McGraw-Hill, Moody’s Risks Rise After S&P Cut

Standard & Poor’s increased the risk of investing in the bond-rating service’s owner and its biggest
competitor by taking away the U.S.’s AAA designation, according to Peter Appert, a Piper Jaffray & Co. analyst.

The chart above compares this year’s performance of McGraw-Hill Cos., S&P’s parent company, and Moody’s Corp. with the S&P 500 Index. Both are higher for the year even after they sustained bigger losses yesterday than the index, which tumbled 6.7 percent in its sharpest drop since December 2008.

McGraw-Hill and Moody’s face two threats because S&P cut the U.S. government to AA+, Appert wrote yesterday in a report.

The first is greater regulatory scrutiny of the rating industry, which has been criticized for flawed assessments of mortgage- backed securities during the past decade’s housing bubble.
“The perception in Washington that the rating agencies have too much power and must be ‘reined in’ will undoubtedly by reinforced by S&P’s decision,” he wrote.

The second risk is that bond sales may become more volatile as the lower rating helps slow economic growth, the report said. Assuming that occurs, revenue and earnings at McGraw-Hill and Moody’s would become less predictable as well.

These issues weren’t big enough to prompt Appert to reduce his ratings on McGraw-Hill and Moody’s. He has the equivalent of a “buy” recommendation on both stocks, which he sees as cheap by comparison with projected earnings. Yesterday’s closing prices were about 11.5 times his profit estimates for next year.

Goldman Sachs rating downgraded to negative

Investment bank Goldman Sachs’ has had its rating downgraded from stable to negative by Fitch Ratings.

Recent legal issues faced by the financial services provider and changes to the regulatory landscape are the main reasons for the move, the agency explained.

Goldman Sachs’ A+ and F+ long-term default ratings were reaffirmed due to its strong liquidity, balance sheet and global presence within capital markets.

However, Fitch stated that the recent filing by the Securities and Exchange Commission, which accused the bank of deliberately misleading investors over an investment product related to subprime mortgages, had threatened the institution’s standing.

In a statement, quoted by Business Week, Fitch said: “The rating outlook revision to negative incorporates recent legal developments and ongoing regulatory challenges that could adversely impact Goldman’s reputation and revenue generating capacity.”

“For financial services companies, particularly those dependent on the capital markets, reputation is critically important.”

The organisation also listed changes to regulations which could threaten the bank’s rating.

Increased capital requirements, restrictions on proprietary trading and the centralised clearing of derivatives were all cited as potential future problems for Goldman Sachs.

E-mails show high ratings were issued often on subprime mortgages

E-mails from credit rating agencies that were released to the government show analysts gave favorable ratings to subprime mortgages even though they were aware of the risks. "Let's hope we are all wealthy and retired by the time this house of cards falters," a Standard & Poor's analyst wrote in a December 2006 e-mail.

"This is frightening. It wreaks of greed, unregulated brokers, and 'not so prudent' lenders," said one S&P internal e-mail dated September 2006. And another from that same month: "...this is like another banking crisis potentially looming!!"

http://money.cnn.com/2010/04/23/news/economy/credit_rating_agencies_hearing/index.htm?postversion=2010042411

Rating agencies tailored reports to please clients, Senate inquiry finds

During the year leading up to the financial crisis, credit rating agencies compromised the integrity of their reports to win favor with clients and collect huge fees, according to documents released by the Senate Permanent Subcommittee on Investigations. Rating agencies waited too long to downgrade deteriorating investments, relied on obsolete mathematical models and gave in to pressure from their clients, the panel found.

more at http://www.bloomberg.com/apps/news?pid=20601208&sid=aWME.5mf2cCw

Credit rating agencies need massive overhaul

Arturo Cifuentes, a principal with New York financial advisory firm Atacama Partners, writes that although the reputation of credit rating agencies is in tatters, the firms continue to give opinions and influence markets. Cifuentes argues that substantial changes to the agencies are needed, but proposed reforms "are likely to be ineffective as they are based on misunderstandings."

more at

http://www.ft.com/cms/s/0/d948647e-7abe-11de-8c34-00144feabdc0.html