The case against Standard and Poor's finally got underway on October 7th in Australia. Thirteen towns were sold AAA-rated Constant Proportion Debt Obligations (CPDO's - also known as "Rembrandts" by the Australian firm Local Government Financial Services in 2006. According to Standard and Poor's, who rated the synthetic derivatives, there was less than a 1% chance of failure. Within two years the products had crashed, resulting in losses of $15 million for the affected councils. Standard and Poor's has been charged on two fronts. Firstly, as the CPDOs were new products, they did not have sufficient information to accurately rate them. Secondly, they are charged with bowing to pressure from the issuing bank, ABN Amro, to issue a favourable rating.
In responses, Standard and Poor's has rehearsed familiar arguments, stating that "rating is an art, not a science", and reminding us of recent US judgments declaring ratings no more than "predictive opinions". See previous posts on the Ohio case here.
These may be revisited, however, as on September 30th a judge sitting in Albuqureque denied rating companies' requests to have claims brought against them dismissed. The case is being brought against all three big ratings agencies (Moody's, Standard and Poor's and Fitch) by Maryland-National Capital Park & Planning Commission Employees’ Retirement and the Midwest Operating Engineers Pension Trust Fund. They are representing investors who lost $5 billion in Thornburg Mortgage Home Loans Inc. mortgage- backed securities which were rated AAA.
Developments will be posted here.
Showing posts with label Rating. Show all posts
Showing posts with label Rating. Show all posts
Wednesday, 30 November 2011
Monday, 24 October 2011
... and the downgrades continue
And so the banking crises and the sovereign debt crises rumble on, with endless meetings in Brussels that have so far achieved stupendously little given the time already devoted. We are being reassured that progress is taking place, so perhaps just a little longer...
In the meantime several more European downgrades have been occupying the rating agencies. On the 18th October Moody's cut Spain's sovereign credit rating, making it the last of the big three rating agencies to take such action, lowering the rating from Aa2 to A1. A couple of weeks before, Fitch had cut Spain's sovereign rating to A minus from double A, followed closely by a similar move by Standard and Poor's. Considering Spain's sovereign rating was triple A status until September last year, recent downgrades mark the latest turn in a significant drop. Moody's cited reasons of political uncertainty (further elections could see the conservative People's Party make huge gains in elections on November 20th), unrealistic deficit reduction plans (from 9.2 per cent of GDP last year to 4.4 per cent in 2012) with equally unrealistic growth figures (forecasts of 1.8 per cent growth have been estimated by Moody's to be closer to 1 per cent). Further reasons cited include the government debts of Spain's 17 autonomous regions, and the willingness of these to curb their spending.
Moody's have also downgraded both Belgium and Italy, the latter following a similar move by Standard and Poor's last month. Standard and Poor's have also downgraded three large Italian banks although it confirmed the ratings of 18 large banks - including the largest by assets. 21 regional banks were also downgraded. However concerns have been raised by the head of Italy's banking association and chairman of Monte dei Paschi, Giuseppe Mussari, that EU bank recapitalisation plans being discussed in Brussels could do more harm than good in Italy by forcing banks to hold 'unnecessary' amounts of capital and exacerbating the sovereign debt crisis. Italy's 10-year bond yield rose 7 basis points to 5.867 per cent on Tuesday, the highest close since before the European Central Bank began buying Italian bonds on August 8 to try keep down borrowing costs.
As negotiations to bail out Greece and the Euro with it continue in Brussels, Moody's has announced that it may change the outlook on France's triple A rating from stable to negative in the next three months. As is customary in such situations, a downgrade is neither forthcoming or imminent, but the mere prospect of such sends shivers through the markets and French banks' shares fell following the announcement. Moody's praised France's 'very high economic strength', its 'ample capacity to absorb shocks' and its 'favourable public debt maturity', along with political efforts aimed at fiscal consolidation. However, the global financial and economic crisis had, according to the rating agency, led to a deterioration in French 'government debt metrics'.
