Posts filed under “Analysts”

Reverse Engineering AAA Ratings

Q: How did Wall Street manage to convince the rating agencies to slap investment grade ratings on Junk?

A: They had cheat codes !

Here is Gretchen Morgenson and Louise Story in today’s NYT:

“One of the mysteries of the financial crisis is how mortgage investments that turned out to be so bad earned credit ratings that made them look so good. One answer is that Wall Street was given access to the formulas behind those magic ratings — and hired away some of the very people who had devised them.

In essence, banks started with the answers and worked backward, reverse-engineering top-flight ratings for investments that were, in some cases, riskier than ratings suggested, according to former agency employees . . .

But while the agencies have come under fire before, the extent to which they collaborated with Wall Street banks has drawn less notice. The rating agencies made public computer models that were used to devise ratings to make the process less secretive. That way, banks and others issuing bonds — companies and states, for instance — wouldn’t be surprised by a weak rating that could make it harder to sell the bonds or that would require them to offer a higher interest rate. But by routinely sharing their models, the agencies in effect gave bankers the tools to tinker with their complicated mortgage deals until the models produced the desired ratings.”

This is something that only a few people have long suspected: That the Agencies were complicit — active participants — in the gaming of their own ratings.

Its one thing to poach an employee to figure out some of the secret to how sausages are made; But from a business perspective, I didn’t imagine the Agencies themselves were so foolish as to allow their secret sauce to become widely known amongst underwriters.

>

Source:
Rating Agency Data Aided Wall Street in Mortgage Deals
GRETCHEN MORGENSON and LOUISE STORY
NYT April 23, 2010   
http://www.nytimes.com/2010/04/24/business/24rating.html

Category: Analysts, Credit

More on Mortgage Delinquencies & Retail Spending

The latest bad meme to develop legs is the idea that strategic mortgage defaults are goosing retail sales. We looked at this last week in Are Defaults Really Driving Retail Spending? as an idea driven mostly by anecdote (some quite ugly), but unsupported by any hard data.

To those pushing this idea, I ask this: Are these mortgage mod requests from egregiously irresponsible spendthrifts the exception, or the rule? And, if they are more than an exception, would you please produce actual data supporting this thesis?

After my post on this, I got dozens of emails with anecdotal stories of defaulting homeowners going on spending sprees. Many were so similar that I presumed they were email forwards from the same source. Also, Bill Gates wants to send me to Disneyland.

I started hunting for more info on this. I came across three items that are worth discussing. (if you know of any other data sources in this, feel free to mention in comments)

The first item was a quote from Mark Zandi in Monday’s WSJ:

How much can the world count on the U.S. consumer?

U.S. consumers remain the single largest source of global demand, even if their clout isn’t what it once was. J.P. Morgan estimates U.S. consumer spending will account for one-fourth of the global total in 2010, down from about 35% in 2003. Still, the global recession spread to Latin America and Asia when U.S. buyers put away their credit cards.

In recent months, U.S. consumer spending has turned upward and may continue that way for some time, says Economy.com economist Mark Zandi, who figures pent up demand will boost car and home sales. But the long-term outlook is hardly solid. Part of the reason for Mr. Zandi’s short-term bullishness is that he figures about five million households aren’t making payments on their mortgages, giving them as much as $60 billion to spend—for now. -WSJ

Zandi appears to have come up with his $60 billion figure (as far as I can tell) by taking 5 million delinquent home owners X a ballpark $1000 per month mortgage X 12 months = $60B.

Let’s take a closer look at Zandi’s analysis to see if it holds water.

- The March 2010 NFP report data had 15.0 million unemployed persons; the number of “long-term unemployed” rose to 6.5 million — 44.1% of total unemployed. An additional 9.1 million people working part time because full time work was unavailable.

Its reasonable to surmise that there is a huge overlap between the 24 million people either unemployed or under employed, and the 5 million foreclosures, and 6 million+ late mortgage payers. We can reasonably make a connection between a fall in income and foreclosures and defaults.

-Confusing cause and effect. Most people don’t default to get more money; they default because they have run out of money.

