S&P to pay $1.5 bn to resolve financial crisis lawsuits

Yahoo - AFP, 3 Feb 2015

S&P said it had not admitted to any legal violations in the settlements, which
 resolve lawsuits filed by the US Department of Justice, 19 states and the
District of Columbia (AFP Photo/Eric Piermont)

New York (AFP) - Standard & Poor's, the world's leading credit rating agency, will pay $1.5 billion to settle US allegations of inflated ratings linked to the financial crisis that unleashed the Great Recession.

The settlement agreements announced Tuesday resolve civil lawsuits filed by the US Justice Department, 19 states, the US capital and the nation's largest pension fund.

S&P, a unit of McGraw Hill Financial, will pay $1.375 billion to resolve lawsuits accusing it of bilking investors by hiding the true risks of mortgage bonds linked to the financial crisis, the Justice Department.

Half will go to the Justice Department and the other half to the 19 states and Washington, DC.

Separately, S&P will pay $125 million to California state pension fund CalPERS to settle allegations of fraud that led to its investment losses.

The Justice Department and the states sued S&P two years ago for giving undeservedly rosy ratings to bonds that were backed by subprime mortgages, risky home loans that defaulted in droves as the housing price bubble collapsed.

The subprime crisis was at the center of the US financial meltdown that led to the 2008-2009 Great Recession.

According to the Justice Department suit, S&P's alleged fraud occurred from at least 2004 until 2007 and ultimately caused investors, including many financial institutions backed by the federal government, to lose billions of dollars.

S&P had claimed that its ratings were independent and not affected by its relationship with the companies hiring it to rate their securities.

But in a statement of facts as part of the settlement, S&P admitted that company executives had complained internally that it was not downgrading already-soured bonds because it was worried about losing some ratings business.

"The company's leadership ignored senior analysts who warned that the company had given top ratings to financial products that were failing to perform as advertised," said US Attorney General Eric Holder.

"While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression."

Retaliation claim dropped

S&P acknowledged its fraudulent conduct with the ratings of the structured financial products, but it said it had not admitted to any legal violations.

"The settlement agreement states that all parties, including the company, the DOJ and the states, settled this matter 'to avoid the delay, uncertainty, inconvenience, and expense of further litigation,'" the company said.

It said agreeing to the payments was "in the best interests of the company and its shareholders."

S&P also agreed to formally retract an allegation that the US government sued the company in retaliation for its decision to strip the United States of its coveted AAA sovereign debt credit rating in 2011.

In January, S&P agreed to pay $77 million to settle allegations from three US regulators, including the Securities and Exchange Commission, that it had overvalued 2011 mortgage bonds.

As part of that agreement, S&P was stripped of its authority to rate certain bond deals for one year.

CalPERS said that the $125 million settlement addresses losses on three S&P-rated structured investment vehicles that collapsed during the financial crisis.

CalPERS still has similar charges outstanding against S&P rival Moody's Investors Service.

Moody's is also under investigation for allegedly overvaluing bonds between 2007 and 2007 in the ongoing Justice Department probe of crisis-era failings, according to the Wall Street Journal.

Justice authorities and Moody's executives have been holding talks in recent months on the matter, the newspaper reported.

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RBS, S&P's sued in Amsterdam over investment losses

Alternative ratings agency presents test results

US ratings agencies face Chinese challenge

RBS, S&P's sued in Amsterdam over investment losses

DutchNews.nl, Thursday 05 December 2013

(Nos/ANP)

A group of 16 investors has launched legal action in the Netherlands against Royal Bank of Scotland (RBS) and credit rating agency Standard & Poor's, holding them responsible for major losses incurred during the credit crisis.

The institutional investors from Germany, Austria and Switzerland, are demanding a total of €250m in compensation, news agency Bloomberg said.

Their identities have not been made public, but the complex investment products they invested in lost up to 90% of their value during the crisis, Bloomberg said.

The products were sold by ABN Amro’s international arm, which was then in the hands of RBS. Standard and Poor’s gave the products the highest rating of AAA.

More on this

Iceland pushes ahead with controversial debt relief plan

Google – AFP, 1 December 2013

Prime Minister of Iceland Sigmundur David Gunnlaugsson speaks during a press

 conference after a meeting with European Commission President at the EU

Headquarters in Brussels on June 16, 2013 (AFP/File, John Thys)

Reykjavik — The Icelandic government said Saturday it would write up to 24,000 euros off the mortgage of every household, making good on an election campaign promise despite international warnings over the plan.