The agency stated that France's finances were now among the weakest of those countries which still had a triple A rating. France's public finances are not only looking vulnerable but French banks are heavily indebted to Greece. Standard and Poor's last week downgraded BNP Paribas by one notch from double A to double A minus citing exposure to Greek debt. What's more, major consequences could follow for France if Greece defaults on its liabilities and markets react poorly, or if there are any further defaults. Add in the fact that France has been gradually becoming less competitive for businesses over the past years - in contrast to neighbouring Germany - and it becomes easy to understand why Sarkozy might be worried. Moody's isn't alone, however, as Standard and Poor's included France in the role call of countries likely to see further downgrades in the case of a double dip recession - alongside Spain, Italy, Ireland and Portugal. France's public debt is approaching 90 per cent of GDP and so a downgrade could prove extremely painful, even though this figure is set to fall as France's budgetary deficit is brought down from 5.7% currently to 3% in 2013. These figures are - as most Eurozone projections - based on optimistic growth forecasts. France anticipates 1.75% over the next year. Most commentators doubt this will materialize, either making deficit reduction a longer-term goal, or necessitating further austerity measures in the run up to the election next year.
France is already committed to €158.5bn ($217bn) in guarantees for the new eurozone rescue fund, the European financial stability facility, which is equivalent to 8.5 per cent of GDP. It has also just agreed to guarantees for the failing Franco-Belgian bank Dexia. Now these don't matter much unless and until one of these fails, at which point the government is bound to step in. But it does mean that France has much less room for manoeuvre on its balance sheets than it did three years ago, leaving it vulnerable to further financial shocks. It is also limited in the resources it can supply to the European Financial Stability Fund (EFSF), and Germany's peas for a greater Greek write-off followed by French re-leveraging of banks is, as a consequence, increasingly difficult. Politically, at least, Sarkozy has hailed the AAA rating as 'untouchable', and while rating agencies take political direction into account, it will no doubt take more than a statement of intent to preserve France's rating.
In the meantime several more European downgrades have been occupying the rating agencies. On the 18th October Moody's cut Spain's sovereign credit rating, making it the last of the big three rating agencies to take such action, lowering the rating from Aa2 to A1. A couple of weeks before, Fitch had cut Spain's sovereign rating to A minus from double A, followed closely by a similar move by Standard and Poor's. Considering Spain's sovereign rating was triple A status until September last year, recent downgrades mark the latest turn in a significant drop. Moody's cited reasons of political uncertainty (further elections could see the conservative People's Party make huge gains in elections on November 20th), unrealistic deficit reduction plans (from 9.2 per cent of GDP last year to 4.4 per cent in 2012) with equally unrealistic growth figures (forecasts of 1.8 per cent growth have been estimated by Moody's to be closer to 1 per cent). Further reasons cited include the government debts of Spain's 17 autonomous regions, and the willingness of these to curb their spending.
Moody's have also downgraded both Belgium and Italy, the latter following a similar move by Standard and Poor's last month. Standard and Poor's have also downgraded three large Italian banks although it confirmed the ratings of 18 large banks - including the largest by assets. 21 regional banks were also downgraded. However concerns have been raised by the head of Italy's banking association and chairman of Monte dei Paschi, Giuseppe Mussari, that EU bank recapitalisation plans being discussed in Brussels could do more harm than good in Italy by forcing banks to hold 'unnecessary' amounts of capital and exacerbating the sovereign debt crisis. Italy's 10-year bond yield rose 7 basis points to 5.867 per cent on Tuesday, the highest close since before the European Central Bank began buying Italian bonds on August 8 to try keep down borrowing costs.
As negotiations to bail out Greece and the Euro with it continue in Brussels, Moody's has announced that it may change the outlook on France's triple A rating from stable to negative in the next three months. As is customary in such situations, a downgrade is neither forthcoming or imminent, but the mere prospect of such sends shivers through the markets and French banks' shares fell following the announcement. Moody's praised France's 'very high economic strength', its 'ample capacity to absorb shocks' and its 'favourable public debt maturity', along with political efforts aimed at fiscal consolidation. However, the global financial and economic crisis had, according to the rating agency, led to a deterioration in French 'government debt metrics'.
