Late to The Party…Once Again (Peter Schiff)

By: Peter Schiff
Euro Pacific Capital
Monday, April 18, 2011

The only thing more ridiculous than S and P’s too little too late semi-downgrade of U.S. sovereign debt was the market’s severe reaction to the announcement. Has S and P really added anything to the debate that wasn’t already widely known? In any event, S and P’s statement amounts to a wakeup call to anyone who has somehow managed to sleepwalk through the unprecedented debt explosion of the last few years.

Given S and P’s concerns that Congress will fail to address its long-term fiscal problems, on what basis can it conclude that the U.S. deserves its AAA credit rating? The highest possible rating should be reserved for fiscally responsible nations where the fiscal outlook is crystal clear. If S and P has genuine concerns that the U.S. will not deal with its out of control deficits, the AAA rating should be reduced right now.

By its own admission, S and P is unsure whether Congress will take the necessary steps to get America’s fiscal house in order. Given that uncertainty, it should immediately reduce its rating on U.S. sovereign debt several notches below AAA. Then if the U.S. does get its fiscal house in order, the AAA rating could be restored. If on the other hand, the situation deteriorates, additional downgrades would be in order.

AAA is the highest rating S and P can give. It is the Wall Street equivalent to a “strong buy.” If a stock analyst has serious concerns that a company may go bankrupt, would he maintain a “strong buy” on the assumption that there was still a possibility that bankruptcy could be averted? If the company declared bankruptcy, would the analyst reduce his rating from “strong buy” to “accumulate”?

In truth, if bankruptcy is even possible, the rating should be reduced to “hold,” at best. Only if the outlook improves to the point where bankruptcy is out of the picture should a stock be upgraded to “buy.” A “hold” rating would at least send the message to potential buyers that problems loom. Then if the company does declare bankruptcy, at least it does not do so sporting a “buy” rating.

Of course, by shifting to a negative outlook, S and P will try to have its cake and eat it too. In the unlikely event that Congress does act responsibly to restore fiscal prudence, its AAA would be validated. If on the other hand, out of control deficits lead to outright default or hyperinflation, it will hang its hat on the timely warning of its negative outlook. This is like a stock analyst putting a strong buy on a stock, but qualifying the rating as being speculative.

The bottom line is that the AAA rating on U.S. sovereign debt is pure politics. S and P simply does not have the integrity to honestly rate U.S. debt. It has too cozy a relationship with the U.S. government and Wall Street to threaten the status quo. In fact, given the culpability of the rating agencies in the financial crisis, it may well be a quid pro quo that as long as the U.S.’ AAA rating is maintained, the rating agencies will continue to enjoy their government sanctioned monopolies, and that no criminal or civil charges will be filed related to inappropriately rated mortgage-backed securities.

Remember S and P had investment grade, AAA, ratings on countless mortgage-backed securities right up until the moment the paper became worthless. Amazingly, the rating agencies somehow maintained their status, and their ability to move markets, after the dust settled.

Currently, they are making the same mistake with U.S. Treasuries. Once it becomes obvious to everyone that the U.S. will either default on its debt or inflate its obligations away, S&P might downgrade treasuries to AA+. Such a move will be of little comfort to those investors left holding the bag.

In its analysis of U.S. solvency, S and P typically factors in the government’s ability to print its way out of any fiscal jam. As a result, it applies a very different set of criteria in its analysis of investment risk than it would for a private company, or even a government whose currency has no reserve status. But the agency completely fails to consider how reckless printing will impact the value of the dollar itself. It can assure investors that they will be repaid, but the agency doesn’t spare a thought about what if anything our creditors may be able to buy with their dollars.


More Peter Schiff

Standard and Poor's/Moody's Warn U.S. On Credit Rating

"No triple-A rating is forever"

The Wall Street Journal
by Mark Brown and
Nathalie Boschat
January 13, 2011

LONDON—Two leading credit rating agencies on Thursday cautioned the U.S. on its credit rating, expressing concern over a deteriorating fiscal situation that they say needs correction.

Moody's Investors Service said in a report Thursday that the U.S. will need to reverse an upward trajectory in the debt ratios to support its triple-A rating.

"We have become increasingly clear about the fact that if there are not offsetting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase," said Sarah Carlson, senior analyst at Moody's.

Standard and Poor's Corp. on Thursday also didn't rule out changing the outlook for its U.S. sovereign-debt rating because of the recent deterioration of the country's fiscal situation. The U.S. currently has a triple-A rating with a stable outlook at both agencies.

