Five Things: Moody's Chooses Incompetence
In explaining ratings "computer glitch," Moody's will have to use incompetence as its defense.
Moody's Corp. (MCO), the second-largest rating company, is facing government scrutiny after initiating their own internal investigation into whether a "computer error" gave AAA ratings to securities that didn't deserve them.
According to the Financial Times, internal Moody's documents show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received AAA ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower. Upon discovering the error early in 2007, Moody's corrected the coding glitch and instituted methodology changes, the newspaper reported.
Bloomberg is reporting that Connecticut Attorney General Richard Blumenthal is investigating the company for "potential fraud'' in connection with a possible "cover-up'' of inaccurate ratings. U.S. Senator Charles Schumer is urging regulators to fine the company if it delayed disclosing the mistake.
Look, here's the bottom line: Moody's will essentially have to use incompetence as its defense.
We're not rocket scientists with fancy computer models, so the real question is how a bunch of guys like us knew as early as May of 2007 that deteriorating collateral values in the mortgage market were not being reflected in the credit ratings of complicated credit products?
I Knew It Was Bad, But...: May 17, 2007
Bear Stearns (BSC) Fund Reveals Tip of the Iceberg: June 21, 2007
Subprime Mortgage Pools: June 22, 2007
Five Things You Need to Know: "What Is Mark to Model?": June 27, 2007
Five Things You Need to Know: What Does All This Subprime Stuff Mean to You?: July 18, 2007
Five Things You Need to Know About Corporate Credit Ratings: August 3, 2007
2. Speaking of Mortgages...
No good news for housing coming out of the Mortgage Bankers Association mortgage applications data. According to MBS, mortgage applications fell 7.8% in the week ending May 16.
Purchase applications fell 6.9% and refinancing applications fell 8.7%. Meanwhile, the 30-year fixed rate mortgage climbed to 5.90% while the 15-year increased to 5.42%.
So, after a full 325 basis points of "stimulus" since September in the form of Federal Reserve cuts in the Fed funds rate, we are seeing barely 50 basis points of movement lower in fixed mortgage rates. Credit is tight.
3. General Electric (GE) Bringing "Something" to Life...
... and it looks like a return of the secular bear market. GE is suddenly at a four-year low. We would love to be sanguine about it, perhaps conclude it's not so important anymore, but this stock remains an important bellwether.
Below is a point and figure chart showing two important conventional point and figure trend breaks. Conventional point and figure charts draw trend lines at 45 degree angles from the bottom point of the chart. The most recent conventional trendline break occurred in March. The price objective based on a point and figure vertical count is 23.
CLICK TO ENLARGE
4. Don't Skimp On the Vodka; Buy the Good Stuff
We received quite a bit of mail in response to The Coming Decade of the Entrepreneur. Below is an interesting perspective from Minyan Bob:
I am a financial advisor, and I have many clients in the Gen X range (including myself). I have a front row seat at a train wreck.
Not only is the savings rate low, and the desired standard of living high, but the free fall collapse of the housing market here In Michigan and the cruddy job market have led to some other dismaying occurrences.
I have had clients pull out hundreds of thousands of dollars from IRA rollover accounts in the last 15 months. Some cases it was refinancing an ARM, in some cases it was unemployment.
But it is the most brutal destruction of capital for a generation of people that are for the most part not covered by pensions.
All of these cases were people with young families, college degrees, professional employment. You know what nailed a lot of them? The desire to step up as their parents did to that 3-4 bedroom home with two full baths in a nice leafy suburb with good schools. Not wanton purchases of Ferraris and Rolexes, not spec homes ( though some have been through that) but just that regular middle class/upper middle class migration to a bigger house. Just in time for the bottom to fall out… of housing but also, of wage growth.
The really cool thing that's coming next is the baby boomers' attempts to shore up Social Security whilst they begin drawing it down. Guess who's paying that bill? Not the baby boomers.
So a detached attitude is helpful when the world you see looks upon you with a predatory smile. And don't skimp, buy the good vodka. The pretty bottle will make you look and feel affluent.
5. How Will We Possibly Entertain Ourselves?
Finally, in response to yesterday's Five Things, which mentioned price controls of commodities first attempted during the Great Depression, Minyan Scott supplied the following interesting anecdote:
Talked with my Mom tonight. She played Canasta with her girlfriends today (she's the youngest at 66). Topic of conversation was how much things feel like they did going into the Great Depression (several of them lived through it). Interestingly, the biggest concern wasn't that it was coming, they all lived through and survived so that wasn't the focus. Instead they were concerned that the vast majority of young people today have absolutely no idea how to entertain themselves for free. Thus they think the societal impact of a depression may be bigger than the economic and they just might be right.
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