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