13 March 2008

Standard & Poor's Sees "Light At the End of the Tunnel"

If you were watching the US equity markets today and wondered what caused the sharp short-covering rally off the big gap down open due to the Carlyle Group hedge fund failure, it was the report issued by Standard & Poor's cited below that indicates that they see 'light at the end of the tunnel.'

Tanya Azarchs, the S&P analyst who helped Scott Bugie to write the report, appeared on a live interview on Bloomberg Television and reiterated the key points of the report, and the optimistic view they have.

There was one important caveat she mentioned. They assume that the housing markets will not continue to deteriorate, with an eye to the credit indexes in particular. There is one important caveat that we will stress, that the S&P report addresses ONLY what they perceive to be the subprime mortgage debt market.

When pressed by Deidre Bolton, the Bloomberg interviewer, that this seemed like a big assumption and that some have already said that this call is premature, Tanya justified S&P's research conclusions by saying, "Well, this is our best guess."

You can't make this stuff up.

In all fairness to Tanya, who seems like a very nice, intelligent person and an excellent analyst, no one really knows when this will end. And in fairness to the midnight riders of Wall Street, the S&P report was the trigger, but the fuel was provided by reckless piling on the leveraged short side by bear speculators, particularly in the options market. They received a proper beating. Remember, bear markets are triple black diamond trades.

Standard & Poors Sees Light At The End Of The Write-Down Tunnel

3/13/2008 3:02:44 PM A report from Standard & Poor's Ratings Services Thursday that financial companies are nearing the end of the massive asset write-downs sent stocks soaring. These write downs have roiled the stock and credit markets in recent months, and the news boosted investor confidence.

The forecast, titled “More Subprime Write-Downs To Come, But The End Is Now In Sight For Large Financial Institutions,” estimates that write downs could reach $285 billion for the global financial sector, although it noted that the end is in sight for major financial institutions.

The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation write-downs of subprime ABS," said Standard & Poor's credit analyst Scott Bugie, lead author of the report.

The reluctance of major financial institutions to lend money has frozen credit lines and forced the Federal Reserve to intervene on several occasions in an effort to inject liquidity into the market. Although it states that there is a light at the end of the tunnel, the S&P report warns that investors should expect further write-downs in the near future.

“Right now, market forces are placing further downward pressure on valuations, and we expect to see more write-downs related to these pressures in coming weeks and months,” Bugie said. “We believe that any near-term positive impact of reducing subprime risk in the financial system via increased disclosure and write-downs will be offset by worsening problems in the broader U.S. real estate market and in other segments of the credit markets.”

In an additional report, S&P states that the majority of write-downs related to subprime securities may be behind the banks and brokers that have already announced their full year 2007 results.

“There may be some additional marks to market as market indicators have shown deterioration in the first quarter,” said Standard & Poor's credit analyst Tanya Azarchs. “However, when we dissect the percentage of write-downs taken against various types of exposures, in our opinion the magnitude of some write-downs is greater than any reasonable estimate of ultimate losses.”

Scott Bugie
Managing Director, Financial Services Ratings
Standard & Poor’s Ratings Services (Paris office)

Scott Bugie joined Standard & Poor's in New York in 1987 and currently is a Managing Director in Financial Services Ratings. Based in France since 1990, Scott is the Regional Practice Leader for Financial Institutions Ratings in Eastern Europe, Middle East, and Africa (EEMEA), a position he has held since 1998. Scott is also the European Criteria Officer for Financial Institutions Ratings. Before this, he managed Financial Institutions Ratings for southern Europe. Prior to joining Standard & Poor's, Scott worked for the Federal Reserve Bank of San Francisco for six years as a senior financial analyst in the Department of Supervision, Regulation, and Credit.

Scott holds Master of Business Administration degree in International Finance from the University of California at Berkeley, and a Bachelor of Arts degree in Soviet Studies and Russian Language from Ohio State University. He also studied Russian language and history at the Pushkin Institute in Moscow,