The Los Angeles Times reports an unusual move by Standard & Poor’s (S&P) into highly partisan politics by asserting that California’s fiscal problems stem from the tax code. This, says S&P, is the “core problem.”
The agency sidestepped the key Republican argument that California’s dire financial straits are the result of uncontrolled spending. Instead the LA Times quotes S&P as saying, “We don’t see the state’s existing spending level as the key source of its budget distress,” S&P’s report said. “In fact, the state is currently spending less as a share of its economy than it has at any point in the past 39 years.”
The report also went on to explain that they believe tax revenues have grown too slowly and have become increasingly unreliable due to the state’s over-reliance on taxing the very wealthy. Whereas the richest 1% provided 2.7% of the state’s general revenue funds in 1972, in 2010 it was up to 11%.
The long list of countries lashing out at rating agencies for lowering sovereign debt ratings has gotten longer. Now India has joined most of the EU and many others in criticizing Standard & Poor’s (S&P). India’s complaint centers around an S&P report saying that their country could be the first BRIC (Brazil, Russia India and China) country to loose its investment grade rating.
The Business Standard quotes Union Home Minister P. Chidambaram as dismissing the report by saying, “I think we tend to overreact to rating, as you see in reports. In fact, some of these rating agencies have very poor records in the past. I think we need not see reports of rating agencies as the final word on the country’s economy.”
Mr. Chidambaram supported his position by pointing out how India survived the challenge they faced in 1991 and again during the Asian domestic crises in 1997. Today’s challenges, he believes, pale in comparison.
He agreed that inflation was too high, but blamed the problem on high fuel prices. The Business Standard has him explaining, “High crude oil prices are fuelling the price rise compounded by the fiscal deficit and the current account deficit. We have controlled inflation. We believe crude oil prices will moderate in coming months and gradually, inflation will come down.”
Fitch Chief Executive Paul Taylor told Dow Jones Newswires in an interview at the Institute of International Finance conference in Copenhagen that the currency union is still “muddling through” its debt problems.
Bloomberg also reports that at the same conference Mr. Taylor struck out at governments trying to rein in ratings agencies. “There are too many politicians talking about ratings from my point of view at the moment…There must be some advisers around that should be talking to some politicians about being less vocal about ratings.”
Placing a burden of proof on agencies, Mr. Taylor said in a question and answer period, would “completely blow up the system”. Mr. Taylor also repeated the long-held position that rating agencies do not offer expert advice. “We’re not really a financial institution,” he said. “We’re more like a publishing house.”
Remarks made at the same conference by Standard & Poor’s President, Douglas Peterson, were more accommodating to governments seeking greater control over rating agencies. Bloomberg reports him saying, “The rating agencies can play a role in ensuring that there continues to be transparent information provided by those securities in a way that is done under strict standards of governance and control.” Relying on rating companies will help provide “consistency,” Peterson said.
After a series of missteps culminating in major errors last July that pulled a $1.5 billion Goldman Sachs/Citigroup deal off the market and cost Standard & Poor’s most of its market share in the Commercial Mortgage Backed Securities (CMBS) business, the agency announced that it was changing how it rates CMBS.
In the wake of the debacle, S&P fired the head of the unit and overhauled the team doing the analysis.
Essentially, S&P will be changing how it views the loan diversity underlying the CMBS. Under the new criteria, deals with less diversity would have a 20% credit enhancement to protect the highest-rated tranches.
Industry insiders were initially unimpressed with the changes. Reuters reports that Harris Trifon, head of CMBS research at Deutsche Bank, wrote in an email, “At first glance, it seems the magnitude of the changes will disappoint most investors.”
Since the disaster, except for a small piece of a deal in November, S&P has been passed over for every CMBS that has come to market.
Turkey has joined a chorus of countries accusing rating agencies of unfair and unsubstantiated rating decisions.
Standard & Poor’s (S&P) revised its outlook on Turkey from positive to stable. The Famagusta Gazette reports Turkish Prime Minister Recep Tayyip Erdogan as saying that the move is “… totally an ideological decision. No one would buy that. And we shall declare that we do not recognize you [S&P] any more as a credit rating agency.”
The Prime Minister continued, “It increased the rating of bankrupt Greece and cut our rating. Isn’t this nonsense? This is totally an ideological approach. No one can believe this. You cannot fool Tayyip Erdogan.”
Turkey’s Deputy Prime Minister Bulent Arýnc also described the decision as “unjust and baseless.” Arýnc said the rating agency holds incorrect data about the Turkish economy.