"The view of markets is that the U.S. will continue to benefit from the exorbitant privilege linked to the U.S. dollar" to fund its deficits, Carol Sirou, head of S and P France, said at a Paris conference Thursday. "But that may change. We can't rule out changing the outlook" on the U.S. sovereign debt rating in the future, she warned. She added the jobless nature of the U.S. recovery was one of the biggest threats to the U.S. economy. "No triple-A rating is forever," she said.

Moody's said the U.S., Germany, France and the U.K. still have debt metrics, including the debt affordability, compatible with their triple-A ratings at Moody's. But all four countries must bring the future costs arising from pension and healthcare subsidies under control if they "are to maintain long-term stability in their debt burden credit metrics," Moody's said in its regular triple-A Sovereign Monitor report.

Moody's noted that measures were recommended by the U.S. National Commission on Fiscal Responsibility and Reform, appointed by President Obama, to achieve a balanced primary budget by 2015, but that there was insufficient support to trigger consideration of those recommendations by the full Congress.

They included a wide variety of measures, including Social Security reform, cutbacks in the growth of Medicare outlays, elimination or modification of the mortgage interest tax deduction, a gasoline tax and other measures, Moody's said.

"In Moody's view, a plan that would result in a reversal of the upward trajectory in the debt ratios would indeed be supportive of the country's Aaa rating," the ratings agency said in its report. "However, it is unlikely that the Commission's recommendations will be adopted."

The most recent official figures show the ratio of federal debt to revenue averaging 397% of gross domestic product in the period to 2020, while the ratio of interest to revenue will rise to 17.6% by 2020, from 8.6% in the last fiscal year. "These figures are "quite high for an Aaa-rated country," Moody's said. Read On

U.S. CMBS defaults rising, losses approaching all time highs

Perfect Conditions Justifying the Meteoric

Launch of REITS

Oct 25 (Reuters)
By Karen Brettell

Defaults by U.S. commercial mortgage debt that is bundled in securitizations are likely to climb at least until 2011, while losses from the deals are approaching an all-time high, Standard and Poor's said on Monday.

Issuers defaulted on 1200 loans in the first half of this year and if the current pace continues defaults could eclipse 2009's total of 2,138 defaults, S and P said.

S and P conducted a study of more than 69,000 commercial mortgage loans that were originated for securitizations between 1993 and 2008 and found that more than half of the defaults occurred in the 18 months between January 2009 and June 2010.

Meanwhile losses from the defaulted deals have been steadily rising since 2008 and are approaching a record high, S and P said.

The loss severity rate increased in the first half of 2010 to 43.58 percent from 41.57 percent for loans resolved with a loss in 2009, and from 18.49 percent in 2008.

Defaults are likely to continue to climb until at least 2011 as the effects of the recent recession continue, S and P said.

"It took two years for the number of annual loan defaults to peak after the 2001 recession ended, and if the recent recession's impact on loan performance follows suit, annual loan defaults would not crest until 2011," the rating agency said.

"Given the severity and length of the recent recession, coupled with historically high vacancy rates and unemployment, Standard and Poor's believes the lag may be even more pronounced this time around -- and could push the annual loan default peak out even further," it said.

Mary Schapiro thinks Flash Crash "Anxiety" may have contributed to retail investors running for the hills

By Marcy Gordon (AP)
9/7/10

WASHINGTON — Anxiety over May's "flash crash" on Wall Street may have contributed to the withdrawal of retail investors from the stock market in recent months, the head of the Securities and Exchange Commission said Tuesday.

SEC Chairman Mary Schapiro said the panicked disruption, which saw the Dow Jones industrials plunge nearly 1,000 points in less than a half-hour, "was clearly a market failure" that heightened concerns over the fast-evolving structure of the market.

Schapiro said the SEC has received written comments from brokerage firms saying their retail customers have pulled back from the market since the May 6 plunge. Many individual investors filed comments that are sharply critical of the current structure of the market, Schapiro said in a speech to the Economic Club of New York.

Schapiro acknowledged there could be many reasons for investors withdrawing from the market. But she said the issue is troubling, especially if investors' concerns about the market in the wake of the plunge "are playing even a small role in investor decision-making." More on Schapiro's Anxiety

Grandpa

Yes Mary, there very well could be many reasons for investors withdrawing from the market. Your choice of "withdrawing" is classic government "understatement speak" as retreating and fleeing from the market more aptly describe the retail investor.

