The Wall Street Journal on its Money & Investing cover looks at another shady practice of the credit-ratings firms—switching out analysts at the request of the companies whose debt they rate. Basically, important corporations who got too many questions raised about their debt issues, or thought they were rated too low, leaned on Moody’s, Standard & Poor’s, and the like to switch them to more favorable analysts.
The little-known practice could spur even more questions about whether bond issuers have too much influence over how their bonds are rated before being sold to investors. Critics claim that the longstanding practice of issuers paying for ratings gives them leverage that can undermine the independence of credit-rating firms.
Here’s a managing director of Moody’s, which is already in trouble after the Financial Times revealed this week new shenanigans with its debt ratings:
While switching analysts appears to be infrequent, there are situations “where an analyst doesn’t get the message that you’re expected to be responsive,” Bill May, a Moody’s managing director, said in an interview. The reasons can range from failing to return a banker’s phone call about a time-sensitive issue to missing deadlines.
That’s the At-Least-He-Admits-It Quote of the Day.
This is a fatally flawed business model, one whose rules need to be totally rewritten. Good work by the Journal and the FT this week in reporting on the industry. We need more stories like this.
Home sale price still heading south
A government measure of housing prices dropped to the lowest on record in the first quarter. The Office of Federal Housing Enterprise Oversight said home sale prices plummeted a seasonally adjusted 1.7 percent from the previous quarter and 3.1 percent from a year earlier.
The measure is conservative because it only looks at mortgages backed by the quasi-governmental Fannie Mae and Freddie Mac—meaning it doesn’t measure most of the subprime stuff stinking up the markets. The WSJ on A2:
Other nationwide indexes show steeper declines. The S&P/Case-Shiller index, which includes a broader variety of mortgages and which showed a nationwide drop of 8.9% in the fourth quarter from a year earlier, is set to release first-quarter figures next week.
“The OFHEO report shows the weakness in the housing market, but does not, in our view, fully portray the dire state of the market,” Lehman Brothers economist Michelle Meyer said in a note to clients.
Bloomberg writes that mortgage originations will fall 18 percent this year, according to a trade group. The Journal on A5 reports that Fannie and Freddie say they’re cutting interest rates on jumbo mortgages—those over $417,000 a year—months after Congress temporarily allowed them to buy the notes up to $730,000.
Feds bust California housing scam
California and the FBI said they busted a bizarre foreclosure scam that affected hundreds of homeowners, many of whom didn’t speak English, the Los Angeles Times reports.
At the heart of the alleged scheme were land grant transfers, used hundreds of years ago when the United States was still acquiring land from other countries. They are no longer recognized by any court or county assessor…
In San Diego, for example, the company attached a copy of a survey from the Spanish Land Grant of 1872 and told victims that the deed reinstated the land grant and would protect homes from foreclosure, the attorney general’s office said.
Gross likes Fannie and Freddie
Pimco’s Bill Gross, one of the smartest people in finance, is buying up mortgage bonds, the FT reports. But not the subprime “trash.” Gross says the government’s implicit backing of Fannie and Freddie, which it has stepped up in recent months, make them good investments. Mortgage bonds now make up 60 percent of the holdings in his fund, the world’s biggest. That’s up from 20 percent a year ago.
Is Lehman fudging its earnings to avoid Bear-like panic?
The WSJ’s Heard on the Street column focuses on a hedge fund manager who says Lehman Brothers is manipulating its earnings to stave off the panic that took down Bear Stearns.
Lehman registered a $695 million gain on “hard-to-value equities” in the first quarter, ten times its average quarterly gain in that area over the previous year. That led to a half-a-billion dollar profit, “calming investors,” the WSJ says.
While the hedge-fund manager is shorting the stock, which means he bets it will go down, there’s lots of wiggle room in the accounting for these banks to manipulate, as Bloomberg has reported. We have a feeling this (not necessarily for Lehman, but for everyone) is something to watch.
Amtrak in line for a boost
A House committee advanced a bill that would increase funding for Amtrak by more than half to about $2 billion a year, the WSJ says on A2, noting that it’s backed by both parties’ leaders. The legislation would create matching funds “similar to ones used for highway and transit projects” for states to spur rail service and would try to spur high-speed rail, including a bid to make New York to Washington a two-hour trip.
The times appear right for rail travel, with airlines increasingly crowded and more miserable than usual and gas prices seemingly rising by the minute and the carmakers retrenching.
Ford, just a month after an optimistic report, now says it won’t be profitable until after 2009, the Journal and FT report on A1 and The New York Times on C1. That’s because the pace of decline in truck sales increased. Pickups have fallen from 14 percent of sales last year to 9 percent now, the NYT says. Ford will cut its overall production by a fifth next quarter, because of sharp cuts in SUV and truck manufacturing.
The FT says the “US car market in 2008 is headed for its worst year since 1991.” Hybrids are doing well, though. The LAT reports sales were up 58 percent last month from a year ago.
Domestic oil drillers want to expand
The Journal on A5 writes that the oil industry is increasing its push to expand drilling and appears to have the momentum.
A century and a half after oil production began, there is ample evidence that a lot of oil —and natural gas—remains to be found in the U.S. and its territorial waters. Some of those areas are wide open to oil companies, including most of the Gulf of Mexico where deep-water floating rigs now routinely drill wells hundreds of miles from shore. Even in the gulf, areas are off limits, including most of the waters off the Florida coast. The entire East and West Coasts are off limits for new drilling.
Environmentalists, of course, don’t want new drilling, but the industry and supporters say the footprint of oil production is about one-tenth what it was three decades ago. But the Journal writes that oil companies already have millions of acres of leases on federal lands where they aren’t yet drilling.
So much for those stimulus checks
The WSJ on C1 follows Bloomberg in reporting that part of the recent surge in oil prices is due to speculators covering their bad bets that prices would go down. Oil is up 15 percent in May, increasing margin calls and creating a “short squeeze.”
On the same page, the Journal’s Ahead of the Tape column says the oil surge is a “terribly timed shock to the system” that threatens corporate profits after two months of relative calm and a rally in the markets. It quotes an analyst saying the increased costs will “pretty much neutralize” the government’s stimulus-check handout.
Reuters says the effects of soaring oil prices are just beginning to be felt, as air conditioning bills this summer and heating bills in the winter will rise. It then for some reason wanders off into a poor story that meanders through the economy’s not-so-greatest hits.
The Boston Globe looks at natural gas as an alternative to gasoline, noting:
Europeans can buy cars that run on natural gas from at least eight automakers, but despite large reserves of the relatively inexpensive fuel in the United States, the federal government and states, including Massachusetts, are backing pricier biofuels as a way to lessen dependence on imported oil.
And the FT reports on page one that oil prices are causing Asian countries to pull back their energy subsidies to keep from going broke.
Vallejo’s dark angel
The San Francisco Chronicle scoops that the city of Vallejo, California, is talking to a financier about bailing it out. Vallejo is going to declare bankruptcy today in large part due to its dismal housing market.
The problem? The guy the city’s talking to has been indicted twice for fraud related to municipal finance, though he’s never been convicted and was “linked” to another bond scandal and fined for improper campaign contributions.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 firstname.lastname@example.org. Follow him on Twitter at @ryanchittum.