The cost of the measure is estimated to reach 150 billion krona (900 million euros, $1.2 billion) over four years, the government said in a statement.

It would be funded by taxes on banks and funds managing assets of banks which went bust during the 2008 financial crisis, added the government.

The Progressive Party -- led by Prime Minister Sigmundur David Gunnlaugsson, winner of late-April elections -- had won voters over with its campaign promise to offer household debt relief.

Gunnlaugsson has said since taking office that the scheme would not hurt public finances, and had initially suggested that foreign creditors of Icelandic banks would bear the write-off.

The debt relief promise has been met with scepticism elsewhere, with both the International Monetary Fund and the Organisation for Economic Cooperation and Development warning against it.

The IMF had previously said that Iceland has "little fiscal space for additional household debt relief", while the OECD had called for the mortgage relief efforts to target only low-income households.

Standard & Poor's also slashed the outlook for Iceland's long-term credit rating to negative from stable, saying the plan could damage foreign investors' confidence if it is to be funded by existing creditors of Iceland's banks.

The agency further warned that it could still lower Iceland's ratings over the plan.

But Finance Minister Bjarni Benediktsson swept aside the criticisms, telling public television Ruv: "We think that there is no doubt in the fact that this tax can be put in place. And if it comes under attack, we will defend it up to the highest jurisdiction."

Many Icelandic households are struggling to repay housing loans indexed to inflation that seemed safe prior to the 2008 financial crisis but has caused borrowing costs to skyrocket following the krona's collapse against other currencies.

"Currently, household debt is equivalent to 108 percent of GDP, which is high by international comparison," said the government in a statement.

"The action will boost household disposable income and encourage savings," it said, adding that the debt relief would begin mid-2014.

Related Article:

"The Recalibration of Awareness – Apr 20/21, 2012 (Kryon channeled by Lee Carroll) (Subjects: Old Energy, Recalibration Lectures, God / Creator, Religions/Spiritual systems  (Catholic Church, Priests/Nun’s, Worship, John Paul Pope, Women in the Church otherwise church will go, Current Pope won’t do it),  Middle East, Jews, Governments will change (Internet, Media, Democracies, Dictators, North Korea, Nations voted at once), Integrity (Businesses, Tobacco Companies, Bankers/ Financial Institutes, Pharmaceutical company to collapse),  Illuminati (Started in Greece, with Shipping, Financial markets, Stock markets, Pharmaceutical money (fund to build Africa, to develop)), Shift of Human Consciousness, (Old) Souls, Women, Masters to/already come back, Global Unity.... etc.) - (Text version)

“…  Government

Let us speak of government. We're not speaking of your government, but of any government - the way it works, how it survives, how it has survived, the way it campaigns, and how it elects leaders. It's going to change.

Years ago, I told you, "When everybody can talk to everybody, there can be no secrets." Up to this point on this planet, government has counted on one thing - that the people can't easily talk to each other on a global scale. They have to get their information through government or official channels. Even mass media isn't always free enough, for it reports that which the government reports. Even a free society tends to bias itself according to the bias of the times. However, when you can have Human Beings talking to each other all at once, all over the planet without government control, it all changes, for there is open revelation of truth.

Democracy itself will change and you're going to see it soon. The hold-outs, the few countries I have mentioned in the past, are doomed unless they recalibrate. They're doomed to be the same as they have been and won't be able to exist as they are now with everyone changing around them.

I mentioned North Korea in the past. Give it time. Right now, the young man is under the control of his father's advisors. But when they're gone, you will see something different, should he survive. Don't judge him yet, for he is being controlled.

In government, if you're entire voting base has the ability to talk to itself without restriction and comes up with opinions by itself without restriction, it behooves a politician to be aware and listen to them. This will change what politicians will do. It will change the way things work in government. Don't be surprised when some day a whole nation can vote all at once in a very unusual way. Gone will be the old systems where you used to count on horseback riders to report in from faraway places. Some of you know what I am talking about. Government will change. The systems around you, both dark and light, will change. You're going to start seeing something else, too, so let's change the subject and turn the page. …”

Moody's downgrades big US banks on government bail-in plan

Deutsche Welle, 15 November 2013

Moody’s investors’ service has cut the credit ratings of four US banks after a review of the countries nine biggest banks. The move comes amid a US government plan to wind down troubled lenders without taxpayers’ money.

