Moody's Internal Studies Show Ambac and MBIA Already 'Junk'

The swaps marketplace is showing more accurate forecasts of defaults and credit problems than the 'official ratings' by Moody's.

Moody's is paid for their ratings by the companies that issue and sell the debt as products, the Wall Street banks aka the locus of corruption.

Recent events show that when companies don't get the ratings they want to get from ratings agencies like Fitch they fire them.

Anyone see a problem or a conflict of interest? Like a massive fraud that is going to cost a couple trillion dollars, and decimate banks from Hong Kong to Frankfurt?

Just business as usual in the Humpty Dumpty economy.

We heard anecdotally that even rather modest requests for deliverable silver from the COMEX are being met with offers of 'cash buyouts' for amounts considerably higher than the current market prices. The prices are what we say they are, until you actually demand the product? Surprise surprise the cupboard is bare?

Won't we be surprised when some debt and some companies go from AAA to Junk virtually overnight.

If we get a certain kind of exogenous event complete with convenient scapegoats the ratings agencies and corporate confessors and government bureaucrats will be piling downward revisions on top of it like there is no tomorrow. And for many holders of bonds and stocks there won't be. They will be broke.

We understand the concept of 'managing perceptions' but are the Fed and the Treasury running a financial system or a con game here? Is this another example of the Administration trying to achieve their ends through selective deception and propaganda? What the heck has happened to our integrity? Yikes!


Moody's Implied Ratings Lab Reveals Ambac, MBIA Turning to Junk
By David Evans

May 30 (Bloomberg) -- Moody's Investors Service has created a new unit that surprises even its own director.

The team from Moody's Analytics, which operates separately from Moody's ratings division, uses credit-default swap prices as an alternative system of grading debt. These so-called implied ratings often differ significantly from Moody's official grades.

The implied ratings frequently show that swap traders think debt is in more danger of defaulting than Moody's credit ratings signify. And here's the kicker: The swaps traders are usually right.

``When I first saw this product, my reaction was, `Goodness gracious, Moody's has got a product that is basically publicizing where the market disagrees with Moody's,''' says David Munves, managing director for credit strategy research at Moody's Analytics. The implied-ratings unit works in a corner of Moody's new world headquarters in lower Manhattan, across the street from Ground Zero.

``But these differences are out there,'' Munves says. ``We might as well capture and learn from it what we can.''

The credit quality of bond insurers, which have been at the center of the subprime storm, differ dramatically. The official ratings of these companies say the insurers are in great shape; the alternative ratings say they're in dire danger of defaulting on their debts.

MBIA Inc. and Ambac Assurance Insurance Inc., the two largest bond insurers, got themselves into trouble by veering away from the plain-vanilla business of insuring debt issued by municipalities and corporations. The insurers began selling credit-default swaps, which are a type of insurance, to banks eager to hedge their own risks from collateralized debt obligations.

Subprime Debt

Because many of those CDOs were bundles of debt laced with securitized subprime home loans and other asset-backed securities, the insurers might now shoulder tens of billions of dollars in losses.

Ambac and MBIA have raised billions of dollars of new capital so that Moody's and Standard & Poor's would keep top ratings for the bond insurers -- and the rating firms have done just that. (Moody's and Standard & Poor's are under extreme pressure to keep the AAA rating because of the potential damage to the holders of the bonds which Ambac and MBIA are 'insuring' even though the insurance is worthless. It is a farce, a sick joke, a symbol of the falseness of our monetary and financial system of words backed by nothing but words and political pressure. - Jesse)

Moody's implied-ratings group paints a completely different picture. Using the CDS market, Munves's unit rates both MBIA and Ambac Caa1. That's seven notches below junk and 15 below the official Moody's rating.

Swap traders see there's a huge risk that Ambac and MBIA will default, hedge fund adviser Tim Backshall says. He says swap traders don't trust S&P's and Moody's investment-grade ratings for the companies. (Yeah only the stupid public is believing Moody's and S&P these days - Jesse)

`Into Default'

``The only thing holding them at AAA is simply the model that the rating agencies claim they use to judge that capital and the fact they know that if they downgrade the companies, it'll push them into default,'' says Backshall, of Walnut Creek, California- based Credit Derivatives Research LLC. (Oh is this the model that they were shown to be 'adjusting' when they marked garbage debt as AAA when their clients were selling it to Europe? - Jesse)

The rating companies say their grades are correct. (Well that settles that. Who are you going to believe, the marketplace, the swap traders, or a few officials who have been shown to be completely wrong? - Jesse)

``Moody's will not refrain from taking a credit rating action based on the potential effect of the action,'' says company spokesman Anthony Mirenda. (Only if they get caught or the client who paid for the rating doesn't cough up the bucks - Jesse)

S&P spokesman Chris Atkins says, ``We make rating changes when we believe events warrant such action.'' (Events like disclosures of fraud? - Jesse)

Munves says that over one year, the implied ratings have been a more accurate predictor of defaults than Moody's ratings. The Moody's unit reports that implied ratings for one year have a 91 percent accuracy ratio compared with an 82 percent ratio for Moody's official ratings.

``The Moody's accuracy ratio is consistently lower,'' he says.

He says Moody's company debt ratings are designed to remain stable so they aren't influenced by short-term ripples, unlike the more volatile swap-implied ratings.

``The CDS market often ends up coming back towards Moody's rating,'' he says.

By the time the two ratings converge, though, a company's debt may already be in default -- and the investors who bought it may be out of luck. (Sounds like the general plan to us - Jesse)

Editor: Jonathan Neumann
To contact the reporter on this story: David Evans in Los Angeles at davidevans@bloomberg.net.