Opening Bell

SEC's new rules; fluffing the mortgage numbers; Moody's man out; etc.

Stocks fell the most in four weeks, with the Dow dropping 206 points (1.6 percent) and financial shares tumbling 3.7 percent. The Wall Street Journal blames the financials drop on investors taking profits they’ve made in the run-up of the last few weeks and on another record for oil prices, but Bloomberg’s lead cause is the Securities and Exchange Commission saying it would implement new disclosure rules for banks, something the Financial Times and New York Times both mention.

The SEC chairman said that in the wake of the run on Bear Stearns, he would implement rules requiring financial firms to report their capital and liquidity (cash availability) levels “in terms that the market can readily understand and digest”, Bloomberg says in a separate report. The SEC also said it would require disclosure of where firms’ risks are concentrated and would increase its staff overseeing investment banks by 60 percent to a still-paltry forty.

Bloomberg has the Hide It Under a Bushel Quote of the Day:

“The market is obviously worried about what will be disclosed,” said Janna Sampson, co-chief investment officer at Lisle, Illinois-based Oakbrook Investments LLC, which oversees about $1.4 billion. “From an investor’s perspective, you want to know the firm you are invested in has a strong capital standing. Why these firms wouldn’t disclose this data is a mystery.”

The NYT is a bit skeptical, saying it spoke to four investors after the market closed who hadn’t heard about the SEC plan, but it drily notes that “Wall Street rarely cheers an increase in regulation.”

The Journal in a separate story inside its Money & Investing section, notes that banks already provide some information about their liquidity, but the SEC would require more. It also says the SEC is upping its “stress testing” of the four biggest investment banks to make sure they are able to withstand shocks like the one that felled Bear.

Working less, but more productive

A good showing by productivity, which rose 2.2 percent from the fourth quarter, wasn’t enough to offset the worries. The year-over-year increase of 3.2 percent was the highest in four years. The Journal on A3 says it shows that companies “are adjusting quickly to the economic slowdown by shedding workers and cutting back on the number of hours worked.”

The WSJ says labor costs showed their smallest up-tick since 2004, saying that “underscored workers’ difficulty in securing higher wages during a slowdown.” The number of hours worked plunged 1.8 percent, the most in five years.

That was counteracted by (more) bad housing news—pending home sales fell to a new low in March and were 20 percent lower than a year ago. Bloomberg quotes an online real-estate data provider as saying home “values” in the first quarter fell to the lowest level in three years.

And the Associated Press in its economic roundup emphasizes news that consumer borrowing soared a much-higher-than-expected 7.2 percent in March, up from 3.1 percent in February, “in further evidence of the squeeze on consumers.”

Wrong numbers

The Journal stuffs on C6 a very interesting story reporting that Wachovia and Washington Mutual may be low-balling their mortgage losses. The paper says the two banks are using federal data that is much more optimistic than the Case-Shiller Home Price Indices, which the other banks use.

As Seattle-based WaMu posted a $1.14 billion net loss for the first quarter, Chief Executive Kerry Killinger used Case-Shiller data to show investors the magnitude of declines in housing prices. But when WaMu assessed the current value of properties backing its mortgages, WaMu used Ofheo data, the presentation’s footnotes suggest…

Some economists and researchers contend that Ofheo home-price data are thin in hard-hit markets like Florida and California, where Wachovia and WaMu each have about half of their home loans.

More, please.

Moody’s blues

Moody’s president Brian Clarkson became the “highest-profile” person to fall in the credit-ratings debacle, and the Journal implies on C1 that he was forced out.

The Journal calls Clarkson “the driving force behind Moody’s Investors Service’s push into lucrative but riskier businesses” like mortgage-backed securities and collateralized-debt obligations and notes that he’s being replaced by an exec from one of Moody’s stodgier, old-line businesses.

In the early 2000s, Mr. Clarkson overhauled the residential-mortgage team and ushered in a new methodology that led to higher ratings for some mortgage bonds and more market share for Moody’s in the area. While the bonds performed well, in later years, people who worked under Mr. Clarkson assigned ratings to complex mortgage bonds that didn’t take into account the likelihood of a national housing price decline and the widespread nature of fraudulent loans that backed some subprime mortgage bonds.

“We were preparing for a rainstorm and it was a tsunami,” Mr. Clarkson said in an interview in late 2007.

