Research Zeitgeist: It’s the transparency, stupid
Transparency is the word of the week. The lack of it continues to plague Lehman Bros (NYSE: LEH) as worries persist that the investment bank may not have marked down the value of its assets enough. Granted there is an argument that competitive considerations prevent full transparency, but it is becoming clearer that the market is no longer giving Lehman the benefit of the doubt. It will be interesting to see how wide CEO Dick Fuld opens the kimono on Monday when Lehman has another (last?) chance to restore confidence when it details first quarter numbers. Barring more bad numbers, the consensus is that Lehman will survive, but may not be able to stay independent. The challenge lies in finding a buyer or partner in the current climate. Moody’s warns that some US banks may still be undercapitalized while the BIS says European banks have greater funding needs than US banks.
Transparency is also a large part of the SEC’s prescription for reforming the credit rating agencies.
In addition to addressing conflict of interest issues, the SEC’s proposals would require Moody’s S&P, Fitch and others to make the data on which they base their ratings publicly available so anyone (in theory) can evaluate their rationale and calculations. Sounds like an opportunity for a “rating-the-rating- agencies” rating agency.
The agencies, meanwhile seem to be working to repair some the damage cause by their slow recognition of the size and scope of the credit crisis. A measure of how the spread on ratings actions is tightening can be found in the downgrade of monoline bond insurers Ambac and MBIA. Though the downgrades were clearly deserved, even overdue, the fact that one Wall Street insider thinks Moody’s “jumped the gun” serves as a telling reminder of the disconnect with reality.
“Moody’s jumped the gun,” a Wall Street executive told the Financial Times. “They and other credit ratings agencies have been under pressure to anticipate developments, rather than lag behind the curve, and this looks like an attempt to do just that.”
Under pressure from Congress and regulators, any perceived “grace period” companies may have been given in the past seems certain to evaporate.
With the subprime crisis supposedly in the past, warning signs about credit problems elsewhere indicate that more pain lies ahead. In particular concern continues to grow about Alt-A loan borrowers who are supposed to be just a bit less risky than prime borrowers, but are looking more like “subprimers.” Performance off subprime auto loans continues to deteriorate, notably with more recent loans, an ill omen. And credit card borrowers are finding it increasingly difficlut to get back on track if they get behind in their payments.
Our top post of the week: Moody’s report saying the global junk bond default rate doubled in the first five months of this year and is set to continue into 2009.
Research Recap Quote of the Week
Roughly one quarter of the overall increase in banks’ total international
assets since end-1999 has been booked by banks located in the United
Kingdom. - Bank for International Settlements.
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