As in the previous quarter, the global credit crisis dominated Research Recap’s Top Ten Posts of the third quarter, with only one post not related in some way to the market meltdown. Many of the posts turned out to be prescient, led by Fitch Ratings’ July warning that US Mortgage Insurers’ Troubles May Worsen. This prediction was borne out this month when Moody’s put several of the insurers on watch for possible downgrade.
In the runner-up spot was NERA Economic Consulting’s July report Subprime-Related Litigation on the Rise, which was buttressed by a Stanford Law School analysis showing that subprime lawsuits were running at double last year’s pace.
The bronze medal goes to the lone non-financial post, Ernst & Young’s July report US Oil Production Flat Over Past 4 Years, published near the peak of the recent oil price spike.
The fourth place post based on the International Monetary Fund’s December 2007 report examining the Role of Hedge Funds in Subprime Crisis Examined is approaching Hall-of-Fame status, consistently featuring among our top posts nine months after it was first published. The IMF also featured in the fifth place post in which Oxford Analytica drew on IMF and OECD data in September to conclude that Speculation Does Not Explain Apparent Housing Overvaluation.
The sixth place post based on a June Moody’s report, Global Junk Bond Default Rate Doubled in First Five Months, now seems modest. Standard & Poors now expects the speculative default rate to triple in the next 12 months. Standard & Poor’s served up the seventh most popular post, in which the ratings agency accurately assessed that Lehman Failure’s Impact on European Banks would be significant.
In what now seems like understatement, the eighth place post based on a June report from Audit Integrity was also right on the money: Credit Default Swaps Adding Rather Than Mitigating Risk? Moody’s July Guide To Interpreting Mark-to-Market Losses of Monolines took the ninth spot.
In what may now seem like wishful thinking, rounding out the top ten on a more optimistic note was KPMG’s July report Greentech Expected to Lead Resurgence of IPOs in 2010.
Technorati Tags: (LEH), CDS, credit-default-swaps, european-banks, green-tech, Hedge-Funds, housing, IPO, junk-bonds, Lehman, litigation, monoline-insurers, oil-exploration, oil-refining, private-mortgage-insurers, structured-finance, subprime, Zeitgeist
Recent actions by ratings agencies on financial companies in the news:
Bradford & Bingley (London: BB)
Fitch Upgrades Bradford and Bingley to ‘A-’ on Government Intervention (Sep 29)
Moody’s announces rating actions on Bradford and Bingley (Sep 29)
Fortis (Euronext Brussels: FORS)
Fitch Downgrades Fortis’s Ratings (Sep 29)
S&P: Fortis Group Core Entities Downgraded On Weakening Business Position; Outlook Developing (Sep 29)
S&P: Fortis Corporate Insurance N.V. Ratings Lowered To ‘A-’; Outlook Developing (Sep 29)
Citigroup (NYSE: C)/ Wachovia (NYSE: WB)
Moody’s reviews Citi (snr Aa3) for possible downgrade (Sep 29)
Moody’s says Wachovia’s ratings (snr A1) on review. Outcome dependent on its Citigroup review; Wachovia’s preferred stock cut (to Ba3 from A3) (Sep 29)
S&P: Citigroup Inc. ‘AA-/A-1+’ Counterparty Credit Ratings Placed On CreditWatch Negative (Sep 29)
S&P: All Wachovia-Related Servicer Rankings Put On CreditWatch Negative After Sale To Citigroup (Sep 29)
S&P: Servicer Ranking On Wachovia Bank International (Ireland) Placed On CreditWatch Negative (Sep 29)
S&P: CitiMortgage Residential Servicer Rankings Unaffected By Acquisition Of Wachovia (Sep 29)
AIG (NYSE: AIG)
Moody’s places on review for downgrade three AIG related transactions (Sep 29)
National City (NYSE:NCC)
Moody’s may downgrade National City’s ratings (Snr at A3) (Sep 29)
Dexia (Euronext Brussels: DEXB)
S&P: Ratings On Dexia Group’s Core Entities Lowered To ‘AA-’; Outlook Remains Negative (Sep 29)
JPMorgan Chase (NYSE: JPM)/Washington Mutual (NYSE: WM)
Moody’s confirms ratings of notes from WaMu’s credit card trusts (Sep 29)
Previous Ratings Roundup.
