The major rat ing agencies have been <\/p>\n
in the thick of credit market disaster. During the housing boom, they failed miserably in evaluating the risk associated with mortgage backed bonds and their derivatives. Their failure resulted in bonds with junk quality risk, getting investment grade, even pristine AAA ratings. This cost investors all over the world billions in losses, and precipitated the current crisis.<\/p>\n
The rating agencies faced a conflict of interest; they were hired and paid by the same banks that were issuing the bonds and benefited from the investment grade ratings. The banks needed the imprimatur of two out of the three major rating agencies (S&P, Fitch & Moody\u2019s), and could pressurize the agencies to give better ratings to their bonds. <\/p>\n
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\nIn the after-math of the disaster, the credit-ratings are being very cautious about their behavior, especially when it comes to the financial sector. However, Moody\u2019s stands out in being egregiously aggressive, without any regard to the significance or the impact of their calls, especially in these tumultuous times.<\/p>\n
Lehman Brothers<\/strong><\/p>\n Lehman Brother\u2019s shares came under immense pressure on Tuesday, September 9, when the news that the talks with Korea Development Bank (KDB) for a capital infusion had broken down. The markets were in a jittery mood since the Federal take-over of Fannie-Mae and Freddie Mac the previous weekend had caused significant losses to investment firms which held preferred shares of the GSEs. <\/p>\n In response, Lehman preannounced its results on Wednesday morning, along with plans <\/p>\n to reorganize itself by splitting the firm up and selling some parts to raise new capital. Lehman\u2019s stock fell a bit more that morning, since Lehman had not announced an agreement, but just mentioned plans. <\/p>\n However it had stabilized by noon and was gradually inching back up as the market settled down and waited in hope for Lehman\u2019s next move.<\/p>\n Later that day, Moody\u2019s announced that they would downgrade Lehman Brother\u2019s debt ratings unless it completed the transactions it had already announced earlier. <\/p>\n Further, Moody\u2019s felt that Lehman\u2019s falling equity prices showed that it was fast losing the market\u2019s confidence and hence just raising capital would not be sufficient.<\/p>\n Morgan Stanley<\/strong><\/p>\n With the world\u2019s financial markets under a spectacular collapse, Moody’s announced that they are putting almost $200B of Morgan Stanley A-1 rated debt on review for a downgrade. <\/p>\n The news resulted in panic selling of Morgan Stanley\u2019s stock sending it down almost 50% before it recovered to close down 22%; the financial sector (XLF) was up 10% on the same day. <\/p>\n <\/p>\n Moody’s attributed its review for a downgrade on the following: Credit Ratings and Their Role<\/strong><\/p>\n Credit ratings are primarily used by professional bond traders to price bonds. <\/p>\n Traders are typically ahead of the rating agencies when it comes to anticipating risk and price it into the bonds before the rating <\/p>\n agencies. The ratings are also used to determine the collateral to be posted to back up financial contracts made between institutions. <\/p>\n Equity analysts use ratings to determine cost to borrow capital and calculate estimates for financial firms.<\/p>\n Lehman\u2019s problems were well known for months, and any financial professional doing business with them was well aware. Any potential investor would do their own detailed analysis, with orders of magnitude greater rigor than what the rating agencies do.<\/p>\n In Lehman\u2019s case Moody\u2019s call triggered a sell-off in Lehman\u2019s share from which the firm never recovered, destroying the tenuous level of equilibrium they had reached after Wednesday morning\u2019s restructuring announcements. <\/p>\n When a distressed firm is trying to raise capital in a bearish environment, it makes a huge difference whether its shares are priced at $8 or $4. Further by declaring that just raising capital was not enough, and equity prices had to rise to prevent a downgrade, Moody\u2019s effectively ruled out equity sale as a means to raise capital. <\/p>\n <\/p>\n <\/p>\n Incidentally, other credit ratings though concerned about Lehman Brothers, did not come out with similar statements about how the drop in equity price will lead to a downgrade. Under normal circumstances equity prices are a good proxy for market\u2019s confidence in the firm. However, under such extraordinary circumstances, where the market is far from stable and trying to find an equilibrium equity prices can become very far detached from fundamental values. <\/p>\n <\/p>\n In the case of Morgan Stanley, <\/p>\n the change in charter from an Investment Bank to a Commercial bank, the lower leverage, and slower business are all facts well known to the investment community. <\/p>\n However Moody\u2019s chose to put Morgan on a credit-watch just after the ban on short-selling of financial shares was lifted, and right before the $9B investment in Morgan Stanley from Mitsubishi UFG is about to close. <\/p>\n The collapse in the price of Morgan Stanley\u2019s share from $18 on Wednesday to $10 on Friday has raised doubt about whether the investment from MUFG will close.<\/p>\n Moody\u2019s Mood Swings<\/strong><\/p>\n Moody\u2019s action in the case of Lehman Brothers and Morgan Stanley, were neither based on new information nor on new analysis of existing information. They were primarily a reaction to market action. <\/p>\n None of the other two major agencies followed Moody\u2019s.<\/p>\n Moody\u2019s might be coming down hard on banks during this period to restore some confidence in the value of their ratings. However, the timing of these actions was egregiously inappropriate, bordering on the point of being irresponsible. It is unlikely that they are scoring any points with regulators; and are more likely to be face greater wrath when the hunt for the scapegoats starts.<\/p>\n","protected":false},"excerpt":{"rendered":" The major rat ing agencies have been book com guest online penny propecia site in the thick of credit market disaster. During the housing boom, they failed miserably in evaluating the risk associated with mortgage backed bonds and their derivatives. … Continue reading
\n\u2022\t“Its expectation that an extended downturn in global capital market activity will reduce Morgan Stanley’s revenue and profit.”
\n\u2022\tThe bank “will need to adapt the firm’s business activities and balance sheet to operate in a bank holding company structure.”<\/p>\n