In the stifling heat of a New York summer, a banking report arrived yesterday from Moody's, replete with soothing blue graphics: "Another False Alarm in Terms of Banking Systemic Risk but a Reality Check."
"The recent turbulence on financial markets associated with the U.S. subprime lending crisis has led to some risk reappraisal across credit markets, but does not reach systemic levels of intensity," the report said.
"Core" financial institutions have big capital cushions and strong liquidity management, Moody's reasons. So, no worries about the recent pullback in high-yield debt markets – it's not likely to shatter confidence enough to hurt the "real" economy.
Moody's is right. The big banks aren't in trouble from the subprime mortgage mess, but that's only because of one thing: they’ve passed along all the risk to the debt markets. Moody’s neglects to mention that, really, the core banking system no longer controls credit creation; capital markets and investors do.
Maybe Moody's feels guilty about not downgrading all those asset-backed securitizations of subprime mortgages sooner.
Indeed, a growing distrust of the models used by Moody's and its credit-rating brethren may be helping the debt markets waver. Bill Gross of PIMCO Bonds said yesterday that high-yield investors seem to be thinking that Moody's and Standard & Poor’s could be repeating the same
"structural, formulaic, mistake" they committed with subprime securities in their ratings of collateralized loan obligations and collateralized debt obligations.
The "backed-up market" for high-yield new issues, which Gross compares to a "constipated owl," is, indeed, a problem for the U.S. economy, especially now that it is spilling over into the markets for corporate debt. While this may not be a "systemic" crisis in the classical sense, we're in new waters here. Moody's though, appears to be happy with its head in the sand. |
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