The views expressed in this column are those of the author and not SVB Financial Group.
Let me t-t-tell you 'bout some friends I know
They're kinda crazy but
you'll dig the show
They can party 'til the break of dawn
At Delta Chi you
can't go wrong
- Stephen Bishop (from the film Animal
The ratings agencies have largely escaped public scorn
throughout the current financial crisis, including the recent regulatory reform
signed into law. A notable exception is the legal liability foisted upon them
regarding the ratings they place on specific issues. Their reaction, of course,
was to halt assigning such ratings until clarity prevailed, killing bond
issuance for a time.
The message here is that they stand behind their
ratings, unless legal liability potential follows. But who can blame them?
Predicting market outcomes is a gamble, and believing the ratings agencies can
or should have an infallible record is simply childish. Instead, we view their
opinions as simply a starting point — sort of a bare minimum standard for
One recent action they've taken that drives this
point home are Moody's Bank Financial Strength Ratings (BFSRs). For those of you
who do not intimately follow such activities, BFSRs were introduced just prior
to the liquidity crisis and intend to "represent Moody's opinion of a banks
intrinsic safety and soundness and, as such, exclude certain external credit
risks and credit support elements that are addressed by Moody's Bank Deposit
They "are a measure of the likelihood that a bank will require
assistance from third parties such as its owners, its industry group, or
official institutions." In other words, there is a "core" credit rating and a
"bailout" credit rating — reminding me of the "double-secret probation" Dean
Wormer extended to the residents of Delta Chi so long ago.
But which is
important to the investor? Of course, it is whether payments will be made in
full and on time, although neither of these ratings addresses this objective
Credit analysis cannot be outsourced to the ratings
agencies. These entities are paid a fee to provide an opinion as to the relative
credit quality across issuers in the marketplace.
However, if you are
investing in a 6-month security vs. a 10-year security, your credit exposure is
certainly different. The ratings agencies, for the most part, perform the same
analysis and ratings do not deteriorate (or improve) with terms, but credit
quality most assuredly does.
Instead, make it a priority to base your
decisions on analysis that is specific to your desired outcome. The best way to
accomplish this is to work with a Registered Investment Advisor that has a
fiduciary obligation enforced by the SEC to make decisions that place your
interest above theirs.
And one that specializes on your stated objectives
should be a prerequisite!
Finally a Focus on Fannie and
The White House has scheduled an August 17 conference on the
U.S. housing market that will include a focus on the beleaguered twins and their
future. After putting off this discussion twice, I am very pleased this topic is
moving into the on-deck circle.
By defining government involvement in the
housing sector going forward, the government is moving toward greater
involvement of the private sector in this important segment of the
Sales of U.S. new homes rose in
June more than forecast, following an unprecedented collapse the prior month — a
signal the worst of the slump triggered by the end of a government tax credit is
over. Purchases increased 24 percent from May to an annual pace of 330,000,
figures from the Commerce Department showed. The rate was the second-lowest in
data going back to 1963 after May's downwardly revised 267,000 pace.
prices in 20 U.S. cities rose in May from a year earlier, more than forecast as
a government tax credit temporarily underpinned sales. The S&P/Case-Shiller
Index of property values increased 4.6 percent from May 2009, the biggest
year-over-year gain since August 2006, the group announced today. There has been
a retreat in demand since the April 30 contract-signing deadline to be eligible
for an incentive worth up to $8,000, signaling that home prices will slacken in
coming months. Mounting foreclosures may add to the pressure on property values,
pointing to decreases in home equity that will hurt consumer spending and
Real GDP growth decelerated to a 2.4 percent annual pace
in the second quarter, from 3.7 percent in Q1 and 5.0 percent in Q4 2009.
Revisions to 2007–2009 data reduced growth by 0.2 percentage point on average.
Although the second-quarter GDP report featured a number of minor surprises,
final demand continues to expand at the sluggish pace of the past year — a mere
The views expressed in this column are solely
those of the author and do not reflect the views of SVB Financial Group,
or SVB Asset Management, or any of its affiliates. This material,
including without limitation the statistical information herein, is
provided for informational purposes only. The material is based in part
upon information from third-party sources that we believe to be
reliable, but which has not been independently verified by us and, as
such, we do not represent that the information is accurate or complete.
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