagon around.
It will make for some great comedy though, when in retaliation for continuing German obstinacy to hike German retirement age to 100 so that the French can retire at 60, the ECB itself will downgrade Germany's credit rating.
You laugh, but it's coming.
Obviously, once the general public comprehends that the ECB has now gonefull tilt with its entire deposit base, backstopping it by now officially worthless paper in the biggest and most corrupt failure of circular valuations ever, and everyone decides to invest in the First and Only Mattress Bank, it will be too late. And the ECB will be saying how nobody, nobody, could have possibly predicted that it itselfis the precipitating factor for the terminal bank run.
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