When your income plummets — in 15 million case above, by 100% — you stop spending except for necessities. The majority of hard working Americans who are unemployed (or under employed) and who are delinquent on their mortgages because they have run out of money. Merely failing to pay that liability, does not men you therefore have lots of extra cash burning a hole in your pocket.

- Therefore, Liabilities — what is owed by defaulting homeowners — are not the same as Disposable Income. Not paying that liability is not a windfall — its a sign of economic distress. That $60 billion is a collective measure of how much homeowners owe, not how much they have.

And this is coming from me, the guy who advocated that the economy needs more foreclosures . . .

The second item was from Minyanville’s James Kostohryz. He blamed the idea on Perma-Bears, stating they are “running out of excuses for why retail sales rose so strongly in March of 2010” (Are Mortgage Deadbeats Juicing Up the Economic Numbers?).

But James takes it a step further, crunching the numbers to determine, if true, how much this could be impacting spending. His conclusion? The most that strategic defaults are helping retail sales is about $228 million per month — “~0.026% of monthly Personal Consumption Expenditures (PCE) which are averaging about $863 billion per month.” Hardly enough to explain the significant uptick in retail sales.

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Category: Analysts, Consumer Spending, Credit, Retail

Dick Bove – Open Mouth Insert Foot

The following was written by an analyst who has long criticized how Wall Street covers itself. It is published anonymously due to his firm’s legal & compliance rules. ~~~ At 9:43 AM ET on CNBC, Dick Bove (Rochdale Securities) said Goldman would pay a fine and this will pass (3:00).  He also called the stock…Read More

Category: Analysts

Are Defaults Really Driving Retail Spending?

Every now and again, I see an economic commentary that is so ass backwards, I am compelled to call it out. Today is one of those occasions. The commentary in question comes from the usually astute Housing Wire. Paul Jackson makes the case that voluntary mortgage delinquencies are driving retail sales. I disagree. ~~~ Our…Read More

Category: Analysts, Credit, Real Estate, Really, really bad calls

Dumb Research of the Day: Dick’s Good, BJ’s Bad

That’s a shame: > > I had to do a double take to make sure it wasn’t April Fools dated . . .

Category: Analysts, Humor

S&P 500 Index at Inflection Points

Last week, I showed JPM’s chart of why some investors perceive the market as cheap. This second chart from the same source puts that into perspective, showing the valuation of the SPX at inflection points (all data thru Q1 2010). As you can see, the market was cheaper in March 2009 than March 2010. Note…Read More

Category: Analysts, Valuation

No Cushion for Greenie’s Legacy

As Alan Greenspan will once again attempt to defend his now-tarnished legacy (see Paul Krugman’s recent takedown here), I feel compelled to point out what is, in my opinion, among Greenspan’s most egregious miscalculations.  It came in a speech on Sept. 26, 2005: In summary, it is encouraging to find that, despite the rapid growth…Read More

Category: Analysts, Data Analysis, Economy, Real Estate

It Was Maven Heaven

In his Wednesday edition of Cashin’s Comments, Art wrote the following: Marinating With The Mavens – Last night, we had drinks and dinner and drinks with several Wall Street legends and luminaries. Among those present were David Rosenberg, Walter Murphy, Ray DeVoe and Richard Yamarone along with a few more friends and co-workers who shall remain…Read More

Category: Analysts

Alacra Pulse

> Interesting website that compiles analyst commentary and media coverage on stocks: Street Pulse, finds comments by sell-side, industry and credit research analysts and melds those with comments from respected bloggers in an effort to answer the question “what do key opinion leaders have to say…” about a given company. Deal Pulse* compiles the latest…Read More

Category: Analysts, Financial Press, Web/Tech

Forecasting with a Grain of Salt

Bloomberg News is out with its latest monthly survey of economists’ forecasts and, according to those polled, the U.S. economy “will grow 3 percent this year and next, more than anticipated a month ago.” Good news, right? Well, maybe not. If you go back and look at how the experts have fared when forecasting the…Read More

Category: Analysts, Economy