I maintain retail investor "anxiety" stems from a history of the equity market pillaging retail investors and an absence of proactive enforcement courtesy of the Securities and Exchange Commission. Individual investors have been and continue to be duped and abused by Wall Street players and the CEO con artists of publically traded companies. Given the following "barely scratched the surface" recap, anguish and angst are better descriptors versus "anxiety".

1. Bernie "I do not believe I have anything to hide" Ebbers. Nothing to hide other than $11 Billion worth of WorldCom accounting statements.
2. Jack "WorldCom Cheerleader" Grubman of Smith Barney who reiterated his buy rating 3 months prior to WorldCom filing for bankruptcy, cut to neutral one month later and cut to underperform 2 days prior to WorldCom filing for bankruptcy.
3. Henry "internet stock pumper" Blodget of Merrill Lynch fined $4 million and banned from the securities industry for life. industry for life
4. Ken "I was fooled" Lay during a four period made $217 million from stock options and another $19 million in salary and bonuses while running Enron into bankruptcy. Let's not forget while he was selling stock, he was advising employees to continue to purchase Enron stock.
5. Lehman Brothers files for bankruptcy mid September 2008 while Moody's, Standard and Poor's and Fitch maintained at least an "A" rating right up to bankruptcy filing.
6. Moody's maintained a AAA rating on AIG until hours prior to AIG's collapse.
7. Bernie "I had a great run" Madoff and his $18 billion Ponzi Scheme.
8. January 2006. The SEC and McAfee simultaneously settled the case (SEC complaint stating McAfee overstated its revenues by $622 million in order to meet revenue and earnings targets and understated its cumulative net losses by $353 million). McAfee paid a fine of $50 Million.
9. August 2009, GE settles SEC fraud charges for $50 million without admitting or denying SEC's allegations.
10. Marvell Technology Group settles with SEC ($10 million fine) on regulator's accusations of improper backdating of stock options. Marvell neither admitted nor denied wrongdoing but did agree to refrain from future violations of the securities laws
11. A Federal judge said Monday (2/22/10) he would reluctantly approve an amended $150 million settlement between the Securities and Exchange Commission and Bank of America to end civil charges accusing the bank of misleading shareholders when it acquired Merrill Lynch.
12. July 2010, Securities and Exchange Commission today announced that Goldman, Sachs & Co. will pay $550 million and reform its business practices to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse. Goldman regrets that the marketing materials did not contain that disclosure.
13. Ben Bernanke (5/17/07): “The sub prime mess is grave but largely contained. Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the sub prime sector on the broader housing market will likely be limited”.
14. April 2009, U.S. accounting rule makers (FASB) bowed to congressional and financial industry pressure on Thursday by allowing more flexibility in valuing toxic assets, a move expected to boost bank earnings and improve their capital levels.
15. June 2010, More than half of the lobbying force seeking to influence landmark financial reform legislation is made up of former members of Congress, Capitol Hill staffers and executive branch employees, according to a Center for Public Integrity analysis
16. August 2010, (AP-New York) — The 10 banks that received the most bailout aid during the financial crisis spent over $16 million on lobbying efforts in the first half of 2010, as the debate over financial regulatory reform reached its height.
17. Regulators are scrutinizing what some in the stock market are calling "quote stuffing," trading in which unusually large numbers of orders to buy or sell stocks are placed in a fraction of a second, only to be canceled almost immediately. The Securities and Exchange Commission has begun looking into whether the practice is putting some investors at a disadvantage by distorting stock prices, according to people familiar with the matter.

Perhaps your assessment is correct Ms. Schapiro, the fundamental basis of retail investor "anxiety" was a single day "flash crash"...

Morgan Stanley Says Government Defaults Inevitable

By Matthew Brown
Aug. 25 (Bloomberg) -- Investors will face defaults on government bonds given the burden of aging populations and the difficulty of securing more tax revenue, according to Morgan Stanley.

“Governments will impose a loss on some of their stakeholders,” Arnaud Mares, an executive director at Morgan Stanley in London, wrote in a research report today. “The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.” The sovereign-debt crisis is global “and it is not over,” the report said.

Borrowing costs for so-called peripheral euro-region nations such as Greece and Ireland surged today, resuming their ascent on concern that governments won’t be able to narrow their budget deficits. Standard and Poor’s downgraded Ireland’s credit rating yesterday on concern about the rising costs to support nationalized banks.

Mares said debt as a percentage of gross domestic product is a false indicator of an economy’s health given it doesn’t reflect governments’ available revenue and is “backward- looking.” While the U.S. government’s debt is 53 percent of GDP, one of the lowest ratios among developed nations, its debt as a percentage of revenue is 358 percent, one of the highest, the report said. Conversely, Italy has one of the highest debt- to-GDP ratios, at 116 percent, yet has a debt-to-revenue ratio of 188, Mares said.