The agency stated that France's finances were now among the weakest of those countries which still had a triple A rating. France's public finances are not only looking vulnerable but French banks are heavily indebted to Greece. Standard and Poor's last week downgraded BNP Paribas by one notch from double A to double A minus citing exposure to Greek debt. What's more, major consequences could follow for France if Greece defaults on its liabilities and markets react poorly, or if there are any further defaults. Add in the fact that France has been gradually becoming less competitive for businesses over the past years - in contrast to neighbouring Germany - and it becomes easy to understand why Sarkozy might be worried. Moody's isn't alone, however, as Standard and Poor's included France in the role call of countries likely to see further downgrades in the case of a double dip recession - alongside Spain, Italy, Ireland and Portugal. France's public debt is approaching 90 per cent of GDP and so a downgrade could prove extremely painful, even though this figure is set to fall as France's budgetary deficit is brought down from 5.7% currently to 3% in 2013. These figures are - as most Eurozone projections - based on optimistic growth forecasts. France anticipates 1.75% over the next year. Most commentators doubt this will materialize, either making deficit reduction a longer-term goal, or necessitating further austerity measures in the run up to the election next year.
France is already committed to €158.5bn ($217bn) in guarantees for the new eurozone rescue fund, the European financial stability facility, which is equivalent to 8.5 per cent of GDP. It has also just agreed to guarantees for the failing Franco-Belgian bank Dexia. Now these don't matter much unless and until one of these fails, at which point the government is bound to step in. But it does mean that France has much less room for manoeuvre on its balance sheets than it did three years ago, leaving it vulnerable to further financial shocks. It is also limited in the resources it can supply to the European Financial Stability Fund (EFSF), and Germany's peas for a greater Greek write-off followed by French re-leveraging of banks is, as a consequence, increasingly difficult. Politically, at least, Sarkozy has hailed the AAA rating as 'untouchable', and while rating agencies take political direction into account, it will no doubt take more than a statement of intent to preserve France's rating.
Friday, 7 October 2011
UK financial firms downgraded by Moody's
The credit rating agency Moody's has downgraded the senior debt and deposit ratings of twelve UK financial firms, including RBS (down two notches from AA3 to A2), Lloyds TSB (down one notch from AA3 to A1), Nationwide and Santander UK. Nine Portuguese banks were also subjected to the same. While the agency stated that it did not believe that conditions had deteriorated, it attributed the downgrades to the belief that the UK government was less likely to bail out any of the institutions should they get into difficulties.
The removal of implicit government support for the banking sector was welcomed by Lloyds as necessary for the sector in the UK at least to stand on its own once again, however the news prompted falls in all the share prices, including for Barclays whose share price fell in accordance with the other banks despite the fact that it was not downgraded.
The Chancellor George Osborne stated that British banks were among some of the best capitalized in the world, and that the government were taking steps to address the "too big to fail" problem. Of course, detail is scant, and heralding capitalization levels and stress test successes should be taken, one feels, with a Dexia-sized pinch of salt. Moody's split the downgrades into three categories - those institutions still with a high likelihood of government support, a moderate level, and a low level of support. Unsurprisingly, the large banks including RBS and Lloyds fell into the first category, while the smaller institutions were split between the second and third.
While most UK banks have exposure to Irish sovereign debt, they are not exposed to other Eurozone countries in the same way as some of the European banks. There's more on this point, along with discussion of some interesting calculations carried out by French bank Natixis here.
The removal of implicit government support for the banking sector was welcomed by Lloyds as necessary for the sector in the UK at least to stand on its own once again, however the news prompted falls in all the share prices, including for Barclays whose share price fell in accordance with the other banks despite the fact that it was not downgraded.
The Chancellor George Osborne stated that British banks were among some of the best capitalized in the world, and that the government were taking steps to address the "too big to fail" problem. Of course, detail is scant, and heralding capitalization levels and stress test successes should be taken, one feels, with a Dexia-sized pinch of salt. Moody's split the downgrades into three categories - those institutions still with a high likelihood of government support, a moderate level, and a low level of support. Unsurprisingly, the large banks including RBS and Lloyds fell into the first category, while the smaller institutions were split between the second and third.
While most UK banks have exposure to Irish sovereign debt, they are not exposed to other Eurozone countries in the same way as some of the European banks. There's more on this point, along with discussion of some interesting calculations carried out by French bank Natixis here.
