Articles Posted in Moodys

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United States v. Standard &
Poor’s

By R Tamara de Silva

January 5, 2013

 

       The Department of Justice filed a civil lawsuit yesterday against one of the of big three credit ratings agencies, Standard & Poor’s (“S&P”) and its parent company, McGraw-Hill, Inc.[1]  The suit alleges that S&P deliberately gave its coveted triple-A ratings to sub-prime debt in order to win fees.  The suit does not address the structural conflicts of interest within the three credit ratings agencies that are Nationally Recognized Statistical Rating Organizations (“NSRO”), nor will it address or cure any of the underlying causes of the credit crisis.  While there are problems with the credit rating agency business model, it will be difficult to prove that S&P knew any more than even the audit committees of the investment firms on whom it relied, or the issuers of debt instruments themselves.  The suit will of course result in the levy of a fine.
But while S&P’s hands may not be entirely unsullied- far more importantly to the untrained public eye, they are as good a scapegoat as any other.

       S&P is a credit rating agency whose business is to provide credit ratings represented by letters from triple-A to D, in exchange for fees.  Federal laws require that certain institutions only hold investments that have a credit rating of “investment grade,” but most of the financial world relies on credit ratings agencies to weigh and measure risk, risk defined in terms of the credit worthiness of investments and institutions.    S&P is the largest of three credit ratings agencies that is recognized by the Securities and Exchange Commission (“SEC”)
as an NSRO.   From 2004 towards the end of 2008, S&P assigned credit ratings on nearly $4 trillion of debt instruments.  In terms of sheer size and credibility, despite this suit and skepticism of the NSROs particularly in Europe, the world has no credible alternative to credit ratings agencies and specifically nothing to replace, Standard & Poors.

       Keep in mind that almost five years after the worst financial crisis in United States history, the Department of Justice has yet to criminally charge a single culpable senior executive or firm.  If history is any guide, the Justice Department will reach a civil settlement with S&P wherein the firm will agree, without admitting any wrongdoing, to pay a fine that in relative terms, will have as large a fiscal impact on S&P as the cost of one month’s dry kibble would have to the owners of the Grumpy Cat.  The suit asks for a fine in excess of $1 billion but these will typically be negotiated down and the government has not latterly demonstrated a willingness to go to trial with these suits.
Like so many Wall Street settlements reached over the past ten years,
the cost of the settlement fine imposed will ultimately be a pittance relative to the quarterly earnings of the offending firm-S&P is not likely to become the first exception to this rule. Continue reading

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J.P. Morgan’s Loss as a Red Herring By R Tamara de Silva May 14, 2012

Much ado is being made about J. P. Morgan’s disclosure of over $2 billion in trading losses and one hopes the media and regulators do not use this as yet another opportunity to completely miss the point. Wall street must not rely exclusively on its present risk models that are based exclusively on VaR and variations of VaR-it must learn to think outside its own box and anticipate worse case scenarios. We cannot afford to have many more systemic crises that threaten to bring down the financial system simply because yet again, the unexpected and un-modeled occurs.

Chief Executive Jamie Dimon’s public self-flagellation aside, this loss compromises merely 20% percent of J. P. Morgan’s pretax profit for the first quarter of this year. Put another way, J. P. Morgan has a market capitalization of $137.4 billion of which $2 billion comprises a bit more than 1 percent–hardly fodder for anyone’s angst against quasi-public Wall Street juggernauts that seem to privatize profit and publicize loss being ‘too big to fail.” Mr. Dimon is wrong to assert that the trading losses were the result of hedges. It would be more wrong for lawmakers on either side of the aisle to call for hasty regulations on an industry they have never really understood and from whose pockets they are lobbied and receive the heftiest campaign contributions. A cursory look at what has happened to the Volcker Rule illustrates this point. The real lesson of J. P. Morgan’s $2.3 billion loss is that Wall Street must once and for all adjust the way it manages and understands risk.

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Comparing the Incomparable- Credit Ratings Agencies Revisited

By R. Tamara de Silva January 17, 2011

Yesterday, Standard & Poor’s relieved the Eurozone’s bail-out fund, the European Financial Stability Facility (“EFSF”) of its AAA credit rating, possibly hampering the fund’s ability to contain the European debt crisis. This comes on the heel’s of the S&P stripping both France and Austria of their triple-A rating in favor of a rating of AA+.[1] The effect of the S&P downgrade may be negative. Ratings agencies exist to level asymmetries in information and evaluate risk but one of their inherent oddities is that they seek to compare things whose differences in scale make them incomparable. Ratings agencies also have conflicts of interests, they often evaluate financial products (like collateralized debt obligations) that they do not understand, they seem to lack fixed ways to measure absolute risk, and they are at times, catastrophically wrong.

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