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One issue for the credit ratings companies is that they pretty much have to be profit driven. Standard & Poor's is part of McGraw Hill, which trades on the NYSE, as does Moody's. They have shareholders, who expect profits. Few would begrudge the right of a company to do whatever it takes (as long as it's legal) to expand their market share.

In the credit rating industry, S&P has returned to what has long worked: offer a service that customers find valuable. Toward that goal, "S.& P. has been giving higher grades than its big rivals to certain mortgage-backed securities just as Wall Street is eagerly trying to revive the market for these investments," according to an analysis conducted by Commercial Mortgage Alert for the New York Times. The latter notes that "S.& P.'s chase for business is notable because it is fighting a government lawsuit accusing it of similar action before the financial crisis.

"As the company battles those accusations, industry participants say it has once again been moving to capture business by offering Wall Street underwriters higher ratings than other agencies will offer. And it has apparently worked. Banks have shown a new willingness to hire S.& P. to rate their bonds, tripling its market share in the first half of 2013. Its biggest rivals have been much less likely to give higher ratings."

S&P told the paper that the study was flawed without elaborating. It also said that its ratings are not influenced by any conflicts of interests.

That may be true, but the perception is hard to counter. The reality is that the heart of the system has not changed. Credit ratings companies are still paid by banks to rate debt products. (The action these days is in CMBSs.) They have every incentive to give the banks what they want and at the same time win market share.

That said, in the immediate aftermath of the financial crisis, there was some real change. The company brought in new execs, who made some big reforms---initially. "The two quickly pushed inside the company for tougher standards for the bonds that were at the root of the financial crisis. This alienated many banks, and the agency was rarely chosen to rate the mortgage-backed bonds. The company rated only 22 percent of the bonds issued in 2011, down from 80 percent in 2006."

At a for-profit firm, that's not going to work, hence the recent push to expand market share via higher ratings.

One issue here is what sort of opposition will emerge in light of the study's revelations. This time around, the recovery is so fragile that it's doubtful a lot of opposition will crop up.

All in all, it's sad that a new credit rating system, one that ensures objective reviews, couldn't be created. As of now, we just have to somehow make peace with the conflicts. Investors should be wary of all ratings. They just might have to find a way to do their own analysis.

Read more about: Credit Rating Companies
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Today's Top News

1. Blackstone eyes real estate lending

By Jim Kim

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2. Bank of America still in enforcement cross hairs

There were a few alternative investment companies that hit the jackpot by successfully betting against the residential real estate market. Are there any that will win just as big by betting on the recovery?

Of course, plenty of private equity operations have sprung up to invest in distressed residential real estate in some of the hardest hit markets, much to the chagrin of local buyers. Blackstone has been a leader in that arena. It's now doubling down, so to speak, on its real estate bet by starting up a lending operation.

It has big plans to finance other landlords. According to Bloomberg, it has "set up B2R Finance LP to offer loans starting at $10 million, according to four people who reviewed the terms. B2R is reaching out to landlords with portfolios of properties seeking to grow in the burgeoning industry for single-family homes to rent, said the people, who asked not to be identified because the discussions are private…. By increasing its stake in the rebound through lending, New York-based Blackstone could benefit from smaller landlords already investing in what Goldman Sachs Group Inc. estimates to be a $2.8 trillion market."

The thinking here is that the rebound is strong enough to sustain a wide variety of players in the market. The firm thus seems willing to lend to would-be competitors, which seems smart if the market is really poised for a long-term boom.

This represents another example of an alternative investment firms willing to provide lending in competition with traditional banks. Indeed, regional banks may well be the ultimate losers, if these loans work out.

For more:
- here's the article

Read more about: Blackstone Group
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By Jim Kim

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3. Another Richard Lee takes center stage in SAC drama

By appearances, it would appear that the prosecutorial effort to hold banks accountable for the many exploded CDOs continues. There are plenty of suits and investigations going on at several levels, as made clear in Bank of America's most recent 10q.

