Cluster Family Office Blog

On Good Friday, 21 March – a public holiday and therefore a day on which the US and European markets were closed – news emerged from Standard & Poor’s: a warning of a possible downgrade of Morgan Stanley’s rating, whilst the Outlook negative rating for Merrill Lynch and a downgrade from stable to negative for the Outlook from Goldman Sachs and Lehman Brothers… Impressive.

They should be ashamed of downgrading the credit ratings of American investment banks when it is a foregone conclusion and public outcry had already been building for days, weeks or even months beforehand. Their downgrades With the benefit of hindsight, their incompetence or bad faith is laid bare, as they failed to warn the market of the actual increase in risk. Let us not forget that this is precisely their job; they are professionals in assessing the risk of companies, particularly investment banks. The reality of the market is so stark that their hopes that, without politically incorrect downgrades, things would return to normal have vanished. They have had no choice but to be exposed, belatedly and to their detriment. But their gamble was clear: they crossed their fingers in the hope that their complicity in the nascent crisis would be resolved within a few months as a false alarm and that things would return to normal. Not only the cost to them «politician’»It would not only have been zero, but they may also have been complicit in what I would call the largest and most serious bribery scandal in modern history. And that alleged bribery would have taken place whether the waters had returned to their normal course or, on the contrary, the harsh reality had exposed them, as has in fact happened.”.

We’re all familiar with the tricks that three-card monte players use to deceive and swindle unsuspecting passers-by and tourists at their makeshift street gambling tables. Every now and then, they let the hook hidden amongst the crowd wins the bet and collects what are purported to be substantial winnings. And that encourages the unsuspecting to place a bet, as it instils confidence in the betting system and the payout process. However, these indecent, after-the-fact re-ratings by S&P do not even rise to the level of a charade designed to lend credibility to its ratings, given that they are the latest in publicly acknowledging the increased risk at American investment banks. They have taken this step out of a sense of shameful obligation, not even out of professional decorum.

«Standard & Poor’s is the world’s leading provider of independent credit ratings, indices, risk assessment, investment research and data. We provide investors with the independent benchmarks they need to feel more confident about their investment and financial decisions.»

Standard & Poor’s.

However, credit rating agencies have not been solely responsible for the current credit crisis, as we noted back in August 2007 in The Ponzi Syndrome and the current crisis, but they are undoubtedly among the main protagonists of this drama. And these crude, underhand manoeuvres, carried out after the event, only serve to expose them in a most despicable light.

But the fact is that, in addition to the false sense of risk control provided by these rating agencies, organisations of the calibre of Société Générale o Credit Suisse corrupt and/or incompetent employees are pulled out of thin air who carry out opaque transactions o misjudge banking assets, respectively. In the case of CS, this «incorrect valuation» has forced them to revise their results for the last quarter and even to amend the figures for the 2007 financial year, which has already been closed, and, of course, the figures for 2008 to date. The financial market reminds me more and more of the Marx Brothers’ cabin: ‘More wood, it’s war…’ and also ‘two hard-boiled eggs’, although we’ll discuss Groucho’s view of the 1929 crash in a future article.

But it’s not all about the ground giving way beneath our feet: The skirmishes between scavengers to feed on the remains of the corpse of Bear Stearns (I’d recommend reading the FAQs for shareholders on their website – they’re well worth a look) are the best indicator of the a light at the end of the tunnel. The tantrum of Joseph Lewis who has been fleeced of 1,200 million $, losing 98 $ per share, and Deutsche Bank’s moves to bid for Bear are the best guarantee of the system’s solvency. Far more so than the credit rating professionals, who deserve to be made an example of.

We’ll have to start looking for other risk indicators, because the traditional credit rating agencies have lost their bearings and their sense of decency. Where’s the ball? They don’t even know, and what’s worse, they don’t care.