Saturday, 24 September 2011
Bank of America - Too Big To Fail No Longer?
Can a bank ever be too big to fail?
After a three month review the rating of long term Bank of America debt has been downgraded a couple of notches from A2 to Baa1. Moody's have cited the reduced chance of a full-scale bailout by the US government should the bank run into difficulties, although the rating agency concedes that should trouble occur, it is still likely that some government help would be likely. According to Moody's, allowing a troubled bank to fail is now more likely than previously because of a realisation that this approach reduces the risk of contamination. Citigroup's long term rating and Wells Fargo's rating have also both been downgraded.
So are taxpayers safe from future bailouts? Are the big banks now no longer "too big to fail"? In its report, accessible here, Moody's states:
"Moody's continues to see the probability of support for highly interconnected, systemically important institutions as very high, although that probability is lower than it was during the financial crisis. During the crisis, the risk of contagion to the US and global financial system from a major bank failure was viewed as too great to allow such a failure to occur -- a view borne out in the aftermath of the Lehman failure. This led the government to extend an unusual level of support to weakened financial institutions and Moody's to incorporate the expectations of such support in its ratings. Now, having moved beyond the depths of the crisis, Moody's believes there is an increased possibility that the government might allow a large financial institution to fail, taking the view that contagion could be limited."
So Moody's believes that the worst of the financial crisis is over and that we are emerging into the sunny uplands of recovery? Maybe not, however there seems to have been a shift in perception that contagion can now be stopped not by bailing out huge financial institutions, but by letting them fail. There are obviously political implications in protecting the taxpayer from more massive bills (more on this later), however provisions in the Dodd-Frank Act that work to reduce interconnectedness among financial institutions can also explain this. Under rules recently finanalized by the Federal Deposit Insurance Corporation (FDIC), the orderly liquidation authority set out in Dodd-Frank sets out a clear intent to impose future losses on bond holders in the event that a systemically important bank - such as the Bank of America - was nearing failure.
However, as yet the parts of Dodd-Frank that would serve to reduce interconnectedness among financial institutions, such as resolution plans or changes to over-the-counter derivatives markets, are still pending. It would therefore be extremely difficult for an orderly liquidation of an institution the size of Bank of America to occur at the present time, and consequently Moody's believes that for this reason, should disaster strike, the government would still be compelled to provide some financial support. Reliance on the ordinary liquidation authority to resolve a systemically important bank would prove too disruptive to the marketplace and wider economy, leading to a situation almost as undesirable as those Dodd-Frank was designed to avoid.
Bank of America, according to Moody's is still exposed to "potentially significant" levels of risk related to both residential mortgages and home equity loans that are still languishing on its balance sheet. Moreover, while Bank of America has taken steps to improve its capital and liquidity positions, and while Moody's believes that it has an ample buffer to absorb any losses that might occur as a result of bad debts, a deterioration in the economic environment or adverse legal rulings on claims against it might serve to tip the balance against the bank's long term financial stability. Of course, these latter are not within the direct control of management of the Bank, meaning that short of further increasing their "modest" capital and liquidity, there is little more the Bank can do except weather the storm out. Of course, following a downgrade of long term debt by the CRA, this one option available to the Bank of America is now just that little bit harder.
So can a bank ever be too big to fail? The obvious answer has to be yes, however the political climate in which a financial crisis materializes should not be underestimated. Is Moody's taking into account the rise of the Tea Party movement in the US? Considering Obama's difficulties in raising the debt ceiling, and the way in which a left-leaning congress balked at previous bailouts, the increasingly vocal right wing in American politics is likely to signal the end for taxpayer support of financial institutions.
After a three month review the rating of long term Bank of America debt has been downgraded a couple of notches from A2 to Baa1. Moody's have cited the reduced chance of a full-scale bailout by the US government should the bank run into difficulties, although the rating agency concedes that should trouble occur, it is still likely that some government help would be likely. According to Moody's, allowing a troubled bank to fail is now more likely than previously because of a realisation that this approach reduces the risk of contamination. Citigroup's long term rating and Wells Fargo's rating have also both been downgraded.