"The Corporation has received a number of subpoenas and other requests for information from regulators and governmental authorities regarding MBS and other mortgage-related matters, including inquiries, investigations and potential proceedings related to a number of transactions involving the Corporation's underwriting and issuance of MBS and its participation in certain CDO offerings. These inquiries and investigations include, among others, an investigation by the SEC related to Merrill Lynch's risk control, valuation, structuring, marketing and purchase of CDOs, and investigations by the DOJ, the SEC and the New York State Attorney General (the NYAG) concerning the purchase, securitization and underwriting of mortgage loans and RMBS."

There are some fairly imminent issues here. The Department of Justice has informed the bank that it intends to file civil charges against Bank of America entities "arising from one or two jumbo prime securitizations." One would think that the issues are similar to what we've seen so far, in terms of misrepresentation to investors. In addition, the SEC has informed the bank that it too will file civil charges concerning one of those securitizations. Same goes for the New York Attorney General. To pile on, the SEC might charge Merrill Lynch in connection with its CDOs.

The bank would be wise to settle these issues.

If you thought that the bank had put MBS-related enforcement issues behind it, you would have been wrong. It will be interesting to see how much this all costs the bank, and whether the costs rise to the level of the private litigation, key pieces of which have yet to be resolved.

For more:
- here's the 10q

Read more about: Bank of America, Enforcement Action
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By Jim Kim

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4. Michael Dell sweetens his bid

Richard S. Lee has emerged as the second Richard Lee to cooperate with the government in its high-profile probe of SAC Capital. He has emerged as a central player. News reports paint him as critical piece of the government's case, providing a wealth of information that helped lead to charges against the firm. Richard S. Lee was employed by SAC from April 2009 until June 2011. He then returned to SAC last September, and stayed until March. He managed a portfolio of up to $1.25 billion at one point.

Richard S. Lee has already pleaded guilty to insider-trading charges. He no doubt hopes that his cooperation will win favorable treatment. One of his main contributions may be the simple fact that he was hired by SAC, with Steven Cohen himself overriding concerns voiced by those in the compliance division.

Richard S. Lee had run into some rather large compliance issue at his previous employer Citadel. In fact, he was terminated for fudging the books in ways that could have enhanced his compensation at the firm, notes the New York Post. That was on the first day a big promotion went into effect.

According to DealBook, the "interview process added to questions about SAC's hiring practices and controls. His cooperation, as well as evidence suggesting that SAC recruited employees with sources inside publicly traded companies, provided ammunition for the government's claim that SAC and its units permitted a 'systemic' decade-long insider-trading scheme."

For more:
- here's the article

Read more about: SAC Capital
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By Jim Kim

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5. SAC Capital: view from the street

In the end, despite a lot of posturing and "final offer" rhetoric, Michael Dell has bowed to inevitable. He sweetened his bid yet again. According to DealBook, he and Silver Lake, the private equity firm supporting his deal, have apparently agreed to supplement his latest $13.75 a share offer with a special dividend of 13 cents a share, on top of the regular third-quarter dividend of 8 cents a share.

In return, the canny founder of the embattled computer company that bears his name got what he wanted in terms of voting rules.

The special committee, after initially rebuffing him, has agreed to change the rules by no longer counting uncast Dell shares in the upcoming special election as "no" votes. The current rules mandate that such treatment of absentee votes and have created a high hurdle for Dell.

While it's unclear if this rule change guarantees that Dell and Silver Lake will prevail, it raises their chances significantly. To make things even sweeter, the special committee has apparently also agreed to shift the record data that governs who can vote in the special election. The committee will shift beyond June 3, which will allow more shareholders who purchased relatively recently to participate. They likely bought in below the offer prices and there would not have to swallow as much in capital losses. The conventional wisdom holds that this too would be favorable to Michael Dell.

One consequence unfortunately is that the special vote on the deal will be postponed again, probably until September.

To be sure, Carl Icahn has sued the board to ensure that the committee does not change the rules in ways unfavorable to him. He will certainly oppose this development. But he may have to back that up with a tweaked offer of his own.

All in all, Michael Dell may have again seized the upper hand.

For more:
- here's the item

Read more about: Leveraged Buyout, Dell
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By Jim Kim

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