Swans Commentary » swans.com February 27, 2012  



Blips #123
 From The Martian Desk


by Gilles d'Aymery





"Obviously crime pays, or there'd be no crime."

—G. Gordon Liddy


(Swans - February 27, 2012)   BLOODY RATING AGENCIES: Just as the finance ministers of the eurozone approved a second Greek bailout worth €130 billion, the Greek parliament approved another series of austerity measures (a 22% cut in the minimum wage, drastic cuts in education, health, pensions, and even defense spending), and the government negotiated with private holders of Greek bonds (banks, pension funds, hedge funds, etc.) worth up to €107 billion, the rating agency Fitch downgraded Greece's rating from CCC to C, one notch above junk status, under the estimation that Greece was going to default on the sovereign debt and bankruptcy was "highly likely." Days earlier, Moody's, the largest of the three rating agencies (with Standard & Poor's and Fitch), downgraded the ratings of Italy, Malta, Portugal, Slovakia, Slovenia, and Spain, and put a negative outlook on Austria, Britain, and France, warning that they could soon lose their AAA ratings because of "the continuing uncertainty over financing conditions over the next few quarters and its corresponding impact on creditworthiness." I am aware that I keep revisiting this topic time and again. There are two reasons to do so. First, the actions taken by the rating agencies have been highly unwarranted, destabilizing, and destructive to the entire eurozone while based on political considerations that instead of reflecting the financial markets, influence them. Second, the implosion of the eurozone would have devastating consequences for the entire world, from China to the USA and beyond. We are all -- you and your children -- affected by these ignominious developments.

THE FRENCH DAILY Le Monde published an article on February 3, 2012, Face à leur échec, dégradons les agences de notation ! that could be translated as "Given their failure, downgrade the rating agencies!". It was penned by Robert G. Wilmers, the chairman and CEO of the US commercial bank M&T, which is based in Buffalo, NY, and is one the largest commercial banks in the U.S. with some 16,000 employees and over 800 branches located in the Northeast and Middle Atlantic. The 77-year-old Wilmers is known for his banking acumen -- a highly regarded executive. He is also considered a blunt, straight-talking fellow. I was unable to find the English version of the text, which in French, can be found all over the Web (still, you can read an approximate translation courtesy of Google). Most of the content of the article originated in a brilliant speech he delivered on September 19, 2011, at the American Banker Symposium in Washington D.C., "Too Big to Overlook" -- a speech that should be read by anyone interested in the intricacies of a financial world that pretty much presides over our destinies. (And once you are at it, take a moment to read his Op-Ed, "Small Banks, Big Banks, Giant Differences," that was published on Bloomberg, June 12, 2011 -- short and very clear.)

IN THE FRENCH ARTICLE, Wilmers points out that Moody's and S&P (he does not even bother to include Fitch), which he calls an oligopoly, have downgraded the sovereign debts within the eurozone more than 75 times from 2009 to date (actually, with the latest Moody's salvo, it is now over 80 times). He relates that a study by the European Central Banks shows a direct correlation between the yields (interest rates) on bonds and the repeated downgrades by the oligopoly. He shows the irrational and the politically-motivated decision to downgrade the US rating by S&P. He relates the abject failure of the ratings of this oligopoly over time starting in 1929 all the way to these days. Not only did they miss the Asian financial crisis in the 1990s and the Mexican crisis, they also failed with Enron, Worldcom, Penn Central, Lehman Brothers, Washington Mutual, on and on, which they deemed safe investments, while they went under within months of the assessments. He explains that this oligopoly rated various securities worth some 10 trillion dollars between 1985 and 2011 as worthwhile investments, but he says, quoting from his Washington speech:

In a sample of 2,679 residential mortgage-backed issues originated between 2004 and 2007 with a current balance of over $100 million and totaling $564 billion in face value, 2,670 or 99 percent were rated triple-A at origination. Today, 90 percent of these bonds are rated non-investment grade (below triple-B minus) by both count and dollar balances.