Technorati Tags: (AIG), (bb), (c), (DEXB), (FORS), (JPM), (LEH), (NCC), (WB), (wm), banking, Bradford & Bingley, Citigroup, credit-crisis, credit-ratings, credit-risk, Dexia, Fortis, JPMorgan-Chase-&-Co, Lehman-Brothers, National-City-Corporation, Nomura, Wachovia-Corporation, Washington-Mutual
Recent actions by ratings agencies on financial companies in the news:
JPMorgan Chase (NYSE: JPM)/Washington Mutual (NYSE: WM)
Fitch: Recovery Prospects Dim for WaMu Debtholders; IDR Downgraded to ‘C’ (Sep 26)
Fitch: WaMu Acquisition a Strategic Positive for JPMorgan Chase; IDR Affirmed at ‘AA-’ (Sep 26)
S&P: Washington Mutual Servicer Rankings Placed On CreditWatch Negative (Sep 26)
Lehman Brothers
S&P: Two Lehman-Related Servicers Off Select List After Corporate Rating Withdrawal; On Watch Dev (Sep 26)
Bradford & Bingley (London: BB)
S&P: Bank Bradford&Bingley Short-Term Rating Raised To ‘A-1′ On Nationalization; Off Watch (Sep 29)
Fitch Places Bradford & Bingley’s Mortgage Covered Bonds on Rating Watch Negative on B&B Downgrade (Sep 24)
Previous Ratings Roundup.
Technorati Tags: (bb), (JPM), (LEH), (wm), banking, Bradford & Bingley, credit-crisis, credit-ratings, credit-risk, JPMorgan-Chase-&-Co, Lehman-Brothers, Nomura, Washington-Mutual
Recent actions by ratings agencies on financial companies in the news:
JPMorgan Chase (NYSE: JPM)/Washington Mutual (NYSE: WM)
S&P: Ratings On Washington Mutual Inc. Revised To ‘D’ After Receivership And Sale To JPMorgan Chase (Sep 26)
S&P: JPMorgan Chase&Co.’s Rating Unaffected By Acquisition Of Washington Mutual Corp.’s Assets (Sep 26)
Moody’s affirms JPMorgan Chase’s ratings with negative outlook (Sep 25)
Moody’s said that it affirmed JPM’s ratings because of three broad considerations The first is that JPM is paying $1.9 billion to acquire net assets of $31 billion. This gives JPM substantial protection against further losses on WaMu’s assets. The second consideration is that JPM will maintain comparatively high capital ratios assuming that it is successful in raising $8 billion of common that it announced on September 25th, 2008. The third consideration is that Moody’s believes JPM has the managerial skills to successfully integrate WaMu’s operations into its own.
Nomura (NYSE: NMR)/Lehman Brothers
S&P: Ratings On Nomura Group Companies Unaffected By Planned Lehman Brothers Acquisition (Sep 24)
Previous Ratings Roundup.
Technorati Tags: (JPM), (LEH), (NMR), (wm), banking, credit-crisis, credit-ratings, credit-risk, JPMorgan-Chase-&-Co, Lehman-Brothers, Nomura, Washington-Mutual
Recent actions by ratings agencies on financial companies in the news:
Nomura (NYSE: NMR)/Lehman Brothers
Fitch Affirms Nomura’s Ratings on Acquisitions of Lehman’s Businesses (Sep 24)
Moody’s comments on Nomura’s acquisition of Lehman’s Asian and European operations (Sep 24)
Washington Mutual (NYSE: WM)
Fitch: Partial Sale Increasingly Likely for WaMu; IDR Downgraded to ‘B-’ (Sep 24)
Morgan Stanley (NYSE: MS)
Fitch Affirms MUFG Banks on up to 20% Buy in Morgan Stanley (Sep 24)
Previous Ratings Roundup.
