Several U.S. states unprepared for a recession: S&P

Several U.S. states studied by S&P Global Ratings are ill-equipped to deal with an economic recession, hampered by the slow rebound in U.S. economic growth after the damage wrought by the Great Recession.

Fiscal imbalances, slower state tax revenue growth and increased spending on social services have contributed to a challenging economic landscape, as real GDP has only increased at 2.1 percent per year since 2009, S&P said in a report issued on Tuesday.

Real U.S. GDP growth of 2.43 percent in 2014 and 2015 compared to pre-recession rates of 3.79 percent in 2004 and 3.35 percent in 2005, according to data from the World Bank.

To determine states’ fiscal capacity to withstand the first year of a hypothetical recession, S&P sampled 10 states, the report said. The study found that a collective revenue shortfall would eclipse the states’ combined budget reserves by $5.4 billion.

Of the 10 states studied, several have budget reserves that equal less than half of “potential revenue underperformance” in the first year of a moderate-intensity recession. These include Illinois, Pennsylvania, New Jersey and Connecticut.

Washington, Florida and New York would fare best, with reserve balances that exceed potential shortfalls. The remaining states sampled, California, Massachusetts and Wisconsin, fall between those two groups.

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S&P Receives A One-Year Suspension For MBS Ratings Misconduct

On January 21, 2015, the US Securities and Exchange Commission brought charges for the very first time against a major rating agency, sanctioning Standard & Poor’s Rating Services (S&P) for making misrepresentations and failing to maintain accurate records and controls concerning its rating of certain commercial and residential mortgage- backed securities (CMBS and RMBS). Those sanctions include a one-year ban from rating any new issue US conduit/fusion CMBS transactions and $77 million in payments to the SEC and to the New York State and Massachusetts attorneys general.

S&P’s Rating of Conduit/Fusion CMBS

Beginning in 2009, S&P issued new criteria for rating conduit/fusion CMBS transactions (i.e., CMBS transactions involving a pool of multiple loans that are diversified by both property type and geography). Specifically, S&P used the debt service coverage ratio (DSCR) — a property’s annual net operating income divided by the annual mortgage debt service — to estimate whether the underlying mortgage loans would default during their term. S&P then used that estimate to determine the amount of credit enhancement it would require to achieve each rating level.

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Calpers settles with S&P for $125 million

Standard & Poor’s Ratings Services has reached a $125 million settlement with the California Public Employees’ Retirement System, or Calpers, to resolve a case involving inflated grades of residential-mortgage deals that later faltered, an article in The Wall Street Journal said.

The state Supreme Court ruled in September that Calpers could sue Moody’s and Standard & Poor’s for millions of dollars due to the high ratings they gave to investments that collapsed in 2007 to 2008.

The Calpers settlement will bring S&P’s total payout to resolve the latest round of crisis-era lawsuits to $1.5 billion.

Calpers also named Fitch Ratings and Moody’s Investors Service in the lawsuit. Fitch previously settled, though the pension fund will continue to pursue Moody’s, the people said. Moody’s wasn’t immediately available to comment.

“Numerous initiatives by legislators and regulators across the globe to regulate Credit Rating Agencies, including the enactment of the Dodd-Frank Act in 2010, have imposed new requirements addressing potential conflicts of interest and procedures to protect the integrity and transparency of rating methodology. The Company and S&P Ratings take compliance with regulatory obligations very seriously and continue to make investments in people and technology to strengthen controls and risk management throughout the organization,” Standard & Poor’s said in response to its recent lawsuits.

Source: WSJ

BREAKING: DOJ, States Near $1.38B Accord With S&P

Law360, New York (January 28, 2015, 12:39 PM ET) — Standard & Poor’s Ratings Services will pay $1.375 billion to settle lawsuits brought by the U.S. Department of Justice and 20 attorneys general around the country over the firm’s ratings work leading up to the financial crisis, according to a person familiar with the matter.

The settlement is expected to be announced as early as next week, the person said. Details of the landmark accord, such as how the haul will be divvied up between authorities, could not immediately be confirmed.

An S&P spokeswoman declined to…

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Credit Rater S&P to Be Banned for a Year From Biggest Part of Commercial-Bond Market

Standard & Poor’s will be suspended for a year from rating bonds in one of its most lucrative businesses in a $60 million settlement with the U.S. Securities and Exchange Commission, according to a person with knowledge of the matter.

The deal, which the person said may be announced as soon as tomorrow, is the agency’s toughest action yet in an industry blamed for fueling the 2008 financial crisis by assigning inflated grades to risky mortgage debt. Instead of securities created during that period, though, the SEC’s investigation has looked at whether S&P bent its criteria to win business on commercial-mortgage bonds issued in 2011.