 The holding companies of US banks Morgan Stanley, Goldman Sachs, JPMorgan Chase and Bank of New York Mellon had their credit ratings downgrade by one notch each, US ratings agency Moody's announced Thursday.

Moody's made the decision in view of new US banking regulation which will make the government less likely to bail out troubled lenders if they fail. Under new rules, US bank regulators would take over the management of such a bank to ensure that investors accept losses as bonds would be converted into equity capital.

Moody's described the plan as a credible framework to resolve a large, failing bank. However, the regulation would increase their borrowing costs and force them to post more collateral in their trading, weighing on profits.

“Rather than relying on public funds to bail out one of these institutions, we expect that bank holding company creditors will be bailed-in and thereby shoulder much of the burden to help recapitalize a failing bank,” Moody's Managing Director Robert young said in a statement.

With the cut, the holding company of Morgan Stanley is now rated Baa2, which is just two steps above junk status. Goldman Sachs was cut to a level three steps above non-investment grade, while JP Morgan is now five steps away and BNY Mellon six.

uhe/hc (dpa, Reuters, AFP)

Standard & Poor's expects lawsuit over subprime ratings

BBC News, 4 February 2013

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• Geithner on 'terrible judgement' of S&P Watch
• Mizuho pays $128m to end CDO case

S&P says it "deeply regrets" how its
CDO  ratings failed to anticipate
mortgage market conditions

Standard & Poor's says it is to be sued by the US government over the credit agency's rating of mortgage bonds before the financial crisis.

The civil lawsuit would focus on S&P's high ratings in 2007 for some mortgage-backed securities that later collapsed in value, said the agency.

S&P says the case is entirely without factual or legal merit.

The suit would be the first such case over alleged wrongdoing by a credit agency tied to the financial crisis.

S&P said the justice department had informed them of the impending civil suit, although the federal agency declined to comment.

The move follows a breakdown in talks between the justice department and S&P, the Wall Street Journal reports.

Several states are expected to join the suit, US media report.

'Key enablers'

S&P and other agencies have faced criticism from investors, politicians and regulators for assigning AAA ratings to thousands of subprime and other mortgage securities that later collapsed.

Such agencies are paid by the issuers of bonds and other securities for ratings, raising concern about potential conflicts of interest.

Grades assigned by these firms can affect a company's ability to raise or borrow money as well as how much investors will pay for their securities.

In its January 2011 report, the US Financial Crisis Inquiry Commission called the agencies "essential cogs in the wheel of financial destruction" and "key enablers of the financial meltdown".

S&P has previously disclosed a Securities and Exchange Commission (SEC) investigation into its rating of a specific $1.6bn (£1bn) collateralised debt obligation (CDO) known as Delphinus CDO 2007-1.

Delphinus was the basis of a $127m settlement by Mizuho Financial Group over allegations that the US unit of the company obtained false credit ratings for the CDO using millions of dollars in dummy assets.

It is unclear if Delphinus is included in the expected civil suit.

S&P has also faced lawsuits from investors, and argues its ratings constitute opinions protected by the First Amendment to the US Constitution.

The firm says it "deeply regrets" how its CDO ratings failed to anticipate mortgage market conditions as the financial crisis hit, and that it has since spent $400m to help bolster the quality of its ratings.

"Every CDO that [the department] has cited to us also independently received the same rating from another rating agency," S&P said in a statement on Monday.

"The Department of Justice would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith."

Alternative ratings agency presents test results

Deutsche Welle, 20 November 2012

An alternative international ratings agency is what European governments would like to see in place soon to break the power of the US bellwethers. A German-conceived model has just completed a first test run.

Crisis-stricken eurozone countries don't have to bring up the rear when assessing their creditworthiness with a non-standard set of gauging parameters, Germany's Bertelsmann Foundation claimed on Tuesday while presenting the test-run results of its alternative international ratings agency.

The non-profit credit rating agency INCRA analyzed Brazil, Japan, France, Germany and Italy for test purposes, with the latter surprisingly taking third position in terms of long-term creditworthiness. Italy did so well "because of its financial crisis management capabilities," the Bertelsmann Foundation argued.

In scrutinizing the countries in question, INCRA applied standard macroeconomic indicators as well as a set of forward-looking factors such as a nation's reform endeavors and its willingness to carry out necessary investments.

Broadside at Moody's and Co.

Germany excelled among the nations examined due to its robust economy and labor market. But the study warned that the country must not rest on its laurels and tackle demographic issues in a more courageous way.