Bloomberg reports that UBS analysts said last month that Moody’s was the least accurate of the credit-rating firms assessing subprime-mortgage securities. It’s an interesting bit of information that bears further scrutiny:

Moody’s was the least accurate assessor of risk for subprime-mortgage securities, UBS AG analysts said in a note to clients last month. At the time of the report, Moody’s assigned ratings of Caa2 or lower to 12 percent of the 292 bonds underlying benchmark Markit ABX indexes and expected to default by UBS.

Both Fitch and S&P tagged 57 percent of the bonds with equivalent rankings, according to the New York-based UBS analysts. A rating of Caa2 from Moody’s is eight levels below investment grade.

Separately, the NYT on its business-section front looks at how a “wave of lawsuits” by investors over losses in the mortgage markets face a hard time in the courts.

Hope now?

The WSJ and NYT look at the status of housing-bailout legislation winding through Congress after President Bush threatened to veto it Tuesday night and come to totally opposite conclusions.

The Journal’s A3 headline says “Hope Arises for Housing-Bill Deal” while the C2 Times story isn’t very hopeful at all, focusing on the feuding yesterday between the parties in Congress. The Washington Post and the Los Angeles Times say Dems were surprised by Bush’s veto threat.

The bill would allow the Federal Housing Administration to back $300 billion in mortgages that lenders have written down partially to help struggling borrowers stay in their homes. The White House says it doesn’t want to reward lenders and speculators for their bad investments, which the Journal says could cost $1.7 billion, which we’d assume is far less than the bailout of Bear Stearns will cost taxpayers.

The Journal leads its story with a scoop that the top White House economic adviser told it that the parties’ differences aren’t “insurmountable”, suggesting a willingness to compromise that the two Times’s and the Post don’t report. Therein lies the hopefulness that the other papers don’t see.

Big Oil spills cash, too

The NYT on C1 and the Journal on B1 and the report that the big oil companies settled a lawsuit brought by 153 public water utilities in seventeen states over pollution by the chemical gas-additive MTBE. The group will pay $423 million and foot the bill for most of the cleanup over the next thirty years, something the Journal says could cost $30 billion.

Leaky gas tanks (WSJ) and rainfall (Bloomberg) dumped the cancer-causing chemical into water tables over the last three decades it’s been used to help cut smog. The Times says that the Clean Air Act in 1990 “mandated the use of an oxygenate” to cut smog and other pollution” and the WSJ says the oil companies tried to defend themselves by saying they were required to use an oxygenate, though neither paper goes into any detail that would tell us whether that meant Congress forced them to use MTBE.

Six companies, including Exxon Mobil, didn’t sign on to the agreement.

First-ever comparison of New Zealand to Saudi Arabia

The Journal takes an A1 look at New Zealand, which it calls the “Saudi Arabia of milk” and says that problems expanding production there are similar to those that could make ameliorating the food crisis tougher. The WSJ makes the capitalist case, of all things, for industrial farming.

In commodities like oil or metals, when prices rise on a sustained basis, large companies with deep pockets invest to develop new supply. Food commodities have also seen price jumps, on everything from rice to palm oil. But their production, by and large, remains dominated by millions of small farms.

Policy makers and social critics generally like it that way: Small farms keep rural communities alive and, especially in developing countries, provide needed jobs. But there are problems with small farms, when it comes to reacting quickly to a rise in food needs. They tend to be less productive than larger ones. And they often lack capital for the heavy investment in new productive capacity that many economists say now is needed.

Investors have capital. But, again because of the small-farm structure, those who want to put some of their money into enhancing food output find limited avenues to do so. The result is a world food-production system operating at close to capacity, with grain stockpiles, for example, at their lowest in decades.

But the Journal doesn’t get into all those pesky problems with big farms, like increased pollution, health risks, and other so-called externalities that add big costs.

Sox goes private?

The Boston Globe reports that two lawsuits by former Fidelity employees could end up extending the reach of the 2002 Sarbanes-Oxley Act to private companies.

Congress gave whistle-blowers at public companies strong protections against retaliations when it passed the Sarbanes-Oxley Act in 2002 after the collapse of Enron Corp. and WorldCom. But the law does not specifically extend to privately held firms such as Fidelity that invest in public companies.

Now, groups such as the Consumer Federation of America argue that to protect millions of retail investors, the whistle-blower rules should also apply to companies that run mutual funds sold to the public. The rules require companies to set up ways for employees to report claims anonymously and set penalties including fines and prison terms for retaliation.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.