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PhD Candidate in Economics at George Mason University. Received a Master's in Public Administration from George Washington University. Majored in economics and finance at Washington University in St. Louis. Previously worked as an Options Market Maker/Trader.
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Bubbles and Busts
  • Rating Agencies Now Detract Value 0 comments
    Jun 22, 2012 1:16 PM | about stocks: JPM, MS
    Now that the well telegraphed downgrades are over, bank CDS are tightening this morning (MS and JPM CDS shown below).

    At this point Moody's might as well downgrade major banks to below investment grade level and be done with it. Over time rating agencies will become less relevant for large bank credits as all major banks involved in capital markets will converge to roughly the same rating.

    Read it at Sober Look
    Rating agencies will become less relevant for bank risk
    By Walter Kurtz

    Where I wonder about the ongoing impact of rating agencies is with investment funds (primarily mutual and pension). I think many of these funds are only allowed to hold debt with certain ratings, so at some level they may be forced to sell or no longer hold bank debt. This would remove a significant bid from debt of those banks (or other companies for that matter). Anyone have a sense of how large that issue might or might not be?

    Separately, the reaction in markets today (improving CDS and debt) may disappoint banks who were expecting a boost to profits from DVA.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: JPM, MS
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