Category Archives: Credit markets

Will S&P Downgrade Be Another Y2K Scare?

Remember Y2K? The world was gonna end because there was tons of legacy code that couldn’t accommodate the rollover to the new century. I know people in who went into survivalist mode, stocking up months of supplies, and others who took less extreme precautions, like having lots of cash on hand in case ATMs were disrupted.

As we now know, January 1, 2000 came in without major incident, since the widespread publication of this software threat to End the World as We Know It led to lots of preventive action. Perversely, the big effect of the Y2K scare was that it accelerated tech spending, since many firms bought new systems and upgraded hardware as part of their overhaul. That increased the severity of the post-bubble economic downturn. Remember, Greenspan dropped Fed fund rates to negative real interest rate levels and held them there for an unprecedented amount of time, which many argue helped stoke the housing bubble. So while Y2K’s direct effects were greatly overestimated, its indirect impact (on how long the former Maestro kept rates down) may not have been fully acknowledged.

It isn’t yet clear what the impact of the S&P downgrade of the US to AA+ will have. There are good reasons to believe, despite the media hyperventilating, that it won’t add up to much, and may perversely hit wobbly stock markets more than Treasury yields.

But there is a much bigger issue, namely S&P’s highly questionable conduct, the lack of any analytical process behind this ratings action, and the political implications.

Market Rout Continues

After a very bad day in the US, Asian markets swooned and European markets fell again, but their declines are less gut wrenching. 2-3% falls in most Euromarkets at the opening (2.5% for the FTSE, 2% for the Dax, and 3.5%.for the Milan’s FTSE-MIB) but for the most part, they have come back somewhat as of this hour. The FTSE is now down 2.2%, the CAC 40 a mere 1.2%, the DAX 2.7%, and the FTSE-MIB has is in positive territory, up 0.25%. This follows plunges of 3.7% for the Nikkei and 4.5% for the Hang Seng indexes.

Bank of America Death Watch (Updated)

This blog is starting a Bank of America death watch.

New York Attorney General Schneiderman Drops Bomb on Bank of America Settlement and Bank of New York

The meltdown in the financial markets obscured an important development on the mortgage front, namely, that New York state attorney general Eric Schneiderman filed a motion to intervene in the proposed $8.5 billion settlement between Bank of America and the Bank of New York acting as trustee of 530 Countrywide residential mortgage securitizations.

We said when the deal was announced that it was not a done deal and it stank to high heaven, so we are glad to see confirmation of our dim view. In keeping, the motion charges Bank of New York with “fraudulent and deceptive conduct”. As we will see, the allegations that Schneiderman has made against Bank of New York opens up a whole new front of mortgage securitization liability, that of the trustees failing to live up to their contractual duties and worse, making ongoing certifications that they had. This is an area we’ve discussed at some length before and have been surprised hasn’t been taken up until now.

Market Craters: Dow Falls 512 Points

What we are seeing today is not as bad as the worst days of the crisis, but it ins’t much consolation for investors who had gotten back in the pool on the belief that the system had been patched up reasonably well and the economy was on the mend.

Satyajit Das: Still Stressed After All These Tests!

By Satyajit Das, the author of Extreme Money: The Masters of the Universe and the Cult of Risk (forthcoming August 2011) and Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

For the second time in two years, the European Banking Authority (“EBA”) completed tests on European banks to demonstrate their “solvency” under conditions of “stress”.

The results have been over shadowed by other momentous events – the announcement by the European Union (“EU”) of a range of measures to deal with the European debt crisis. The tests remain highly relevant as the EU measures are unlikely to “resolve” the debt problems and European banks remain heavily exposed to losses. The risk of a European banking crisis remains.

Beleaguered Bank of America Seeking Yet Another Get-Out-Liabilty-Almost-Free Card in AG Negotiations

Bank of America is hemorrhaging liability. Although it will take years for this drama to play its way out in court, the Charlotte bank, thanks in large measure to the self-inflicted wound of its Countrywide acquisition, faces litigation-related losses that will make a joke of its second quarter “we put it all behind us” $20 billion writedown. Anyone who followed the crisis reasonably closely will recall that banks similarly tried drawing a line in the sand when they wrote down subprime loans and CDOs, only to take additional life-threatening losses in the following quarters.

The credibility of BofA’s loss reserves took a nosedive last Friday, and I am sure they were delighted to have the debt ceiling nail-biter crowd out their bad news

“Is Too Much Significance Given to U.S. Credit Rating?”

A useful discussion with Marshall Auerback on Fox News on the debt ceiling deal and the implications of a possible downgrade of US Treasuries. Enjoy!