The rationale S&P provided for its revised outlook included, “less buoyant external demand and worsening terms of trade [which] could inhibit Turkey’s economic rebalancing.”
Don’t blame the weatherman for the weather…
In a statement, Standard & Poor’s affirmed that Great Britain’s AAA credit rating was secure. The rating agency endorsed the Chancellor’s deficit reduction scheme saying that the country’s “wealthy and open economy” improved its “capacity to absorb shocks.”
However, the agency warned in the same statement that the Government’s austerity program would be a drag on Great Britain’ s economy in the coming years: household spending would be impacted by weak wage growth, there would be increasing unemployment, and the housing market would remain soft or deteriorate even more.
George Osborne, Chancellor of the Exchequer and a member of the Conservative party is quoted by The Telegraph as saying that without austerity Britain would encounter “an economic catastrophe”.
“Britain is weathering the international debt storms because of the policies we have adopted and stuck to in tough times,” he said.
The difficult position that the rating agencies find themselves with regard to the European Union (EU) grew worse when Standard & Poor’s (S&P) inadvertently sent a message suggesting in which France’s AAA bond rating with a stable outlook had been downgraded.
A spokesperson for S&P emphatically stressed that the message was a technical error and cited the fact that France’s AAA rating on the agency’s web site was never changed. The error did cause French bond yields to rise slightly higher.
CNN quoted the blistering comments by European Commissioner Michel Barnier: “This incident is serious and it shows that in the current tense and volatile market situation, market players must exercise discipline and demonstrate a special sense of responsibility.”
The EU is already considering regulation to increase transparency and oversight for how rating agencies evaluate sovereign debt. The agencies strongly oppose these changes; however this snafu is likely to make regulators’ positions still more difficult.
Dow Jones reports that Superintendencia de Valores y Seguros de Chile (SVS) has announced that it will press charges against Fitch Chile Clasificadora de Riesgo Limitada and Feller-Rate Clasificadora de Riesgo Limitada, a unit of Standard & Poor’s.
The SVS alleges that the two rating agencies misled investors for ratings they had assigned to Empresas La Polar SA. La Polar is embroiled in what the company’s current president, Cesar Barros, describes as “the biggest fraud of a publicly traded company in Chile.”
In June, La Polar broke the unexpected news that it needed to reserve nearly $900 million to cover bad credit card loans. At the same time, they admitted that they had overcharged one million low and middle-income consumers for past-due store credit card bills; this in a country of only 17 million.
Before the scandal broke, Fitch had rated La Polar A-minus with a negative outlook; Feller-Rate had assigned La Polar’s debt as BBB+ and stable. They both now rate the debt as D.
SVS believes that the rating agencies should have spotted the “inconsistencies.” They said in a statement that, “The SVS feels there is enough evidence to believe Feller and Fitch didn’t comply with the law that establishes an obligation for ratings agencies to give an informed and independent opinion.”
In his speech given at Jackson Hole, Wyoming, Federal Reserve Bank Chairman Ben Bernanke complained that the recent downgrade of the U.S. debt by Standard & Poor’s and congressional budget battles were counterproductive to recovery.
First, he discussed how much had been done to address the root causes of the 2008 financial crisis that sparked the recession including a “substantial program of financial reforms” that had led to a significant improvement in the U.S. banking system and financial markets.
However he believes that “financial stress” continues to negatively impact the recovery, both in the U.S. and abroad. “Bouts of sharp volatility and risk aversion in markets have recently re-emerged in reaction to concerns about both European sovereign debts and developments related to the U.S. fiscal situation, including the recent downgrade of the U.S. long-term credit rating by one of the major rating agencies and the controversy concerning the raising of the U.S. federal debt ceiling.”
He admitted that the impact of these events can’t be judged exactly, however, “there seems little doubt that they have hurt household and business confidence and that they pose ongoing risks to growth.”
Bloomberg News reports that Standard & Poor’s is prepared to give an upcoming bond issue by Springleaf Finance Corporation a AAA rating. Hoover’s describes Springleaf Finance Corporation as an originator and servicer of first and second real estate mortgages. Most of these “are categorized as subprime or nonprime loans.”
Bloomberg writes, “S&P is poised to provide AAA grades to 59 percent of Springleaf Mortgage Loan Trust 2011-1, a set of bonds tied to $497 million lent to homeowners with below-average credit scores and almost no equity in their properties.”
Subprime mortgage-backed securities that were rated AAA and then later failed spectacularly are considered by many to be a key contributing factor to the financial crisis in ’08 and the subsequent recession.
What is old is new again. However, what S&P rates and what investors buy is a private matter. Let’s go back to caveat emptor.