So are taxpayers safe from future bailouts? Are the big banks now no longer "too big to fail"? In its report, accessible here, Moody's states:
"Moody's continues to see the probability of support for highly interconnected, systemically important institutions as very high, although that probability is lower than it was during the financial crisis. During the crisis, the risk of contagion to the US and global financial system from a major bank failure was viewed as too great to allow such a failure to occur -- a view borne out in the aftermath of the Lehman failure. This led the government to extend an unusual level of support to weakened financial institutions and Moody's to incorporate the expectations of such support in its ratings. Now, having moved beyond the depths of the crisis, Moody's believes there is an increased possibility that the government might allow a large financial institution to fail, taking the view that contagion could be limited."
So Moody's believes that the worst of the financial crisis is over and that we are emerging into the sunny uplands of recovery? Maybe not, however there seems to have been a shift in perception that contagion can now be stopped not by bailing out huge financial institutions, but by letting them fail. There are obviously political implications in protecting the taxpayer from more massive bills (more on this later), however provisions in the Dodd-Frank Act that work to reduce interconnectedness among financial institutions can also explain this. Under rules recently finanalized by the Federal Deposit Insurance Corporation (FDIC), the orderly liquidation authority set out in Dodd-Frank sets out a clear intent to impose future losses on bond holders in the event that a systemically important bank - such as the Bank of America - was nearing failure.
However, as yet the parts of Dodd-Frank that would serve to reduce interconnectedness among financial institutions, such as resolution plans or changes to over-the-counter derivatives markets, are still pending. It would therefore be extremely difficult for an orderly liquidation of an institution the size of Bank of America to occur at the present time, and consequently Moody's believes that for this reason, should disaster strike, the government would still be compelled to provide some financial support. Reliance on the ordinary liquidation authority to resolve a systemically important bank would prove too disruptive to the marketplace and wider economy, leading to a situation almost as undesirable as those Dodd-Frank was designed to avoid.
Bank of America, according to Moody's is still exposed to "potentially significant" levels of risk related to both residential mortgages and home equity loans that are still languishing on its balance sheet. Moreover, while Bank of America has taken steps to improve its capital and liquidity positions, and while Moody's believes that it has an ample buffer to absorb any losses that might occur as a result of bad debts, a deterioration in the economic environment or adverse legal rulings on claims against it might serve to tip the balance against the bank's long term financial stability. Of course, these latter are not within the direct control of management of the Bank, meaning that short of further increasing their "modest" capital and liquidity, there is little more the Bank can do except weather the storm out. Of course, following a downgrade of long term debt by the CRA, this one option available to the Bank of America is now just that little bit harder.
So can a bank ever be too big to fail? The obvious answer has to be yes, however the political climate in which a financial crisis materializes should not be underestimated. Is Moody's taking into account the rise of the Tea Party movement in the US? Considering Obama's difficulties in raising the debt ceiling, and the way in which a left-leaning congress balked at previous bailouts, the increasingly vocal right wing in American politics is likely to signal the end for taxpayer support of financial institutions.
Wednesday, 14 September 2011
Downgrade of French Banks
Moody’s has downgraded by one notch top French banks Societe Generale and Credit Agricole while leaving BNP Paribas on negative watch. The agency said that during the review, Moody's concerns about the structural challenges to banks' funding and liquidity profiles increased, in light of worsening of refinancing conditions. Moody's cut SocGen's debt and deposit ratings by one notch to Aa3 from Aa2. The outlook on the long-term debt ratings was negative. For Credit Agricole, Moody's downgraded its BFSR by one notch to C from C+, and cut its long-term debt and deposit ratings by one notch to Aa2 from Aa1.
Credit Agricole and Societe Generale have seen their share prices fall 60% and 65% respectively since February, while BNP has fallen 53% over the same period.
Analysts have welcomed this move as the Moody's rating was slightly elevated compared to other agencies.
Credit Agricole and Societe Generale have seen their share prices fall 60% and 65% respectively since February, while BNP has fallen 53% over the same period.
Analysts have welcomed this move as the Moody's rating was slightly elevated compared to other agencies.
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