Down With Rating Agencies! Plus, Lehman for Laymen

Lehman (LEH) shares have been hammered or just killed in the past few days. And our beloved rating services are once again proving to be champions of creating chaos and market turmoil. But they are the byproduct of investing firms' laid back attitude and hands-off approach.

Probably, well in the past, rating agencies did their jobs and made a reputation for themselves. Nowadays it's easy: First work with underwriters and dealers to give high ratings to whichever bond or security they issue. Then one fine day, the whole world finds out the folly of that. So to salvage some reputation, you start working on the vagaries of the stock market and base your rating decisions on the stock price. Give the reasons that even a taxi driver on Wall Street knows. Because if everyone is saying it, then nobody can single you out for saying it. And voila, we have a rating agency.

I am simply not convinced by the due diligence rating agencies are doing these days. Their reasons for ratings are just nonsense and I think we as investors would be better off not depending on these institutions. Investment firms should hire bright people to do this job instead of paying these agencies. I think that would be more cost-effective.

Coming back to investments, I think Lehman is actually worth much more than the current share price. And if nothing else, that  the minimum price it will fetch is $12/share. That's about a 300% gain in the next few months. And if the company can weather the storm then it will definitely be valued higher, but that scenario looks very unlikely given the total desperation of its stockholders. I think CEO Fuld was on the right track by trying to spin-off non-performing assets. It seems simple but it takes the mud out of the water. In fact, with this as one of the possible strategies, I wonder why other PEs and Funds are not snapping up Lehman at a take-and-run price.

Perhaps money has become dearer on Wall Street. And rightly so. It has been too long that boutiques and hedge funds have been playing with other people's money, and of late they were just driven by one passion: greed. Responsibility towards their investors is killed and buried in the investment agreement. As a result we are having this bonfire of money without any smoke to be seen. But investors are feeling the heat.

In my last article, I warned investors about the energy markets, especially oil and USO. And I am sure saner investors bought the advice and avoided the pain in this unwinding of the energy market. To reiterate the point of that article, oil is headed towards $70-$80/bbl. As an update, I want to add that OPEC can't stem the slide.

And lastly, if Goldman Sachs (GS) was doing in energy markets what it was telling other people to do (and not actually taking the reverse position, as it did in the mortgage based securities) then it will be a horrible quarter for Goldman. Its earnings are on tap for next week so I would suggest to stay away from its stock.

And as usual, happy investing.

Disclosure: No positions in stocks mentioned.

Comments

[Ishortyou:]

rating base on stock price doesnt show due diligence, don't you think? it shows laziness.

2008 Sep 13 01:41 PM

[prescient11:]

Ratings agencies should be sued out of existence, how has that not happened?

2008 Sep 13 01:45 PM

[Ishortyou:]

who regulates the regulators? little is known about it and the guidelines to rate is obscure, so far the regulate based on perception and subjetivity rather than objective facts, so there is a lot of remediation to do in those rating agencies.

2008 Sep 13 03:16 PM

[Tom Armistead:]

Several of the rating agencies have separate departments that will give you a rating based on the CDS spread. CDS spreads are frequently the first sign of trouble.

The problem is, CDS spreads can be manipulated, if someone buys enough of them they will go up, creating the appearance of trouble.

I think the rating agencies are secretly relying on the CDS spreads, everything else they say is obfuscation.

2008 Sep 13 07:47 PM

[schminkie:]

if they sell leh off in pieces what becomes of my shares of leh common stock and my leh bond?? if parts are worth more than the whole which part if any would be attached to shares.

leh is about 79% institutionally owned. think those guys will be pissed if they lose 100%??

2008 Sep 14 03:35 PM

[schminkie:]

any relief from sipc in this mess. i guess short merrill is the next move. does gold go up in a depression? i'd think so.

2008 Sep 14 03:37 PM