Technorati Tags: (LEH), (MS), (NMR), (wm), banking, credit-crisis, credit-ratings, credit-risk, Lehman-Brothers, morgan-stanley, Nomura, Washington-Mutual
Recent actions by ratings agencies on financial companies in the news:
Nomura (NYSE: NMR)/Lehman Brothers
S&P: Why Was Lehman Brothers Rated ‘A’? (Sep 24)
In conclusion, we believe the downfall of Lehman reflected escalating fears that led to a loss of confidence-–ultimately becoming a real threat to Lehman’s viability in a way that fundamental credit analysis could not have anticipated.
Fitch: No Rating Change for Selected Euro RMBS with Lehman Interest Rate Caps (Sep 24)
S&P: Ratings On Nomura Group Companies Unaffected By Planned Lehman Brothers Acquisition (Sep 24)
S&P: Lehman Bros. Inc. Ratings To ‘D’; Liquidation Proceeding Against Lehman Bros. Holdings Begins (Sep 24)
Fitch Recovery Analysis: Lehman Brothers Holdings Inc. (Sep 23)
Washington Mutual (NYSE: WM)
S&P: Washington Mutual Inc. Rating Cut To ‘CCC’ From ‘BB-’; Bank Subsidiary ‘BBB-/A-3′ Affirmed (Sep 24)
Previous Ratings Roundup.
Technorati Tags: (LEH), (NMR), (wm), banking, credit-crisis, credit-ratings, credit-risk, Lehman-Brothers, Nomura, Washington-Mutual
Poor corporate governance ratings are highly correlated with high risk among financial institutions, according to Audit Integrity, which provides such ratings.
For Corporate Governance metrics, “high Executive Compensation is prevalent for the riskiest financial institutions,” Audit Integrity says. “A substantial number of financial institutions have been flagged for high Incentive Compensation (both CEOs/CFOs and Other Officers), as well high ratio of CEO to CFO Total Compensation. Of the data set, 57.6% of the financial institutions have been flagged for CEO and CFO Incentive over Annual Compensation.”
Lehman Brothers, for example, was flagged for all 3 compensation metrics: CEO and CFO Incentive Compensation and Officers Incentive Compensation (99% percentile for both) and CEO to CFO Total Compensation (90% percentile). Merrill Lynch (NYSE: MER) is flagged for Officers Incentive Compensation (99% percentile) and for CEO to CFO Total Compensation (84% percentile).
Performance-based compensation may indicate that company executives have incentives toward short-term profits and stock gains over longer-term health of the company, and can motivate executives to manipulate company books in order to boost earnings and thus increase the value of executive options. Also, excessively steep compensation increases as one goes up the corporate hierarchy indicate the possibility of senior management exercising undue influence over the compensation committee.
Corporate Restructurings and Share Repurchases also are High Risk Events that are frequently flagged, as are Loan Loss Allowance, Interest Income, and Accounts Receivables.
Of the data set, 57.6% of financial institutions are flagged for Corporate Restructuring and almost 40% are flagged for Loan Loss Allowance.
Morgan Stanley (NYSE: MS), for example, is flagged for Corporate Restructurings (96th percentile) and for Accounts Receivable (91st percentile). Washington Mutual NYSE: (WM) is flagged for Corporate Restructurings (96th percentile), Loan Loss Allowance (98th percentile), and Interest Income (82nd percentile).
The full, free report is available here.
Technorati Tags: (LEH), (MER), (MS), (wm), banking, corporate-governance, Lehman-Brothers, merrill-lynch, morgan-stanley, Washington-Mutual
In this space last week we wrote that a financial hurricane awaited if Lehman Brothers was not bailed out over the weekend. But we had no idea quite what a momentous and tumultuous week lay ahead.
