Friday, October 10, 2008

Rating agencies payola?

Remember the good old days when record promoters brown bagged the dee-jays to play their records? And how this became a "social" scandal? Rock and roll was a threat to the 50's lifestyle, and an easy target. Congressional hearings and outrage, and a few arrests were all it took to clean up the music industry.

How about the "payola" of the rating agencies? Isn't that the next scandal?

Didn't these rating agencies, for a fee, wrap up junk and give it a AAA rating? And now that they are running scared, they downgrade the stocks that are raising capital, at propitious times. Propitious for those that are shorting their names. Or maybe you want to believe that the stocks just trade off before the news because the market is so smart. Or maybe the information is just leaked.

A perfect example of leaked information on Wall Street, was the situation with CHK the last few days. The stock never got a lift. Why would it? They were selling Aubrey's stock, and you had hedge funds shorting this name, in front of the dealer, to make sure all his stock was sold.

But maybe you want to believe that the rating agencies and all their employees are saints. Downgrading a rating on a stock isn't criminal behavior; but telling someone when you are going to do it, so they can amass a short position and attack it before you release this news is. I suppose they are all decent and honorable men.

We were told Dick Fuld was a decent, honorable man at Lehman. I see we have a new definition of decent and honorable. Screw your investors who buy your paper to finance your company and screw the counterparties who sold credit default swaps on your debt, and screw the shareholders and employees who believed.

Oct. 10 (Bloomberg) -- Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay 91.375 cents on the dollar to settle the contracts, setting up the biggest-ever payout in the $55 trillion market.

An auction to determine the size of the settlement on Lehman credit-default swaps set a value of 8.625 cents on the dollar for the debt, according to Creditfixings.com, a Web site run by auction administrators Creditex Group Inc. and Markit Group Ltd. The auction may lead to payments of more than $270 billion, BNP Paribas SA strategist Andrea Cicione in London said.
http://www.bloomberg.com/apps/news?pid=20601087&sid=ainXunmcK3kw&refer=home
(Net/net, if everybody holding these contracts are solvent and can pay up, the "net" losses are supposedly $6 billion, versus the "notional" losses acording to DTCC. We won't know, however, the actual losses until October 21, when everything is settled.)

I guess that's why he was paid over $500 million. Overstate your level 3 assets by $25 billion, and then cause systemic breakdowns in the financial system by the unraveling of your fraud. In front of Congress you would know the difference between a collateral call and a margin call, but not much of anything else, because if the firm's document didn't have his name on it, he couldn't tell you what it meant. How long before his perp walk? Do you think he has a chance before a jury? A jury of decent and honorable people?

So now, the rating agencies that wrapped up all these securitizations, now think they can CYA by downgrading or threatening to downgrade company ratings in the midst of this economic storm, showing that they are even above government pressure or influence. Maybe it's because the influence they are now loyal too, is that of the shadowy underground; those who want to break the stock prices of the companies so their raises of capital cannot be accomplished, and their massive short positions and their credit default bets will pay off. They just need the kick from the rating agencies to finish the death spiral. Gasoline thrown on the fire in this panicky pernicious climate.

Let me give you an example how a raid works. Yesterday morning, Goldman Sachs had this to say about Lincoln National Insurance-"Insurance. Storm clouds on the horizon. Asset quality issues on the rise and EPS on the fall."

LNC opened yesterday at 27.68, traded up to 28.71, and then down to 13.38, closing the day at 18.31. The stock was cut in half before rallying. A friend of mine, who was quite familiar with LNC had a substantial life annuity with them, and I called the company, but they were in a "quiet period" before earnings, so they couldn't answer my questions. A perfect situation for a raid. This morning, they pre-announced earnings, and the stock recovered to 24. Why wouldn't it recover? It wasn't real selling in the first place. It was selling induced to create a panic; the rally back in the stock showed that it was just a raid.

Now Goldman Sachs has been publishing a list of liquidation unwind stocks. They have been behind many of these raids. Tell the strong hedge funds the ones that are weak, with positions they need to puke up. When the puking up is done, they can then clean up by buying the discounted shares and selling them in a stronger market. Short and short the stock again until it breaks, and then cover and go long for the ride up.
http://aaronandmoses.blogspot.com/2008/10/lehman-bear-on-ropes.html

But the above isn't the next scandal. It concerns those players who attempted the raid on Goldman today that acted in concert with the rating agencies.

That's where the payola doesn't lie!

No comments: