Randomly Noted

In Berlin to try to secure Germany’s assent for a Greece bailout deal, IMF boss Dominique Strauss-Kahn said earlier today that we “shouldn’t believe too much in what rating agencies say.”

One has to agree – on a number of levels. Over the past decade, Moody’s, Standard & Poor’s and Fitch have proved time and again they can be fallible – and late – in identifying all manner of credit vulnerabilities.

Moreover, during the Greek crisis, the rating agencies have become prime actors rather than arbiters – issuing downgrades and decisions that principally shape markets’ direction (in a fairly brutal way) rather than enlighten and inform.

DSK may in fact hold rating agency industry in contempt. But today what he’s really trying to do is calm markets. The rating agency downgrades – of Greece, Portugal and Spain – over the past two days have pushed the euro down significantly and spurred stock market selloffs around the world.

Ask a child who broke a chair or drew on the walls or put cat food in shoes what happened, and they are liable to answer: “Dolly did it”.

Apparently dolly is also now to blame for what’s happening in Greece.

We have murmurings that Greece’s woes–the latest being the downgrade of its sovereign debt to junk by Standard & Poor’s amid worries about its financing risks and growth outlook–aren’t of its own making. It was the euro that did it.

Czech President Vaclav Klaus has been quoted in the German daily Frankfurter Allgemeine Zeitung as saying the real cause of Greece’s crisis lies in the euro and not the country’s economic policy. It is “the euro that causes this tragedy,” he’s cited as saying.

In a way it’s surprising that we haven’t heard more of this sooner. Greece’s problems, and the worries about others in the region, like Portugal and Spain, provide the perfect chance to hammer the euro-zone and the euro in particular.

Finance ministers in the euro-zone haven’t shied away in the past in complaining about the euro’s level. It’s either too strong, or too weak, but never just right. The European Central Bank has been much more relaxed about the euro’s level than individual countries, in part because its primary monetary policy objective is to maintain price stability; certainly it’s not indicated any inclination to intervene in the market to adjust the currency.

Finance ministers also tend to grumble about the difficulties of a unitary monetary policy system. Interest rates that suit one country may not suit another.

But that’s not what caused Greece to get into such a mess. Blaming the euro is like giving Greece a leave pass for all its silly mistakes.

Its problems came about in some measure at least because it fudged its fiscal position to gain entry to the euro-zone. That fudging continued after it joined, and allowed government officials for years to sweep the budgetary problems under the carpet and operate in an increasingly precarious position.

Greece ignored its own difficulties, no doubt hoping that if it closed its eyes it’d all magically disappear.

People can argue that an elevated euro hurt the country’s exports or that interest rates were too high (though the ECB has kept them low for some time), and this sorry episode has highlighted the issues of a union like the euro-zone where there is a one-size-fits-all currency and monetary policy, but the Greek tragedy is largely one of its own making.

There’s a new player in the corporate ratings game who is introducing a business model very different from the one used by more established agencies. Morningstar announced today that its research team that analyzes companies from an equity investment perspective will apply some additional metrics to come up with corporate credit ratings. It released a list of the first 100 companies it has rated. Click here to see the ratings. An interesting twist is how Morningstar will make money on this new service. Firms like Standard & Poor’s, Moody’s and Fitch charge issuers of debt securities to analyze them and come up with ratings. And that model has led to criticism about how impartial the ratings agencies actually are when they are being paid by an issuer for a rating. That criticism really heated up following the subprime mortgage disaster. Mortgage-backed securities were issued a few years ago with AAA ratings, many of which eventually blew up because the subprime mortgages that backed the securities were no good. So, Morningstar will give away its ratings for free but will charge institutional investors for a service that compares comparably rated bonds and their secondary market prices to determine whether they are overvalued or undervalued. Obviously, you get pricing distortions in illiquid markets, which is what many corporate bonds become once they are seasoned. But that said, it is good to see someone taking a stab at a new ratings model.

