Moody's Finds "Inappropriate" Conduct in Rating of European Structured Debt

"Inappropriate factors" is an interesting label to use, especially when termination punishment is being considered. It covers a wide range of possibilities.

Our google search of 'inappropriate conduct' turned up this picture of Ms. Spears. Score one for Wall Street in not having yet taken this category of infamy away from Sin City. "Oops, we crashed it again, we shattered your dreams, we're hearing your screams..."

Warren Buffet is a major shareholder in Moody's. He does not date Ms. Spears, but is rumoured by Bess Levin of Dealbreaker to be cavorting with lesser names of entertainment fame. Dealbreaker.com

If the lady (Britney, not Bess) was swimming in this market when the tide goes out it might make things more interesting. Note to CNBC for when the Dow cracks 9,000, although we'd suggest you acquire some one piece suits for the sake of your viewers.


Moody's initiates disciplinary proceedings for employees reviewing some European ratings
Jul 1, 9:17 AM EDT

NEW YORK (AP) -- Moody's says it initiating employee disciplinary proceedings and reviewing measures to strengthen its monitoring process based on a review of certain European debt ratings.

Moody's Investors Service has said it would review whether computer errors wrongly assigned top-notch ratings to debt known as constant-proportion debt obligation, or CPDOs.

The review shows Moody's employees did not make changes to ratings criteria to hide the error. But, employees working on monitoring the ratings also did not meet the company's code of professional conduct, Moody's says.

Moody's says some employees considered "inappropriate factors" when reviewing the ratings after the computer error was discovered.

Lawsuit filed June 30, 2008


Moody's Says Some Employees Breached Code of Conduct on CPDOs
By Emma Moody
July 1, 2008 09:03 EDT

July 1 (Bloomberg) -- Moody's Corp. said some members of its credit committee breached its code of conduct when evaluating some structured debt products.

The company has initiated disciplinary proceedings against some employees who were involved in monitoring constant proportion debt obligations, or CPDOs, the company said in a statement distributed today on Business Wire.

``Penalties could include termination of employment,'' Moody's said in the statement. In a separate release, Moody's said Noel Kirnon, the head of the company's global structured finance business is leaving the company.

To contact the reporter on this story: Emma Moody at emoody@bloomberg.net

Goldman is Bearish on Europe

Pot notices the deep dark color of the kettle.

Buy `Crash Protection' Puts on European Stocks, Goldman Says
By Alexis Xydias

June 30 (Bloomberg) -- Investors should buy ``crash protection'' against a plunge this year in European stocks because losses are likely and insurance costs are low, according to Goldman Sachs Group Inc.

The world's most-profitable securities firm recommended Dow Jones Euro Stoxx 50 Index puts that expire in December and have a strike price of 3,000, or 11 percent less than the measure's closing level today.

`High inflation/low growth is an increasing downside tail risk,'' London-based derivatives analysts at Goldman, which had the second-ranked equity derivatives research team in Institutional Investor magazine's 2007 survey, wrote in a report dated June 26. ``If that risk crystallizes, we think it means material rather than modest downside.''

The Euro Stoxx 50 plunged 24 percent to 3,354.20 in 2008 and closed at the lowest since November 2005 last week. The December 3,000 puts on the index fell 6.7 percent to 83.50 euros today. They cost as much as 189.30 euros in March.

European-style puts convey the right to sell a security for a certain amount, the strike price, on a given date. Some investors buy or sell options to guard against changes in the prices of securities they already own. Others use the contracts to bet price swings, or volatility, will increase or decrease.

To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net.

BIS: Dr. Greenspan, in the Ballroom, with a Printing Press

BIS points finger at easy credit
Monday, 30 June 2008 11:46
RTÉ Ireland

The world's top central banking body has said the world economy could be in for an unexpectedly severe downturn. The Bank for International Settlements blamed lax credit for fuelling the current financial crisis.

The bank, known as the central bankers' central bank, suggested that interest rates should tend towards vigilance even in good times in order to discourage excessive borrowing.

While it was difficult to predict the severity of a downturn, it appeared that a 'deeper and more protracted global downturn than the consensus view seems to expect' was on the way, the BIS said.

It dampened hopes that booming emerging markets would offset the slowdown, saying that many of these markets were significantly dependent on external demand, notably from the world's largest economy the US.

The BIS argued that the sub-prime mortgage market - loans given to borrowers with poor credit ratings - was not a root cause of the turmoil on financial markets, but only a trigger.

The bank said years of cheap borrowing had led to an extraordinary accumulation of debt. It pointed out that in the US, the ratio of household savings to disposable income was about 7.5% in 1992. The ratio fell sharply in the early 2000s. By 2005, it had plunged to almost zero.