INCRA has yet to find the approval of the world's leading industrialized and emerging nations. It is to operate as a counterweight to the US' three heavyweights in the business (Moody's, Fitch and Standard & Poor's) which have been accused by European governments of having too much influence on the fate of financial markets in the euro area.

The alternative ratings agency would only be responsible for assessing the performance of nations and international organizations, and it would do so free of charge, said the head of the Bertelsmann Foundation, Aart de Geus. He added that running costs would have to be born by governments, foundations and private entrepreneurs.

hg/mz (AFP, dpa)

Related Article:

US ratings agencies face Chinese challenge

US ratings agencies face Chinese challenge

Deutsche Welle, 19 November 2012

Agencies Standard & Poors, Moody's and Fitch have dominated the global market for credit ratings. But their dubious role in the 2008 financial crisis has highlighted the need for more impartial alternatives.

In early 2008, the big three US ratings agencies. Standard & Poors, Moody's and Fitch, were till issuing first-rate credit ratings for banks and financial products which only months later collapsed in the financial crisis.

Some analysts have criticized the agencies' near-monopoly positions, arguing their inaccurate assessments helped inflate the subprime mortgage bubble in the United States that caused the crisis.

Since 2008, nothing much has changed as the "big three" agencies still dominate 95 percent of the global ratings market, passing crucial verdicts without which the world's finance markets wouldn't work.

However, China's independent ratings agency Dagong Global Credit is preparing a challenge which could challenge the US agencies. In October, it announced plans to form a joint venture with Russian agency RusRating and Egan-Jones Rating, the fourth largest US ratings group.

The three companies said in a statement that Universal Credit Rating Group, as the new agency will be called, intended to issue "impartial ratings" in an attempt to "speed up reform of the global credit rating system."

Dagong Chief Executive Guan Jianzhong said the group planned to be fully operational within the next six months, and that that "dozens" of smaller ratings businesses from more than 20 countries were interested in joining the group, which would be based in Hong Kong.

Doubts about independence

In an attempt to dispel concerns about state interference in the new group, Guan Jianzhong pointed out that his company was a private venture in which Chinese state and party officials had no political influence.

In addition, the three founders stated in their statement that the new agency wouldn't represent the interests of any country or group.

There are doubts as to how
independent Dagong can be

However, doubts remain about the agency's independence as CEO Guan is a Communist Party member with close ties to the Chinese leadership. Before he founded his private firm, he had worked for the government, which still employs him as an advisor.

Such ties are crucial for doing business in China, market analyst Oliver Everling told DW. "It's impossible to set up a ratings agency in China that is fully independent of the state and could act against state policy," he said. Close ties to politics and business were essential for any agency, Everling added.

Business model makes the difference

The new agency arrives amid mounting criticism of the ratings decisions taken by the US agencies and the business model they pursue.

"There is serious evidence that in the past decade a number of European countries were given worse credit ratings than would have been justified in respect to their finances and the general state of their economies," Manfred Gärtner of the University of St. Gallen told DW.

He welcomed the foundation of an "alternative" to the United States agencies, arguing the seat of the agency was of minor importance.

Gärtner said the biggest problem with ratings agencies was their complex network of inter-dependence with the finance industry as a result of joint ownership structures and shared profit interests, which were fostered by close private ties and business locations.

China's Universal Credit Rating Group, Gärtner added, could avoid the typical clash of interest by adopting the business model of its partner Egan-Jones rather than that of rivals Moody's, Standard & Poors and Fitch.

Egan-Jones Ratings charges the investors who buy their ratings reports, while the Big Three are paid by the company or bank which issues a financial product or seeks a rating.

As well as China, Europe, too is making efforts to launch its own ratings group next year - a project which is spearheaded by Roland Berger consultancy firm.

In addition, the influential Bertelsmann Foundation of Germany presented a proposal in spring 2012, suggesting an international not-for-profit agency.

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S&P loses landmark Australian derivatives case

S&P loses landmark Australian derivatives case

Channel News Asia, AFP, 05 November 2012       

                  

(AFP/File - Eric Piermont)

SYDNEY: Standard & Poor's lost a landmark case in Australia on Monday over top-flight ratings given to financial products that collapsed in the build-up to the 2008 global economic crisis.

The Federal Court of Australia ruled that S&P's AAA rating of constant proportion debt obligation notes created by banking giant ABN AMRO and sold to the councils of 13 Australian towns, had been "misleading and deceptive".

