The market today is reacting to ratings giant Moody’s Investors Service decision to slash the ratings of 15 major global banks.
While the decision may send shockwaves throughout the global economy, regular HousingWire contributor Christopher Whalen, a senior manging director at Tangent Capital, called the move an obvious one that is really “too little, too late.” And he went so far as to ask a more important question: What took Moody’s so long?
“If you have read any or my work or looked at the ratings produced by my colleagues at Institutional Risk Analytics, you have to wonder why Moody’s did not downgrade these banks years ago,” Whalen wrote.
The reaction to Moody’s downgrade reflects not only pessimism about the state of the banks today, but a general lack of confidence in the outlets that are supposed to provide market analytics to investors.
Whalen wrote Friday, “Why should investors care a lick about the opinions of Moody’s? The firm has fundamentally failed in its core mission to give investors at least a couple of quarters warning to change asset allocations. Instead, we have an after-the-fact confirmation of the incompetence and lack of courage of all of the major ratings monopolies.”
After evaluating the delayed downgrade, Whalen said the move generally “means that counterparties of the major banks are going to be forced to begin pricing ratings risk into their credit limits for these institutions.”
Because Morgan Stanley and Goldman Sachs are not actual banks, they will suffer a major hit due to the fact that they do not have the funding base to beat a period of liquidity stress, Whalen said.
“The second and related issues is that Buy Side counterparties will now start to curtail business with Morgan Stanley and Goldman Sachs, again because they are not banks. Each firm has a tiny fraction of its funding needs supported by deposits. Indeed, both GS and MS are ultimately the clients of JPM and the other large banks, which are net providers of funds to the institutional markets. Buy Side clients cannot tolerate risk exposures with counterparties with sub-prime credit ratings. Look for some new names to enter the prime broker market at the urgent demand of major Buy Side clients.”
Whalen goes on to call Wells Fargo a huge winner since it was not downgraded, but remained critical, “given WFC’s crappy disclosure and over-exposure to U.S. housing, maybe Moody’s should rethink the refusal to review the ratings for this too-big-to-fail bank.”
Overall, Whalen characterizes Moody’s downgrade decision as a game of catch-up ball, given the fact that the bank’s revenue and profits started falling two years ago.
“So ask not why Moody’s downgraded the big banks yesterday, but instead ask why Moody’s did not tell us this important news in 2010,” Whalen asserted. “The reality is that politics, not financial analysis, governs the behavior of Moody’s and the other major ratings firms. Only when the lack of visibility on forward revenue and earnings was obvious to all did Moody’s act — and only because events in the EU provided cover for this after-the-fact downgrade by Moody’s. Thanks a lot for nothing Moody’s.”
kpanchuk@housingwire.com