Standard & Poor’s comments supportive of U.S. Treasurys’ AAA rating – reported exclusively by DJN – have just strengthened USD/JPY. They follow similar comments by Moody’s – Neal blogged about this Wednesday.  In our story, headlined “S&P Says US Rating Not Under Threat,” a senior S&P analyst named Kyran Curry addresses recent market speculation that the U.S. could lose its triple-A sovereign debt rating. Curry says: “We don’t believe so at the moment. No. We will have more to say about that in the next few days.” As DJN’s Simon Louisson writes, S&P’s decision last week to lower its outlook on the U.K.’s AAA rating spurred a USD selloff amid speculation about the U.S.’s standing. Curry, who is responsible for Australasia, tells DJN his comments reflect “a global view” within the agency and in fact he has been accompanying S&P’s global head of sovereign ratings on a tour of New Zealand. Check out Simon’s story for more on what Curry said about the U.S. economy and its medium- and longer-term credit quality. He also weighs in on the dollar’s global clout and the Obama administration’s fiscal planning. His comments came after S&P lifted a threatened downgrade on New Zealand’s sovereign debt rating after the government took steps to cut its budget, among other things.

Korea’s Kookmin Bank is aiming to sell Asia’s first-ever covered U.S. dollar bond, DJN’s Ditas Lopez reports. S&P and Moody’s are rating the covered bond higher than they rate the bank itself. This is because the bond is backed both by Kookmin – its ability to repay borrowers – as well as a pool of collateral in the form of  credit card and home mortgage obligations.  Europeans are familiar with covered bonds but they’re still rare in the U.S.  Continue reading…

That’s one way to look at the recently completed tender offer Ford Motor did with certain debtholders. The people doing the running were the holders who tendered their bonds at very distressed prices. Ford and other U.S. automakers are getting pretty seriously clobbered by a depression in their business. They have to restructure across the board – operations, balance sheets, labor contracts. What Ford did is certainly positive from a balance sheet restructuring  point of view – it reduced its debt outstanding by nearly $10 billion and in doing so, is trimming annual interest costs by around $500 million. Despite the 17% rally in Ford’s share price today, this tender offer may indicate how bleak bondholders view the company’s prospects.

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General Electric lost its prized AAA credit rating today and the stock market rallied around 200 points. Standard & Poor’s, one of several credit ratings agencies reviewing GE’s credit profile, downgraded the company to AA+, citing a continued deterioration within the GE Capital unit’s business. Importantly, it left intact the short-term rating – this is the one that affects GE’s day-to-day borrowing costs in places like the commercial paper market. The markets were relieved that it was only a one-step downgrade and that something had actually happened – there has been talk of a downgrade for weeks. In fact, the impending downgrade has been cited a few times for reasons behind broad stock market sell offs. So, GE’s stock today is inching closer to that $10 a share level ($9.64 recently, up 13%).

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There are a host of numbers that stock market prognosticators analyze to get a feel for where we have been but more importantly, where we are going – the levels at which the major indices finished the day, economic data, price-earnings ratios. There are some other numbers worth consdering that have been telling a bad story for the stock markets. A question is whether they are telling a bottom is near or we have a distance to go.

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For weeks, if not months, investors have been betting that General Electric had to cut its dividend to preserve cash. And the company finally did it this afternoon.

GE, you recall, has a majority of its business in financial services (and a chunk in real estate) and we all know generally what has happened to that business in recent months. On a dividend yield basis (13.6% as of yesterday’s close), the market was screaming for a cut. But the company has been adamant about maintaining that dividend.

In late January during a conference call about its 4Q earnings, CEO Jeff Immelt tried to head off the dividend question in his prepared remarks: “The key thing is to maintain our disciplines. We believe that the dividend represents a good shareholder return in this environment and we
continue to run the Company to be AAA. So, we have a lot of cash, we have improved the liquidity, our priorities remain the same. I think we have really reflected a balanced plan in GE Capital. Our priorities for 2009 are just in line with our December outlook, which is to grow the company organically, maintain the GE dividend…”

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In the mortgage-backed securities business, there is garbage and then the real garbage. Standard & Poor’s just downgraded 213 tranches of various residential mortgage backed securities, many of which had been Triple-A rated and were now being downgraded to junk. You have to wonder how you go from AAA to junk with no steps in between… Anyway, one issuer, CWABS, had a tranche downgraded to junk because 74% of the mortgages collateralizing this particular class of security were delinquent. That’s three out of every four of those mortgages have gone belly up. And who is CWABS? a special purpose vehicle created by CountryWide Mortgage.