Double Dip

“Outright sovereign default in large advanced economies remains an extremely unlikely outcome, in our view,” the report said. “But current yields and break-even inflation rates provide very little protection against the credible threat of financial oppression in any form it might take.”

Mares once worked at the U.K.’s Debt Management Office and is a former senior vice-president at credit-rating company Moody’s Investors Service.

“Note that a double-dip recession would not invalidate this conclusion,” Mares’ report said. “It would cause yet further damage to the governments’ power to tax, pushing them further in negative equity and therefore increasing the risks that debt holders suffer a larger loss eventually.”

Investors’ concern that the U.S. may fall back into recession has grown in recent weeks as U.S. economic data missed economists’ estimates. A Citigroup Inc. index of U.S. economic data surprises fell to minus 59 last week, the least since January 2009.

Grandpa 

Morgan Stanley knows  a thing or two about walking away from an obligation.

Dec. 17 (Bloomberg) -- Morgan Stanley, the securities firm that spent more than $8 billion on commercial property in 2007, plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.

The bank has been negotiating an “orderly transfer” of the towers since earlier this year, Alyson Barnes, a Morgan Stanley spokeswoman, said yesterday in a telephone interview. AREA Property Partners will take over the buildings. Barnes declined to say when the transfer will occur.

“This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation.”  Link to Bloomberg Article

Standard and Poor's cuts Ireland's rating...European Stock Markets in the morning...TIMBER!

The European's have Standard and Poor's to thank for the hit they are about to take when their markets commence trading. Naturally, the U.S. Equity market will blow it off as Tim Geithner has stated on numerous occasions that our rating would NEVER DROP!

By Wallace Witkowski SAN FRANCISCO (MarketWatch) -- Standard and Poor's said late Tuesday it downgraded Ireland's long-term sovereign credit rating to AA- from AA because of the high cost to prop up that country's financial sector. The outlook is negative.

"The downgrade reflects our opinion that the rising budgetary cost of supporting the Irish financial sector will further weaken the government's fiscal flexibility over the medium term," said Trevor Cullinan, an S and P credit analyst, in a statement.

Goldman Sachs lowers 2011 GDP (Zero Hedge) and the U.S. Equity market launches well off its low

The algorithmic gamers manipulating the U.S. Equity market embrace Goldman Sachs' reduction of 2011 GDP growth by 24% as a reason to launch the market well off its lows. The Dow was down 160 and closes down a paltry 21 points. U.S. Equities remain a must own replacement for those outdated Hummels as a pathetic non-farm payroll  report combined with Goldman Sachs' GDP reduction for 2011 creates a perfect buying opportunity to start a new collection of common stock (a piece of paper that will never drop in value).

So passe'

A must own for 2010...all the popular

kids are buying...

Zero Hedge

It's official: the double dip is here. Goldman's Jan Hatzius just lowered his GDP forecast for 2011 from 2.5% to 1.9% (kiss goodbye all those 93 EPS estimates on the S&P), increased his unemployment forecast from 9.8% to 10.0%, boosted his inflation expectation from 0.4% to 1.0%, and said that QE lite is now on the table, as he expects that "the FOMC to announce that they will reinvest the paydown of mortgage-backed securities in the bond market at next Tuesday’s meeting." Look for all other sell-side "strategists" (here's looking at you Neil Dutta) to lower their economic outlook in kind, and the 2011 S and P consensus to decline accordingly.

From Goldman Sachs:

Over the past two to three months, the US economic recovery has lost a considerable amount of its momentum. As a result, our forecast of a significant slowing in US growth in the second half of 2010—widely regarded as implausible just three months ago—is now increasingly accepted as the baseline. As the data disappointments intensified in early July, we indicated that we would consider revisions to our economic outlook. With the annual revisions to real GDP now behind us, we are making the following changes:

1. Slower growth in 2011. We continue to expect real GDP growth to average 1½% at an annual rate in the second half of 2010. However, we have scaled back the anticipated reacceleration in US output in 2011, largely due to heightened congressional resistance to extending various measures of fiscal stimulus. Thus, whereas we previously forecasted growth to rise from 2½% in the first quarter to 3½% by the second half, we now look for a more gradual pickup—from 1½% in the first quarter to 3% in the fourth quarter. The 2¼% fourth-quarter-to-fourth-quarter average is about 0.9 percentage points below our previous forecast; on an annual average basis our forecast for growth in 2011 drops to 1.9% from 2.4%. As a result of this downgrade, we now expect the jobless rate to rise to 10% by early 2011 and remain there for the rest of the year.