TO HIM, the "magnitude" of these repeated miscalculations is "staggering." And here is a little bombshell from his speech (also included in the French article):

It is important to note that, despite this poor record, the rating agency oligopoly which government has helped to install amounts to a near gold mine for the so-called nationally-recognized firms. For 2008 through 2010, the pretax profit margin from the ratings business at both Moody's and Standard and Poor's exceeded 45 percent. In 2006, it exceeded 60 percent at Moody's. From 2000 to 2007, Moody's profits quadrupled and, for five years in a row, the firm had the highest profit margin of any company in the S&P 500.

NOW, SINCE MONEY reigns supreme in our culture, the king of the block, the mother of all values, we can only applaud the financial results of this oligopoly (irony intended). But when these profits depend on consistently botched jobs, and wrong assessments and ratings over the years, it begs the question asked by Mario Draghi, the head of the European Central Bank: "...to ask what extent these notes are important for the markets, for the investors?" As Robert Wilmers said in his speech:

We cannot allow a group of organizations which have gotten so many important things so wrong for so long -- including assessments of municipal debt, the likelihood of major corporate bankruptcies, and, of course, the value of subprime mortgage-backed securities -- to continue, unchallenged. Nor should they now be allowed to become political pundits.

POLITICAL PUNDITS? Take Italy: the new prime minister who replaced Il Cavaliere, Mario Monti, a neoliberal technocrat par excellence, just celebrated his first 100 days in office. In 100 days Il Professore, as Monti is known, launched a €20 billion austerity program, a pension reform, an economic liberalization including deregulation and worker flexibility (meaning businesses will be able to lay off workers), a new tax code that includes penalties for tax evaders and the taxation of real estate owned by the Vatican (except churches), lower unemployment benefits, and more, as the saying goes. One would think this should have been music to Moody's ears; but, no, Moody's downgraded the Italian sovereign debt one notch.

THIS WOULD HAVE BEEN the object of laughter in good company during better times. Here is a capitalist referee (Moody's) brandishing a yellow card to the neoliberal player (Monti). A good joke, no? But our very Peter Byrne does not find the joke very funny. He can see, being a retiree living in Lecce, that the squeeze is already on, and everybody is going to suffer, if not already suffering. Remember, as I wrote in my Blips #118, "Italy has no problem servicing her debt, which has remained constant for years; has private savings four times as much as the public debt, which is owned 57% by Italians." Yet, the rating agencies keep piling on the well being of the country.

LET'S GO BACK to the correlation between negative ratings and higher interest rates and the death spiral: It all began with the weakest link of the eurozone, Greece. No need to go through the play again. I've covered it in my Blips #118, Blips #120, Blips #121, and Blips #122. Rating agencies lower their ratings, yields on sovereign bonds go up, the country is squeezed, austerity measures are implemented, and recession ensues (fifth year for Greece). The circle begins again. After Greece, Portugal was targeted, and Spain, and Ireland, and Italy, and Belgium, and France, etc. -- who's next?

ASK YOURSELF why Moody's puts a negative outlook on France when the country's public debt reaches about 86 percent of GDP, but keeps a stable outlook on the U.S. though the federal public debt will reach over 107 percent of GDP this year. Factor in the debts of American states and private households (the French people, like the Italians, have very little debt), and the US financial situation is much, much worse. Actually, the managing director of the Institute of International Finance, Charles Dallara, just told a conference in Mexico City, where the finance ministers and central bankers of the G20 are meeting, that this situation "is a serious accident waiting to happen. And not just a serious US accident, but a serious global accident" -- a threat to the whole world (source: AFP). When French public debt is receding, the US public debt keeps increasing. Yet, from Moody's point of view France deserves a negative outlook but views the U.S. as stable. When S&P downgraded its US rating to AA+ it did not follow up by downgrading American states and public companies. But when it downgraded France's rating it followed up by downgrading French regions and public companies (see my past Blips).

DOUBLE STANDARD, or as the French say, deux poids, deux mesures -- that is, having different measures and "sets of principles for similar situations," given the US situation is indeed worse than that of the eurozone. So, what's going on here? Rating agencies, whose assessments have been consistently wrong over the years, have deliberately targeted the countries pertaining to the eurozone, relentlessly. Why? What is the political motivation? What is the economic motivation? Read my several former Blips for my sense about these questions. To me, there is no doubt that a subterranean conflict is occurring under our noses. I think that European policy makers are paying close attention and I can only hope that they will defend the eurozone (they do) and will find a way to counter the pursuing attacks by these rating agencies, which are not just serving their own profitable interests but working on behalf of a much larger scheme. Enough for today.