Larry Summer's Design for an Economic Maginot Line

Larry Summers is an old general among the Keynesian-statist crowd. His playbook is right out of command and control economies, fighting a new type of war with the old tactics and weapons.

Don't get us wrong, we believe that something must be done and we have laid out broad plans months ago. But what Larry is proposing is a repugnant continuation of the same old game, which is the same prescription the Fed has been following since 1987.

What we can do in this dangerous moment
By Lawrence Summers
Financial Times
June 29 2008 18:10

It is quite possible that we are now at the most dangerous moment since the American financial crisis began last August. Staggering increases in the prices of oil and other commodities have brought American consumer confidence to new lows and raised serious concerns about inflation, thereby limiting the capacity of monetary policy to respond to a financial sector which – judging by equity values – is at its weakest point since the crisis began. With housing values still falling and growing evidence that problems are spreading to the construction and consumer credit sectors, there is a possibility that a faltering economy damages the financial system, which weakens the economy further.

After a period of intense activity at the beginning of the year with the passage of fiscal stimulus legislation, strong action by the Federal Reserve to cut rates and provide liquidity and the introduction of anti-foreclosure legislation, policy has again fallen behind the curve. The only important policy actions of the past several months have been those forced on the Fed by the Bear Stearns crisis. It would be a mistake to overstate the extent to which policy can forestall the gathering storm. But the prospects for a more favourable outcome would be enhanced if four actions were taken promptly.

First, the much debated housing bill should be passed immediately by Congress and signed into law. It provides some support for mortgage debt reduction and strengthens the government’s hand in its troubled relationship with the government-sponsored enterprises – Fannie Mae and Freddie Mac. While it is an imperfect vehicle – too limited in the scope it provides for debt reduction, insufficiently aggressive in strengthening GSE regulation and failing to increase the leverage of homeowners in their negotiations with creditors through bankruptcy reform – it would contribute to the repair of the nation’s housing finance system. Failure to pass even this minimal measure would undermine confidence.

Second, Congress should move promptly to pass further fiscal measures to respond to our economic difficulties. The economy would be in a far worse state if fiscal stimulus had not come on line two months ago. The forecasting community is having increasing doubts about the fourth quarter of this year and beginning of the next as the impact of the current round of stimulus fades. With long-term unemployment at recession levels, there is a clear case for extending the duration of unemployment insurance benefits. There is now also a case for carefully designed support for infrastructure investment, as financial strains have distorted the municipal credit markets to the point where even the highest-quality municipal borrowers are, despite their tax advantage, paying more than the federal government to borrow. There are legitimate questions about how rapidly the impact of infrastructure spending will be felt. But with construction employment in free fall, there will be a need for stimulus tied to the needs of less educated male workers for quite some time. Fiscal stimulus measures must be coupled to budget process reform that provides reassurance that, once the crisis passes, the fiscal policy discipline of the 1990s will be re-established.

Third, policymakers need to make a clear commitment to addressing the non-monetary factors causing inflation concerns. Though this could change rapidly and vigilance is necessary, it does not now appear that there are embedded expectations of a continuing wage price spiral. Rather, the primary source of inflation concern is increases in the price of oil, food and other commodities. Even if structural measures to address these issues do not have an immediate impact on commodity prices, they may serve to address medium-term inflation expectations. Appropriate steps include reform of misguided ethanol subsidies that distort grain markets to minimal environmental benefit, allowing farm land now being conserved to be planted; measures to promote the use of natural gas; and reform of Strategic Petroleum Reserve Policy to encourage swaps at times when the market is indicating short supply. Major importance should be attached to encouraging the reduction or elimination of energy subsidies in the developing world.

Fourth, it needs to be recognised that in the months ahead there is the real possibility that significant financial institutions will encounter not just liquidity but solvency problems as the economy deteriorates and further writedowns prove necessary. Markets are anticipating further cuts in financial institution dividends; regulators should encourage this to happen sooner rather than later and more broadly to reduce stigma. They should also recognise that no one can afford to be too picky about the timing or source of capital infusions and rapidly complete the review of regulations that limit the ability of private equity capital to come into the banking system. Most important, regulators should do what is necessary, including possibly seeking new legislative authority, to assure that in the event of an institution becoming insolvent they can manage the resolution in a way that protects the system while also protecting taxpayers. It was fortunate that a natural merger partner was available when Bear Stearns failed – we may not be so lucky next time.

Unfortunately we are in an economic environment where we have more to fear than fear itself. But this is no excuse for fatalism. The policy choices made in the next few months will matter to the lives of millions of Americans, to America’s economic strength and to the global economy.

The writer is Charles W. Eliot university professor at Harvard University and a managing director of D.E. Shaw & Co