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S&P nears $1 billion mortgage settlement

Standard & Poor’s is nearing a settlement of about $1 billion with the U.S. for allegedly misleading investors about its ratings of mortgage-backed securities before the financial crisis. Per Bloomberg:

The settlement between the McGraw Hill Financial(MHFL) and the Justice Department could close as early as this quarter.

New York-based S&P, the only credit rater sued by the Justice Department’s residential mortgage-backed securities working group, has alleged it was singled out because of its downgrade of U.S. debt in 2011, while its competitors, which issued the same grades for the same securities, weren’t sued by the U.S. The case is tentatively scheduled for trial in September.

Source: Bloomberg

S&P close to settlement on real-estate bond ratings

Ratings company faces fine and suspension

Standard & Poor’s Ratings Services is nearing a settlement with regulators over their investigation of how the company graded real-estate bonds, which could result in at least a $60 million fine and suspension from certain deals, per The Wall Street Journal.

According to the article, the deal involves six commercial real-estate bond ratings from 2011. The joint settlement would be with the Securities and Exchange Commission, New York Attorney General Eric Schneiderman and Massachusetts Attorney General Martha Coakley.

Talks are fluid, but the pact under discussion involves a suspension of S&P, for several months or possibly a year, from rating some deals, the people said. However, the suspension would be narrowly focused on what are known as “conduit” deals, which pool mortgages secured by commercial properties. The New York-based company already has seen its once-dominant position in that sector diminish.

Source: WSJ

S&P Warns: Athens Nearing Default, Again

Remember Yunanistan (Greece, Hellas, Ellada…): the country that in 2010 launched Europe’s sovereign solvency crisis and the ECB’s own helpless attempts at intervention, which later was “saved”, only to default shortly thereafter (but without triggering CDS as that would end the Eurozone’s amusing monetary experiment and collapse the Deutsche Bank $100 trillion house of derivative cards), which later was again “saved” when every single global central bank made sure Greek bonds became the only yield-generating securities in the world?

Well, the country which at last count was doing ok, is about to not be ok. Because according to none other than S&P, at some point over the next 15 months, Greek debt is about to be in default when the country is no longer able to cover its financing needs. In other words, back to square one.

As Bloomberg reports, citing Real News, S&P analyst Marie-France Raynaud said Athens can’t cover its own financing needs.

How is that possible? Isn’t Europe so fixed, it no longer has anything to worry about except deflation, pardon, inflation?

Guess not. According to Bloomberg, S&P estimates Greek financing needs for the next 15 months to be at EU43 billion.

This is a problem because even if Greece sells bonds this year and next, sales won’t be enough to cover net financing needs. So maybe Athens will sell more bonds? Well, the problem with that is that the second the LIFO paradigm of bond investing no longer works, and the last guy in may be stuck holding the bag, nobody will want to buy 1 penny in debt issued by Greece.

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S&P Said to Be Probed by N.Y. Attorney General on CMBS

It’s about time someone is investigating CMBS (Commercial Mortgage-Backed Securities)…

New York Attorney General Eric Schneiderman is investigating Standard & Poor’s to determine whether it failed to follow its own methodology in rating commercial-mortgage bonds in order to win business from banks, according to two people with knowledge of the matter.

The unit of McGraw Hill Financial Inc. (MHFI) is facing scrutiny on six such deals it graded in 2011, said the people, who asked not to be identified because the probe hasn’t been made public. Ed Sweeney, a spokesman for S&P in New York, declined to comment, as did Matt Mittenthal, a spokesman for Schneiderman.

New York’s Attorney General’s office is at least the third government agency investigating S&P’s business of grading commercial mortgage-backed securities, where banks pool together loans on properties such as shopping malls, hotels and skyscrapers to create securities that are sold to investors.

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S&P wins right to Tim Geithner documents in $5 billion U.S. fraud lawsuit

A federal judge said former U.S. Treasury Secretary Timothy Geithner must give Standard & Poor’s documents he used when writing his best-selling memoir, a ruling that could help S&P defend against the government’s $5 billion fraud lawsuit over its credit ratings.

In a ruling made public on Thursday, U.S. District Judge David Carter in Santa Ana, California said the McGraw Hill Financial Inc unit may force Geithner to turn over unedited versions of the documents.

S&P believes the documents may support its claim that the February 2013 lawsuit was filed in retaliation for its having downgrading the country’s debt 18 months earlier.

Carter reviewed the documents before ruling and said the government will have a chance to invoke White House privilege before Geithner must turn them over to S&P.

“A former executive official cannot, with one hand, withhold information implicated in a case of significant public importance while, with the other, collect money from sales of a tell-all book containing much the same information,” Carter wrote. “The public has a right to every man’s evidence.”

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