We have been pretty critical of the ratings agencies not being on their toes and calling on things far too late. In fact, I have been an anti-fan of theirs all the way back to Enron. Today is another prime example of ratings agencies being late. They might even be analyzing a 2000 Gore-Bush vote recount at this point. McGraw Hill’s (NYSE:MHP) S&P and Moody’s (NYSE:MCO) sure seem to have perfected worthless ‘objective’ coverage.
ACA Capital (OTC:ACAH) was downgraded today to junk status under the "BBB" rating at S&P. Congratulations. Like that was a difficult one to see coming. This one is up big today on hopes (rumors) that the brokerage firms may band together to save it, although they would likely be doing this to save their own exposure from it failing more than seeing this one as a good investment.
D.R.Horton (NYSE: DHI) was downgraded by Moody’s to junk status: Ba1 is the new rating after having been at Baa3, the lowest investment grade out there. There shouldn’t be a single homebuilder in the U.S. with an investment grade rating and there shouldn’t have been since 2006. If you tried selling a house in 2006 in a non-hot part of the country you’d know why this is so. The truth is that homebuilders are now just land banks and using the balance sheets for guidance is pure wizardry. We have asked "Which Homebuilder Goes to Zero First?" for good reason.
S&P took its outlook on AMBAC (NYSE: ABK) and MBIA (NYSE:MBI) to negative from stable. Where has S&P been? These companies have had known exposure to this mess for weeks now. At least AMBAC said it could get its rating stabilized. Security Capital Assurance’s (NYSE:SCA) XL Capital Assurance unit is also on negative credit watch, so investors might as well get ready for that "AAA" rating to go away too. Blackstone Group (NYSE:BX) has a unit called Financial Guaranty Insurance Co. that the community has called "FGIC" (or pronounced ‘Fij-ic’) forever. S&P has it under review as well.
Moody’s (NYSE: MCO) just maintained some of its own "Aaa" ratings on Monday, so there is a turf war. If you can recall a housing executive saying the housing market "was going to suck" a while back, it might ring a bell. We don’t have to say that the ratings agencies suck, because they already know that they do. Maybe the conspiracy theorists are right. Maybe if these ratings agencies were truly objective (and actually analyzed these in the manner that we all were counting on them to) that would have never allowed much to really happen in the financial markets.
Most of these stocks have traded lower on the day, but they all have recovered far off lows and some are actually up on the day. If you take a look at what we’ve said here you’ll know we have noted how their business models in covering debt issues are full of conflicts of interest top to bottom. No wonder.
Jon C. Ogg
December 19, 2007
Jon Ogg can be reached at [email protected]; he produces the SPECIAL SITUATION newsletter and he does not own securities in the companies he covers.
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