It is the first time a ratings agency has faced trial over synthetic derivatives and the case could set an important precedent for future litigation.

Within months of the councils buying the CPDOs from Australian firm Local Government Financial Services (LGFS) in late 2006, assured they had a less than one per cent chance of failing, the notes defaulted.

The councils lost AU$16 million (US$16.5 million) on the so-called "Rembrandt notes", more than 90 per cent of the capital invested.

Judge Jayne Jagot said S&P's assessment of the products as "extremely strong" had been central to the loss.

"S&P's rating of AAA of the Rembrandt 2006-2 and 2006-3 CPDO notes was misleading and deceptive and involved the publication of information or statements false in material particulars, and otherwise involved negligent misrepresentations to the class of potential investors in Australia," Jagot said.

Jagot said S&P had claimed to have reached its opinion "based on reasonable grounds and as the result of an exercise of reasonable care when neither was true and S&P also knew not to be true at the time made".

The judge ruled that ABN AMRO had also been "knowingly concerned in S&P's contraventions of the various statutory provisions proscribing such misleading and deceptive conduct" and had engaged in such conduct itself.

She made a similar ruling on LGFS and rejected the financial agencies' arguments that the councils should bear a part of the blame due to to their "contributory negligence".

Jagot ordered S&P, ABN AMRO and LGFS to each pay one-third of the small mostly mining and farming councils' losses plus interest.

The sale of risky investments such as mortgage-backed securities contributed to the worldwide financial meltdown in late 2008.

- AFP/xq

Chinese, US, Russian agencies set up new credit rating company

Want China Times, Xinhua 2012-10-25

Three rating agencies from China, the United States and Russia will jointly launch a new credit rating company to rival current industry leaders and promote independence.

It was announced on Wednesday that the Universal Credit Rating Group will be established by China's Dagong Global Credit Rating, the US-based Egan-Jones Ratings Company, and Russia's RusRating. The headquarters will be set up in Hong Kong within six months, the companies said in a statement.

The group will be invested by private institutions without conflicts of interests with its credit ratings and will not represent any country or interest group, the statement said.

Guan Jianzhong, president of Dagong Global Credit Rating, urged an overhaul of the current international credit rating system, which he criticized.

"As the main providers of rating information that global capital flow relies on, the three major rating agencies in the US failed to ring the alarm bell for the financial crisis and even helped aggravate the crisis," said Guan.

The US-based "Big Three" global credit rating agencies — Standard and Poor's, Moody's, and Fitch Ratings — have come under fire for their credibility during the global financial crisis.

Sean Egan, president of Egan-Jones Ratings Company, said overly optimistic credit ratings led to the financial crisis and the current international rating system can no longer meet investors' demand.

Guan said the new rating group will provide fair and true information about debtors, make a new international standard for credit rating and promote an independent global rating regulatory system.

President Guan Jianzhong of Dagong Global Credit Rating

 (AFP, Wang Zhao)

Related Article:

China-based ratings firm tackles US dominance

EU market regulator is suspicious of rating agencies

RT.com, 02 July, 2012

Moody's rating agency

The European Securities and Markets Authority (ESMA) has launched a probe on whether the three US major ratings agencies Standard & Poor's (S&P), Fitch and Moody's use precise and transparent methods in evaluating banks.

The investigation was launched as Moody's downgrade 15 global banks last month, "raised concerns about whether there are sufficient analytical resources" at the agencies, Steven Maijoor, the head of ESMA told Financial Times.

“This is an area where there have been many ratings changes in the past weeks and years. That raises issues of whether there is sufficient resource and expertise to cope with the additional work,” he explained.

Credit rating agencies were not regulated in Europe until last year, when the European Union required them to register with the European market watchdog ESMA. The agencies were under scrutiny the last few years. First some critics said that the rating agencies were partly to blame for the global financial crisis of 2008–2009 as they gave top ratings to risky debts. Later they were criticized for their mass rating cuts adding woes to the eurozone crisis.

European politicians have been long grilling the agencies, especially those based in the U.S. Some of officials called for creating a European independent rating agency.

Meanwhile the S&P said it is ready to cooperate with the European regulator. The rating agency “looks forward to explaining to Esma, as part of its regular inspection program, the steps we have taken to maximise the transparency, quality and consistency of our bank ratings,” according to the statement. Moody’s and Fitch are yet to comment on the issue.