So there are no prizes for identifying the Zeitgeist this week: the most turbulent financial market action in many, many years that elicited rounds of name-calling, emergency actions and waves of real and rumored deals. It saw a rather generic statement by President George W. Bush that bizarrely coincided with the start of the strongest two-day stock market rally in history. The more the financial crisis unfolds, the less we seem to know what’s really going on. As last week, expectations are very high that some sort of government-backed “bad debt collector” will emerge from the huddle of regulators and congress, so again, the market could be in for a fall if they don’t deliver.
Visitors to Research Recap were interested in the ripples from the latest developments, with S&P’s report Lehman Failure’s Impact on European Banks (S&P) topping the list.
They also seemed to like our new “Ratings Roundup” that compiles recent moves by the ratings agencies, which were coming thick and fast this week. The first of these, Ratings Roundup: AIG, WaMu, BoA/Merrill,
was our second most popular.
Further worrying signs were found in the third most popular post, Moody’s US Credit Card Performance Continues on Downward Trend. And CreditSights’ Analysis of Recent Financial Deals was also well read, as was 24/7Wall Street’s Solar Energy Firms Taking Hit from Lehman Failure.
Research Recap Quote of The Week:
In other words, instead of deleveraging, the banks have just shifted a chunk of their risk to the central bank. - Bianco Research, as quoted by The Economist.
Technorati Tags: (AIG), (BCS), (BOA), (HBOS), (LEH), (LYG), (MER), (wm), asset-backed-securities, Bank-of-America, banking-system, Barclays, credit card debt, credit-crisis, credit-ratings, european-banks, Lehman-Brothers, Lloyds TSB, merrill-lynch, renewable-energy, solar-energy, structured-finance, subprime-mortgage, Washington-Mutual
Recent actions by ratings agencies on financial companies in the news:
AIG (NYSE: AIG)
Moody’s maintains present ratings on AIG and subsidiaries (Sep 18)
Lloyds TSB (NYSE: LYG) HBOS (NYSE:HBOS)
S&P: Lloyds TSB Group Ratings Placed On Watch Neg; HBOS On Watch Dev (Sep 18)
Moody’s reviews Lloyds TSB and HBOS for possible downgrade (Sep 18)
Lehman Brothers (NYSE: LEH)
Fitch: Implications of Lehman Bankruptcy on Global Synthetic CDOs (Sep 18)
Washington Mutual (NYSE: WM)
Washington Mutual Inc. Ratings Unaffected By TPG’s Waiver Of Antidilution Rights (Sep 18)
Previous Ratings Roundup.
Technorati Tags: (AIG), (HBOS), (LEH), (LGY), (wm), asset-backed-securities, banking, banking-system, Barclays, CMBS, credit-ratings, credit-risk, Lehman, Lloyds TSB, RMBS, structured-finance, Washington-Mutual
Moody’s expects the faliure of Lehman Brothers to have a lesser impact on Japanese financial institutions than their direct subprime exposure has cost them.
“The exposure of Japanese financial institutions — including banks, insurance companies and brokers – to failed Lehman Bros is well dispersed across sectors, and their scale is small relative to each institution’s earnings cushion and capital. However, a few banks do hold large exposures, particularly in terms of their
earnings cushions.”
Nevertheless, while we expect this exposure to cost Japanese financial institutions much less than their sub-prime-related exposures have already cost them, this is not to say the current, severe problems of the US financial system will not prove a problem for Japanese institutions.
“The deteriorating investment environment outside and inside Japan will develop into a greater challenge for those highly liquid Japanese financial institutions that want to invest their surplus liquidity,” Moody’s says
“In addition, the reduced financial flexibility of foreign financial houses has added significant pressure to those sectors or borrowers reliant on such seemingly unstable sources of funds.”
Details are available here.
Technorati Tags: (LEH), banking-system, Japanese banks, Lehman-Brothers