Randy Wray: The Budget Compromise – Congress Creates a Rube Goldberg Doomsday Machine

By Randy Wray, Professor of Economics at the University of Missouri-Kansas City and Senior Scholar at the Levy Economics Institute of Bard College. Cross posted from EconoMonitor

Don’t you feel relieved? After weeks of threats, hostage-taking, and other forms of deficit terrorism, our two political parties have finally “compromised” on what was always a foregone conclusion. (As I write, we still await the Senate vote—but it looks like a done deal.)

Washington got what it wanted—a down payment on destruction of the last remnants of progressive policy. Soon, it will be 1929 all over again. We can make believe that the New Deal and Great Society programs never existed, and go back to the good old days when it was every “man” for himself.

Tom Ferguson on the Debt Deal: Debt Ceiling Deal All Cuts No Taxes

Our favorite astute political observer (and curmudgeon) Tom Ferguson weighs in on the debt deal. The bottom line is that the deflationary impact starts relatively soon, what appears to be $300 billion starting in October.

“Europe plans its next crisis”

By Delusional Economics, who is unhappy with the current dumbed-down vested interest economic reporting. Cross posted from MacroBusiness

With the economic world firmly focussed on the US debt debacle this week it is likely that Europe will slip off the radar a little. I suspect, as many people do, that for the US there will be an eleventh hour resolution followed by a short lived bounce in the world markets. Once that bounce heads back to earth again it is likely that the world’s eyes will turn back to Europe. There is much to see.

“Is Standard and Poor’s Manipulating US Debt Rating to Escape Liability for the Mortgage Crisis?”

By Scarecrow and Jane Hamsher. Cross posted from FireDogLake

The Politico headline says it all: U.S. credit downgrade worries Obama, Congress more than default

It’s not the default that strikes the most fear in the White House and Congress these days. It’s the downgrade

As Robert Reich notes, Standard and Poors is the “biggest driver in the deficit battle.” Why would anyone care what the corrupt and disgraced organizations who quite nearly brought down the world economy think about anything at this point? And yet, that is where elite opinion is focused right now:

[W]hat really haunts the administration is the very real prospect, stoked two weeks ago by Standard & Poor’s, that Barack Obama could go down in history as the president who presided over his country’s loss of its gold-plated, triple-A bond rating.

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Financial analysts say such a move would hit Americans with more than $100 billion a year in higher borrowing costs, but it’s not just that. It would be a psychic blow to a nation that already looks over its shoulder at rising economic powers like China and wonders, what’s gone wrong? And it would give the president’s Republican rivals a ready-made line of attack that he’s dragging the country in the wrong direction.

This rumbling has been coming from Capitol Hill for a while, which made us start asking questions about what was really going on with Standard and Poors. It felt like there’s a story-behind-the-story driving S&P’s actions in the debt ceiling debate, which appear inexplicable at face value and go way beyond what Moody’s or Fitch have done. And the more we looked at the timeline of events, the more we wondered how the intertwining dramas of a) S&P downgrade threats, b) the liability that the ratings agencies may have for their role in the 2008 financial meltdown, and c) the GOP’s attempts to insulate the ratings agencies from b) are all impacting each other.

Third Way Document Proves Democratic Party Supports Institutionalized Looting by Banks

It is one thing to suspect that something is rotten in Denmark, quite another to have proof. Ever since Obama appointed his Rubinite economics team, it was blindingly obvious that he was aligning himself with Wall Street. The strength of the connection became even more evident in March 2009, when Team Obama embarked on its “stress test” charade and bank stock cheerleading. Rather than bring vested banking interests to heel, the administration instead chose to reconstitute, as much as possible, the very same industry whose reckless pursuit of profit had thrown the world economy off the cliff.

But now we see evidence in a new paper by the think tank Third Way of an even deeper commitment to pro-financier policies. The Democratic party has made clear that it supports institutionalized looting by banks, via the innocuous-seemeing device of rejecting the idea of writedowns on bonds they hold.

Team Obama Fiddles While Debt Ceiling Fires Burn

Some historical accounts of the Great Fire of Rome, which destroyed three of the city’s fourteen districts and damaged seven others, depict it as an urban redevelopment project gone bad. Emperor Nero allegedly torched the district where he wanted to build his Domus Aurea. Hence any lyre-playing was not a sign of imperial madness, but a badly-informed leader not knowing his plans had spun badly out of control.

President Obama’s plan at social and economic engineering, of rolling back core elements of the Great Deal out of a misguided effort to cut spending in a weak economy, is similarly blazing out of control. The debt ceiling crisis was meant to be a scare to provide an excuse for measures that are opposed by broad swathes of the public. Polls predictably show that voters want five contradictory things before noon: they are against cutting Social Security and care much more about more jobs than about less deficit, but yeah, they’d like that too if they can have it.

While members of the administration may dimly recognize what a firestorm they have unleashed, their crisis responses look to be no better than Nero’s.