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Moody's downgrades 15 major banks

How credit ratings agencies rule the world

Moody's downgrades 15 major banks

BBC News, 22 June 2012

Big Banking 

• Minority vote no to HSBC boss pay
• Barclays hit by revolt over pay
• Barclays to sell Blackrock stake
• HSBC profits fall on debt value

RBS said it "disagrees" with Moody's
move

The credit ratings agency Moody's has downgraded 15 global banks and financial institutions.

The UK banks downgraded were Royal Bank of Scotland, Barclays and HSBC. Lloyds also had its rating cut by Moody's in a separate announcement.

In the US, Bank of America and Citigroup were among those marked down.

BBC business editor Robert Peston said that banks were concerned as the downgrades may make it harder for them to borrow money commercially.

Moody's global banking managing director Greg Bauer said in the agency's statement: "All of the banks affected by today's actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities."

The other institutions that have been downgraded are Goldman Sachs, Morgan Stanley, JP Morgan Chase, Credit Suisse, UBS, BNP Paribas, Credit Agricole, Societe Generale, Deutsche Bank and Royal Bank of Canada.

'Disagrees'

Moody's said it recognised "the clear intent of governments around the world to reduce support for creditors", but added that they had not yet put the frameworks in place that would allow them to let banks fail.

Some of the banks were put on negative outlook, which is a warning that they could be downgraded again later, on the basis that governments may eventually manage to withdraw their support.

In a statement, Royal Bank of Scotland (RBS) responded to its downgrade saying: "The group disagrees with Moody's ratings change, which the group feels is backward-looking and does not give adequate credit for the substantial improvements the group has made to its balance sheet, funding and risk profile."

RBS estimated that the downgrade could mean it needing to find an extra £9bn in collateral for its debts.

Lloyds said it believed that the change would have "limited impact on our funding costs and market capacity".

Of the banks downgraded, four were cut by one notch on Moody's ranking scale, including HSBC, Royal Bank of Scotland, and also Lloyds.

A further 10 banks had their rating reduced by two notches, including Barclays. Credit Suisse was lowered by three notches.

"The biggest surprise is the three-notch downgrade of Credit Suisse, which no one was looking for," said Mark Grant, managing director of Southwest Securities.

Peter Hahn, a former executive at Citigroup and now a lecturer at Cass Business School in London, said the downgrades could limit the banks' activities.

He added: "Banks are going to have to put up collateral in their transactions with other banks.

"As they get downgraded, other banks and system players don't want exposure.

"It's a constraint on capital, it's a constraint on business, so it's obviously not welcome for us, trying to get more money into the economy."

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Moody's cuts credit ratings on 15 major banks

Associated Press, by Pallavi Gogoi, Jun. 21

NEW YORK (AP) — Moody's Investors Service has lowered the ratings of some of the world's largest banks, including Bank of America, JPMorgan Chase, Citigroup and Goldman Sachs.

The ratings agency said late Thursday that the banks were downgraded because their long-term prospects for profitability and growth are shrinking.

The ratings agency said it was especially concerned about banks with significant capital market activities during a time of increased volatility in markets.

A downgrade usually means that it becomes more costly for banks to raise money by selling debt. Investors demand higher interest for riskier debt, which is what the downgrades represent.

Moody's had said in February that it was considering downgrading the credit ratings of major banks.

German companies accuse S&P of profiteering

Deutsche Welle, 23 April 2012

A number of German companies have expressed their indignation at alleged plans by the US Standard and Poor's rating agency to drastically increase fees for assessing the firms' economic performance.

Twelve of Germany's largest companies have sent a joint letter of protest to the Germany head of Standard and Poor's, Torsten Hinrichs, expressing their outrage over alleged plans by the US rating agency to force up prices, the Financial Times Deutschland newspaper reported on Monday.

S & P was expected to double some of its fees for the standard assessment of companies' economic performance; the firms concerned say this would be profiteering.

"Even if S & P has offered to stretch the price hike over three years for exactly the same services, the result would remain unacceptable," said the protest note which was signed by managers from Volkswagen, Daimler, Siemens, Bayer, Eon, RWE, Continental, Lufthansa, Deutsche Post, Henkel, Linde and Bertelsmann.

German companies already paid the US rating agencies about half a million euros annually, the letter said. The three main rating agencies, Standard and Poor's, Moody's and Fitch, have been making most of their profits from the rating of individual companies, and not so much from assessing the performance of whole nations - which for them is more a question of image building.