2. Continued disinflation, but at a slower pace than before. We now expect both the price index for personal consumption expenditures excluding food and energy (core PCE index) and the core CPI to slow to a year-to-year rate of ½% by year-end 2011; our previous forecasts were ¼% and zero, respectively. Although the growth revision implies a larger output gap over the next 18 months, two other considerations dominate: (a) upward revisions to core PCE inflation announced in the latest annual GDP revisions, and (b) signs that disinflation in rents may have ended.

3. A return to unconventional monetary easing by late 2010/early 2011. We expect the Federal Open Market Committee (FOMC) to respond to renewed upward pressure on the unemployment rate with another round of unconventional monetary easing. These measures could involve more asset purchases—probably Treasury securities—and/or a more ironclad commitment to low short-term policy rates. If the committee decides on more asset purchases, the amount would be at least $1 trillion (trn).

4. A “baby step” to unconventional easing next week. Although it is a fairly close call, we now expect the FOMC to announce that they will reinvest the paydown of mortgage-backed securities in the bond market at next Tuesday’s meeting. This would be a “baby step” in the direction of renewed unconventional easing, although it would probably be packaged as a decision to prevent a gradual tightening of the overall stance.

Standard and Poor's 500 Recap Week Ending 7/16/10 (all about the volume)

As noted in prior posts, we are experiencing a common pattern in the U.S. equity market. DOWN days in the market consistently generate greater volume than UP days. Last week was no exception. Friday was the highest volume day of the week and the Standard and Poor's 500 closed down 31.60 points. Friday's volume (a.k.a. down day) was 656.9 million shares higher than the Up 16.59 points day on Tuesday.

Standard and Poor's 500 Week ending 7/16/10

7/16/10  DOWN 31.60   Volume:  5,297,350,000

7/15/10  UP 1.31            Volume:  4,552,470,000

7/14/10  DOWN 0.17     Volume:  4,521,050,000

7/13/10  UP 16.59          Volume: 4,640,460,000

7/12/10 UP  0.79            Volume 3,426,990,000

U.S. corporate defaults hit record in 2009: Standard and Poor's

By Deborah Levine

NEW YORK (MarketWatch) -- The number of companies who defaulted on their debt reached a record high in 2009, more than doubling from 2008 as the recession weighed heavily on companies with below-investment grade ratings, according to Standard & Poor's.

In 2009, 191 U.S. corporate issuers defaulted, the highest total in the 30 years S&P has been tracking defaults, Diane Vazza, a managing director at the rating agency, wrote in a report Thursday. The report is Standard and Poor's first ever focusing on U.S. corporate defaults. U.S. defaulters accounted for $516 billion in affected debt last year -- 82% of the global amount.

The speculative-grade corporate default rate in the U.S. was 11% at the end of 2009. The investment-grade default rate was 0.34% at the end of 2009, with only five companies defaulting. It was higher in 2008, at 0.73%

Rating Agencies attempt to explain their overall greed and incompetence

4/23/10
Must see TV continues this week with yet another hearing on the “Wall Street and the Financial Crisis”. This week’s host is the Permanent Subcommittee on Investigations with guest appearances by representatives from Standard and Poor’s and Moody’s. During the housing boom, they were the equivalent of the USDA rating an insect infested beef carcass as U.S. Prime.

Here are some of today’s highlights from today’s episode:Eric Kolchinsky, who was in charge of the Moody's unit that rated subprime collateralized debt obligations (CDO’s):

• “people across the financial food chain, from the mortgage broker to the CDO banker, were compensated based on quantity rather than quality".
• "The situation was no different at the rating agencies."
• “I believed that to assign new ratings based on assumptions which I knew to be wrong would constitute securities fraud”

Raymond McDaniel, chairman and chief executive of Moody’s:

• "We, like many others, did not anticipate the unprecedented confluence of forces that drove the unusually poor performance of subprime mortgages in the past several years".
• Moody's "is certainly not satisfied with the performance of our ratings during the unprecedented market downturn of the past two years."

Frank Raiter, (former managing director at Standard and Poor's and head of the residential mortgage unit):

• "success bred complacency and an aversion to change" within top management of rating agencies.
• Senior managers were "focused on revenue, profit, and ultimately share price"

3 rating agencies competing for another mortgage portfolio