Today's Top Stories 1. Piling on, AIG sues Bank of America over MBS 2. Moody's vs. Standard & Poor's 3. The ultimate irony: Treasuries soar! 4. S&P to face withering backlash, investigations likely? 5. Legal burdens over MBS continue to mount Also Noted: IBM Whitepaper Spotlight On... What to make of Goldman Sachs' stock? Bank of America to raise capital?, Wells Fargo modifies more mortgages and much more... News From the Fierce Network: 1. What to make of limit up/limit down plans? 2. BlackBerry supports NFC 3. Weak equity volume leads to more HFT elsewhere
Today's Top News
Bank of America can't seem to catch a break, as more critics emerge over its controversial $8.5 billion settlement with aggrieved MBS holders. The latest company to join the chorus of criticism is AIG. It will certainly not join the group that has settled with AIG and will instead oppose it for reasons that have become familiar. In fact, it will formally oppose it. It says that the bank relied on an overly conflicted trustee (BNY Mellon) to negotiate the settlement and that the value of the settlement was way too low. To pile on a bit, AIG will also file its own lawsuit against Bank of America, asking for more than $10 billion on the $28 billion worth of MBS it is holding. It basically believes that the bank, specifically its Countrywide unit and its Merrill Lynch unit, were not forthcoming about the mortgage risks when they sold the securities. According to the New York Times, AIG will file similar suits against other banks, including Goldman Sachs and JP Morgan Chase. What has prompted this belated action? It may be that the insurance giant was waiting for government enforcement action, planning to piggyback and charges. But the likelihood of federal charges--criminal or civil--has dissipated. That realization might have prompted AIG to act. The bottom line for Bank of America and others is that yet another big settlement, which we expect at some point, will have to be reserved against. For Bank of America especially, this is additional cause for uncertainty. That can be easily seen from the stock price movement. It has declined 50 percent so far this year, down to penny stock levels. For more: - here's the article Related articles: Bank of America to take charge to cover settlements Bank of America's deal with bondholders could clear up uncertainty Feds to sue big banks over MBS sales to credit unions
So who should we believe: Standard & Poor's, which has taken the unprecedented step of lowering the credit rating of long-term Treasuries to AA+, or Moody's, which is sticking with its AAA rating for now, as is Fitch? S&P has gotten nearly all the publicity, much of it critical of its downgrade decision. For a look at the other side of the argument, the New York Times does us all a favor by quoting from Moody's explanation of why it is comfortable with its AAA rating. The reasons are as follows. (1) The strength of the U.S. economy. Yes, the strength. Relatively speaking, it is well positioned to survive the current malaise. Other countries are worse off. (2) The dollar continues as the world's de facto currency. Despite the calls we've heard for a globally managed currency, the dollar still reigns, and that allows for all sorts of financing advantages. (3) Relative to other AAA-rated nations, the U.S. deficit, while large, is not so large that it warrants a downgrade. "While the projected trend of U.S. government debt is less favorable without further deficit reduction measures, we believe that eventually such measures will be adopted." And (4) the passage of the Budget Control Act was a step in the right direction. "Although the political process has been considerably more contentious than usual in the past few months, it finally did produce an agreement. We expect further fiscal measures over time, albeit with vigorous debate over the particulars." One striking conclusion from reading the article is that the basis for sovereign downgrades tends to be subjective. Moody's is certainly more upbeat in its assessment of the political process in the U.S. In the end, both can only offer opinions. But Messrs. Market will vote. And in the end, they will likely side with Moody's. For more: - here's the article Related articles: Standard & Poor's U.S. downgrade dilemma U.S. debt downgrade would hit FICC trading profits What to make of the credit rating agencies
Standard & Poor's decision--whether foolish or smart--led to a lot of angst in the markets, as big institutions sold out of stocks and sought safe haven of ... Treasury securities. Now hold on a second. Didn't S&P just declare to the world that the creditworthiness of the U.S. government had been compromised such that long term Treasury bonds warranted a lower rating? Yes, they did, but in the irrationally rational calculus of the markets, it didn't matter because they are still deemed safer than anything else out there, and in some quarters that includes cash (you just might get charged a custodial fee these days). While a strict analysis of creditworthiness is the issue for the rating companies, investors are more concerned about relative safety. Yields took a massive plunge all across the curve, even as more people fretted that interest rates were bond to rise as a result of the downgrade by one of three credit rating agencies. Yields on the 10-year dropped precipitously, to the lowest levels since 2009. Long bond yields also tanked. But the Treasury market's gain came at the expense of other bonds. Agency bonds suffered mightily as S&PO moved to downgrade the big GSEs, to the chagrin of many. The big issue is whether this is the knee-jerk reaction that many predicted, or something more profound. For more: - here's a Bloomberg Business Week article on the Treasury market - here's a Financial Times article on agency bonds Related articles: Bankers and regulators make odd bedfellows on debt ceiling issue Treasuries and government bonds: An era-defining trade? Bond dealers stick with bearish Treasury forecast Read more about: interest rates, Treasury Bonds, credit rating agencies, Creditworthiness back to top