A case for market watchdogs?

Analysts insist the protest letter is also meant as a signal for German and European anti-trust authorities to step into action. German legal expert Torsten Köber told the Financial Times Deutschland that it's not a problem in itself, if a given provider of services - or a group of providers - dominates the market.

"But things are different, if there's any proof of acquired market domination being misused to the detriment of customers, for instance in a bid to force up prices," Köber said.

The dominant position of the three US rating agencies has long been a thorn in the side of European governments, which have sought to set up an independent agency on their own continent. But the attempts made so far have failed to secure enough financial support from banks across the continent.

Even if a European rating agency were to become a reality, it would take many years to build up the solid reputation it would need before it could become a player among equals.

Author: Hardy Graupner

Editor: Michael Lawton

Related Article:

Moody’s Fired by Danish Banks as Investors Show Support

Danske Bank A/S’s mortgage unit  Realkredit Danmark A/S,

 the country’s second-largest home-loan provider,  dropped

Moody’s in June. Photographer:  Ulrik Jantzen/Bloomberg

Moody’s Fired by Danish Banks as Investors Show Support

Bloomberg, by Frances Schwartzkopff - Apr 19, 2012

Denmark’s biggest banks are firing Moody’s Investors Service as they win assurances from some of the country’s biggest investors that the opinions of ratings companies hold limited value.

Moody's Investors Service Inc

. headquarters in New York.

 Photographer: Scott Eells/Bloomberg

Nykredit A/S, Denmark’s biggest mortgage lender and Europe’s largest issuer of covered bonds backed by home loans, terminated its contract with Moody’s on April 13, citing its “volatile” views. Danske Bank A/S (DANSKE)’s mortgage unit Realkredit Danmark A/S, the country’s second-largest home-loan provider, dropped Moody’s in June. Jyske Bank A/S, Denmark’s second- biggest listed bank, is looking into ending its dealings with Moody’s, according to Steen Nygaard, its head of treasury.

“They have just crossed the line for fairness,” Nygaard said in an interview. “It’s not just that we have an opinion and if they rule against us, we are mad and walk away. It is about the fundamentals where we simply cannot follow Moody’s arguments.”

Moody’s in June criticized Denmark’s $470 billion mortgage- bond industry, the world’s third largest after the U.S. and Germany, for failing to curb refinancing risks fueled by a mismatch in funding and lending maturities. Since then, Nykredit’s benchmark index of Denmark’s most-traded mortgage bonds has risen 6.3 percent to a record, signaling investors are disregarding the warnings.

Commercial Relationships

“Moody’s does not comment on its commercial relationships,” Jessica Sibado, a Moody’s spokeswoman, said in a phone interview yesterday. “Moody’s considers Denmark as having one of the strongest covered bond frameworks in Europe. However, since 2009, Danish covered bonds have been impacted by the weakening issuer credit strength” and “increasing refinancing risks,” she said.

Moody’s generated 31 percent of its $2.3 billion in sales last year from Europe, the Middle East and Asia combined, it said March 12. Nykredit and Jyske declined to reveal what they paid the company for their ratings.

Nykredit A/S , Denmark’s biggest mortgage
 lender and Europe’s largest issuer of
 covered bonds backed by home loans, 
terminated  its contract with Moody’s on
April 13, citing its  “volatile” views. Photo-
grapher: Ulrik Jantzen/Bloomberg

“It’s not that ratings don’t matter. Of course they do,” said Inger Huus Pedersen, head of fixed-income investments at Hellerup, Denmark-based pension fund PKA, which oversees about $27 billion in assets. “These mortgage bonds, we feel pretty secure about. It’s an old system that’s gone through a lot, which is why I’m quite secure about the system. History has shown us that ratings agencies make mistakes as well.”

Senate Report

Investors, companies and governments are starting to question the role of the ratings companies following their failure to identify some of the imbalances that led to the global financial crisis of 2008.

According to a 2011 U.S. Senate report, both Standard & Poor’s and Moody’s adjusted the way they graded mortgage-backed securities after Goldman Sachs Group Inc., UBS AG and at least six more banks pressured them. When the ratings companies changed their assessments in July 2007, it helped trigger the financial crisis, the Senate Permanent Subcommittee on Investigations said in April last year.

S&P’s decision to strip the U.S. of its top credit grade in August was followed by gains in the nation’s Treasury debt. U.S. government securities with maturities longer than a year have returned 4.2 percent, including reinvested interest, since S&P’s Aug. 5 downgrade. The Bank of England said March 27 there was “little market reaction” to Moody’s decision to cut the outlook on its Aaa rating to negative.

