Tuesday, February 24, 2009

Follow The Money, Except Sacred Cows?

It has often been said that to find the answer, you just need to follow the money. Well, today I am going to lay out some facts about three sacred cows, the credit rating agencies (CRAs). I hope you will find this interesting.

Moody’s Corporation (NYSE: MCO) is the holding company for Moody’s Investors Service. The company has a 40% share in the world credit rating market. Two of the top institutional owners of Moody’s Corporation are Berkshire Hathaway and Davis Selected Advisers. I do not know anything about Davis Selected Advisers; however, I do know that Warren Buffett is the head of Berkshire Hathaway. Warren Buffett was also a big supporter of Presidential Candidate Obama. Whether the Obama administration owes Warren Buffett anything for his support, I do not know, but Moody’s is what is known as one of three Nationally Recognized Statistical Rating Organizations (NRSRO) that is designated by the U.S. Securities & Exchange Commission.

Standard & Poor’s is a division of McGraw-Hill. Standard & Poor’s is a credit rating agency that issues credit ratings for the debt of corporations both public and private. It is one of several Credit Rating Agencies (CRAs) that have been designated a NRSRO by the U.S. Securities & Exchange Commission.

The Fitch Group is the third of the three major credit rating agencies. Fitch Ratings is an international credit rating agency with dual-headquarters in New York and London. It is also a Nationally Recognized Statistical Rating Organization (NRSRO), and was designated by the SEC in 1975 together with Moody’s and Standard & Poor’s.

The technical term to describe what I have been referring to as asset-backed or mortgage-backed bonds are called collateralized debt obligations (CDOs), and the credit ratings on the CDOs were assigned top ratings by the CRAs. Got that?

For instance, losses on $340.7 million worth of CDOs issued by Credit Suisse Group added up to about $125 million, despite being rated AAA by Standard & Poor’s. Standard & Poor’s also failed to predict the bankruptcy of Iceland in 2008, a country that had a very high credit rating until the country collapsed.

It is no secret that the U.S. Securities & Exchange Commission has failed the investor at several points. The Madoff fraud makes good copy, but for size, it can not compare to the screw up of the whole arena of CDOs held world wide by the largest of the institutional investors. These are your toxic assets. The meltdown is the fact that no traders want to take a position in bonds that they do not know what is really behind them and which the rating is meaningless. The housing bubble was inflated by the money that poured into the CDOs. And, all of these can be traced back to the failure of the SEC and Congress. We have followed the money, but no one, it appears, is ready to take on the three sacred cows. Until the CRAs are made right and credit ratings mean something more than the paper they are written on, the economic recovery will not take place in the United States. In the 21st century, CDOs are a major part of the capital markets, and their credit ratings must stand for something. They must be creditable and give confidence to the world wide debt markets. When this problem is tackled the economic recovery will begin.

Stay tuned.

P.S. I am sorry about the misspelling on sacred. I guess I should wake up before I start to write in the morning.


Butch said...

Don't you think that part of the fact that this won't happen is due to the fact that most individuals do not understand the finances of the world? Most people have heard of Moody's the SEC, etc. but they have no idea as to what they do. What they do know is that the "Talking Heads" on CNBC, or FBN are all screaming on the air. You can watch the "View" in the mornings with the 4 women talking all at once and learn nothing or you can watch 'Market Wrap' or whatever title one wishes to put on it but as long as everyone talks at the same time and screams into the mic everyone will panic and everyone will still be dumb. Too many opinions expressed at the same time tend to turn people off and when it comes to learning about something like finance it needs to be controlled.

I wish I had been taught more about life in school many years ago. Insurances are hard to understand, why would finance be any easier. I learned how to write a check in school but how to balance a checkbook.

I agree with what you are saying. The problem is, from the common everyday citizen to the congressional idiot know it all, there is a lot of room for learning. It would be like making an automotive czar out of someone that doesn't have a background in manufacturing and or the auto industry.

moneythoughts said...

I'm trying to put a little light on what went wrong with the financial system and how the toxic assets, meltdown and housing bubble came about. I don't think that anyone who reads my blog will be able to make a difference, but you never know who may stumble upon it. Our own government, congress and the SEC all played a part in the disaster that followed. Unless there is a plan for correcting the credit rating agencies, their conflicts of interest with the underwriters, the economic recovery will never realize its potential. CDOs are a big part of today's capital markets and the weaknesses in the financial system must be addressed.

LceeL said...

Just keep repeating the word 'OBAMA' in your posts. Eventually the GOV will find you - if for no other reason, because you keep mentioning OBAMA. Just like I keep mentioning OBAMA in this comment. Now - having found you - it then becomes a question of whether or not the idiot working in government can read and even BEGIN to comprehend what you have to say here. Maybe you need to throw in words like REVOLUTION and COMMUNIST for good measure - ah - but then they'll just think you're a REPUBLICAN up to no good and then they'll REALLY shut down. After all, all they have done is turn a deaf ear - and frankly, that's all the REPUBLICANS deserve.

moneythoughts said...

Putting some lead in their pencils, so to speak, is not going to be an easy decision for the Obama administration. Taking on the top three credit rating agencies is serious business, yet it must be done if we are going to experience an economic recovery. Not knowing what to do with the toxic assets is probably the easiest piece of the puzzle, because going after the CRAs is not going to be a picnic. When you take on a corporation tied to Warren Buffett, you better know what you are doing. He has deep pockets, great legal resources and he owns Moody's who has a 40% share of the credit rating market. They will probably go lightly on this one, but I know, so others must know this as well, that without this piece of equation corrected, there will be no satisfactory solution.

Joanne Licsko said...

Thank you for your easy to read explanations. I have had a thing about numbers and I have to re read much of what you say. However, I am going to keep coming back because I think what you are telling us is less (if at all) biased than our media.
Do you believe that Obama's strategy will work?

moneythoughts said...

Yes. And, here are my reasons:

Infrastructure spending, such as roads and bridges, the electric grid, and schools is called capital investment when it is done by a corporation. Corporations borrow to invest in plant and equipment, and usually borrow long term because the assets they are building or acquiring will last more than five years. That is what is behind our stimulus package; however, not all the money is going to infrastructure, but that is OK as long as the other moneys are spent here as much as possible, like teachers, police and firemen and firewomen. Getting away from our dependence on foreign oil is important as well as building a new electric grid. These issues have national security implications and should be a priority. Energy, education and healthcare are the three legs of his economic stool, and I believe it will work. If the Obama stops the wasteful spending by the military, the deficit could be reduced considerably. Even the Generals don't want or need much of the crap Congress makes them buy.

Thanks for your comments, and I love your art work.