HACKING AGGRAVATION: Last Saturday Jan and I woke up to find out that her Yahoo e-mail account had been hacked -- her password and contact list (address book) stolen. Earlier that morning, around 2:00 am PST, the hacker(s) sent a series of e-mails -- about 14 -- to one different member of her contact list with a copy to randomly, computer-selected 8-to-10 other members of her list (friends, family, business associates, and more). Every e-mail displayed a different Web link that apparently contained infected code. Our initial reaction was sheer astonishment. We were stunned, in shock, not really knowing how to proceed. How could have it happened? At the time the malicious spam e-mails had been sent, Jan's laptop was turned off, shut down. Had the hacker(s) taken control of the machine earlier and stolen the password and the contact list? However, Jan has never saved her password on the hard drive, so it could not have been stolen there... I kept walking back and forth thinking, trying to put 2 and 2 together, without much success. Meantime, I received various e-mails alerting me to the happenstance, in particular one from a Swans contributor who is a computer engineer. Fortunately the subject line of each e-mail contained some gibberish like "Tre9green" or "bngrafton." Each e-mail began with a greeting, "How do you do?", followed by a Web link and ending with some kind of weird citation. For example, one read: "The train had arrived, leaving its passenger coach and baggage car standing on the main track at the north end of the station platform, the pin between the baggage and the first box car having been pulled out," signed "(c) Zhonte wahzoo5." So we hoped that recipients would be suspicious, not click on the link, and delete the mail. To date, most have done just that, but we do not know whether one or more recipients have suffered any damage.

AFTER A HALF HOUR of reflection and Web research on "e-mail account hacking," we finally began to react. I asked Jan to immediately change her password, then to send an alert e-mail to all the members of her contact list, while I began corresponding with our friendly computer engineer. He strongly recommended that we check the machine from A to Z for viruses, spyware, and malware. So I downloaded an anti-virus software, installed it, and ran it. No virus was detected, but that particular software did not check for malware. My friend recommended another program, which I dutifully downloaded, installed, and ran. No malware was found. Then, I took care of the Web browser (Firefox), made sure that all cookies were deleted at the end of each session, installed a couple of adds-on (BetterPrivacy and NoScript) that help block malicious stuff that can be embedded in Web pages and delete super cookies. Finally, we decided on a new behavior. Jan will log into her e-mail account, check e-mails, and immediately log out and close the browser tab. And so here we are. We spent most of the day working on this very aggravating circumstance, and we simply do not know whether our efforts will bear fruits.

PERSONALLY, I think that her machine was not compromised and that the bad deed -- the robbery of her password and contact list -- must have happened on the Yahoo server that keeps a database of all users' passwords and address books. The future will tell. If such a dreadful episode is repeated, I suppose we will have to cancel the account and create a new one. A more drastic action will be to reformat the hard drive and reinstall from scratch, or since the machine is some 8 years old, bite the bullet and get a new one. Anyway, this episode has left us very frustrated and, dare I say, angry. Jan felt that her identity had been stolen by some bonehead crook for his benefit while potentially creating damage to her e-mail correspondents. It's like someone stealing one's Social Security card or credit card numbers, using them for their ill-gotten benefits, and forcing you to spend -- literally, waste -- considerable time to rectify the situation and find a remedy. What a shitty culture, indeed.


LET ME END WITH A TAD OF HUMOR, though I am not certain it is that funny: Jan went to a nursery last Thursday to buy a cubic-foot-bag of steer manure. At the checkout counter, an 18-or-so-year-old young man scanned the bag: $1.37. "It's cheap," she said, surprised, "but it's amazing we even have to pay for this shit." The young clerk paused, reflectively, turning his face up toward the ceiling of the store, his eyes showing perplexity, and asked, "A steer is...?", obviously wracking his brain to come up with the type of animal. "It's a cow. It's a bag of cow shit," Jan replied. No Child Left Behind? No shit, it's not working...

 . . . . .

C'est la vie...

And so it goes...


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Gilles d'Aymery on Swans -- with bio. He is Swans publisher and co-editor.   (back)


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Published February 27, 2012