"Pardon me for asking, but who gave Standard & Poor's the authority to tell America how much debt it has to shed, and how?" Robert Reich poses a good question, noting that the downgrade of U.S. Treasuries came at a very bad time. My sense is that all the headlines and controversy may come back to haunt the company, which is increasingly finding itself on the defensive as it enters the unforgiving world of Washington politics. One issue here is the extent to which the conclusions and timing of the release were driven by marketing needs. S&P after all is in this business to make money, as it has to generate funds for shareholders of McGraw-Hill. It's corporate image is relevant in that light. Releasing major studies or products or really anything newsworthy at the most advantageous time is of course a time-honored marketing practice. We saw this recently with McAfee's big study on cybersecurity, which was released just ahead of a major conference. S&P had reasons to inject itself into the most politically heated battle the year. Its reputation has been decimated by the financial crisis, and from an image point of view, it understandably yearns to return to happier times when it was seen as a fairly objective (rightly or wrongly) arbiter of creditworthiness. That reputation dissipated in the wake of the financial crisis, when many shocking practices on the part of credit rating companies were revealed. So whatever moral authority the company now tries to stand on is very weak. The very competence of the company--and there are some issues with its methodology--has once again become a central issue, exactly what the company doesn't want. I'll again quote from Reich: "Had S&P done its job and warned investors how much risk Wall Street was taking on, the housing and debt bubbles wouldn't have become so large--and their bursts wouldn't have brought down much of the economy. You and I and other taxpayers wouldn't have had to bail out Wall Street; millions of Americans would now be working now instead of collecting unemployment insurance; the government wouldn't have had to inject the economy with a massive stimulus to save millions of other jobs; and far more tax revenue would now be pouring into the Treasury from individuals and businesses doing better than they are now." "In other words, had Standard & Poor's done its job over the last decade, today's budget deficit would be far smaller and the nation's future debt wouldn't look so menacing. We'd all be better off had S&P done the job it was supposed to do, then. We've paid a hefty price for its nonfeasance. A pity S&P is not even doing its job now. We'll be paying another hefty price for its malfeasance today." Note the last sentence and the use of the world malfeasance. Is he onto something? No one would be surprised if S&P once again found itself under investigation. I fully expect several to be opened. In the heat of the moment, some think it acted in criminal fashion, hardly civil at the least. In the face of a budding backlash, the McGraw-Hill board needs to think about what to do next. It needs to act wisely. One "out" would be to gracefully find a way to rescind its decision. It can claim-and it certainly seems true-that S&P's methodology and analysis wasn't up to snuff. The sooner this happens, the better off it will be. For more: - here's the Reich commentary Related articles: What will S&P do on U.S. debt? Credit rating woes still linger
When Bank of America announced it had agreed to pay $8.5 billion to settle a suit by aggrieved MBS holders, the knee-jerk reaction was to conclude that it--and the industry--was making great strides in putting the credit crunch behind it. But in just a few short weeks, we're seeing just the opposite. While the chance of criminal--and even civil--charges have receded, we're seeing more private litigation. It's almost as if aggrieved parties were waiting to piggy back government charges but have now decided to go forward on their own. AIG, for example, has sued Bank of America for $10 billion over about $28 billion worth of MBSs. Now comes news from Morgan Stanley that it faces $1.7 billion in potential legal costs from various MBS and CDS-related issues. Reuters notes that the bulk of the $1.7 billion in possible costs about $990 million, relates to its Cheyne Finance SIV. Other loses may stem from transactions with other companies, including MBIA and Citigroup. To add to the malaise, AIG just might join Morgan Stanley as well as a host of other companies, including Bank of America and Goldman Sachs. So we may see a spike in legal reserves spike higher in the near term. We'll have to wait and see if more private litigants come out of the woodwork. It's a distinct possibility. For more: - here's the article Related articles: Bank of America hits snags on road to settlement Short sellers suggest doomsday scenario for banks Fed issues mortgage rules for comment Also Noted
Hard to believe that Goldman Sachs is trading at less than book value right now, which to some people makes the stock an "absolute steal." But there are some strong headwinds that will create lots of risk in the near-term. And there are those who continue to urge caution. Goldman Sachs' profitability has declined markedly and its future sources of revenue growth seem uncertain. At some point, if you have a value-oriented mindset, you might be tempted to say the stock will likely recover. But value investors have been burned badly by financial stocks. Some may want to see the stock drift even lower--Bank of America for example is trading at less than half its book value--before jumping in. Article Company News: > Bank of America to raise capital? Article > CDS spreads on banks widen. Article > Barclays may not pay Lehman bonuses. Article > Tepper sells out of Bank of America. Article > Morgan Stanley weighs in on downgrade. Article > Wells Fargo modifies more mortgages. Article > JP Morgan still sees equities up on the year. Article > Goldman Sachs hires analyst to cover Web stocks. Article Industry News: > Many deals now at risk. Article > Banks predict odds of another recession. Article > Gold prices soar again. Article > Costs of hedging against volatility rises. Article > Mutual fund managers caught by downgrade. Article > Corporate CDS spreads widen. Article > Treasuries surge after downgrade. Article And Finally... Hot financial news: Late season sales on grills. Article
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