Tougher Stance

In Denmark, Moody’s has been tougher on mortgage banks than other rating companies. It ranked adjustable-rate bonds issued by Nykredit Aa1, compared with S&P’s AAA grade. Nykredit’s issuer rating at S&P is A+, its fifth-highest grade, with a stable outlook. Moody’s ranks the lender A2, its sixth-highest rating, with a negative outlook.

“Moody’s has shown a harsh stance on banks ratings compared to the other agencies,” said Marc Stacey, a fund manager at BlueBay Asset Management Ltd. in London, which oversees $42 billion in credit. “If Moody’s upcoming announcements show that they are an outlier, compared to where the other two rating agencies are, then you may find the Moody’s rating being dropped by more and more issuers.”

Nykredit fired Moody’s amid a review of 114 financial institutions in 16 countries. Moody’s said it may downgrade banks as much as three levels. BRFkredit A/S, another Danish mortgage lender, ended its dealings with Moody’s in October.

‘Follow Suit’

Moody’s in June criticized Denmark’s
 $470 billion mortgage-bond industry,
 the world’s third largest after the U.S.
 and Germany, for failing to curb refinancing
 risks fueled by a mismatch in funding
 and lending maturities. Photographer:
 Scott Eells/Bloomberg

“If larger banks begin to look at the Danish banks and follow suit, this could potentially reduce the impact of the rating cuts and simplify matters for investors,” Prateek Datta, an analyst at Royal Bank of Scotland Group Plc, said today in a note to investors.

“It’s not a matter of the rating being X or Y,” Soeren Holm, group managing director of finance at Nykredit, said in an interview. “It’s a matter of volatility in their methods and approaches, and it’s a matter of the value for investors.”

Denmark’s two-century-old mortgage market has moved away from traditional, fixed-rate 30-year loans and started offering adjustable rates in 1996 and interest-only loans in 2003 to attract more customers. The country is still struggling to emerge from a recession triggered by a burst housing bubble in 2007. A regional banking crisis claimed three lenders last year.

“We agree there are risks, but they are less than when the house prices were in a bubble phase,” Nygaard said. “We cannot see the huge risk to the Danish economy. Jyske Bank is much stronger today that it was in 2007.”

Creditor Losses

Moody’s, which published its first guide to securities in 1900 after being founded by John Moody, cut Jyske Bank and five other Danish lenders last year after the government allowed Amagerbanken A/S to fail, passing losses on to senior creditors. Jyske is rated A2, with a negative outlook.

Danske Bank A/S’s mortgage unit
 Realkredit Danmark A/S, the country’s
 second-largest home-loan provider,
 dropped Moody’s in June. Photographer:
Ulrik Jantzen/Bloomberg

Moody’s rates Denmark’s government debt Aaa, with a stable outlook. The country is one of only 12 in the world to enjoy the top credit grade at Moody’s, S&P and Fitch Ratings.

While Denmark’s government debt is half the euro-area average at 44.6 percent of gross domestic product in 2012, the European Commission estimates, its private debt is the world’s highest. Household debt reached 310 percent of disposable incomes in 2010, according to Exane BNP Paribas. Danes’ savings, while high, are mostly “locked up” in hard-to-access pension and real estate assets, central bank Governor Nils Bernstein has said.

Adjustable-rate loans, as well as loans that delay principle payments by as much as 10 years, make up more than half Denmark’s outstanding homeowner debt, according to the Association of Danish Mortgage Banks. Bernstein has urged the industry to phase out interest-only loans, which he says erode economic stability.

Pressure

Foreclosures jumped an annual 32 percent last month to a 17-year high, after Denmark’s economy fell into a recession in the second half and house prices sank an annual 8 percent in the fourth quarter.

“What Moody’s is doing is putting pressure on the system, and that is not necessarily a bad thing,” said Peter Lindegaard, head of investments for Danica Pension, a unit of Danske Bank. Still, Lindegaard said Danica, which holds 20 billion kroner in mortgage debt, won’t exit Nykredit’s bonds after the lender dropped Moody’s.

“We think we know as much as Moody’s about how the system works,” Lindegaard said in an interview. “We still deem them a very secure investment.”

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net.

To contact the editor responsible for this story: Christian Wienberg at cwienberg@bloomberg.net.

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