No No No NO S.E.C.!
We didn’t say Moody’s is just FINE. We said to give Moody’s their "just" FINE! Ya got it all wrong!
Last week, after having Moody’s Investors Services in their crosshairs, the SEC declined to seek fraud charges against them for giving healthy ratings to risky investments, after it determined that it lacked authority to charge a foreign affiliate of Moody’s.
Is that it? The SEC won’t try to find another way to skin this cat?
The SEC instead warned all credit rating agencies that they can face charges “if they mislead investors with deceptive ratings”!
Are you kidding me? Please don’t tell me this is the best the SEC can do. Or is it?
In the last month or so, we’ve heard some whoppers. We saw Citigroup, who was charged with “misleading investors”, pay out a whopping $75 million to the SEC.
That’s right. Citigroup, who originally said in the fall of 2007 that they only had $13 billion in exposure to toxic sub-prime mortgage backed securities, and actually had about 4 times that amount.
The SEC even found that Citigroup had an email chain going around where the staff talked about removing a discussion from a recorded audio announcement (prior to it being broadcast) about an additional $43 billion in higher rated toxic assets (sub-prime MBSs).
Hey, if Moody’s said the $43 billion assets had higher ratings than the $13 billion in the more toxic assets, then why bother reporting it to the shareholders, right?
If only it were that innocent. But again, the email shows Citigroup removing the discussion from the recording before broadcasting it to avoid investors’ questions about them. So they knew they were hiding it but convinced themselves it would be okay because of higher ratings by ratings agencies. So what happened with Bear Stearns? Did they forget to pay the bill to Moody's or something? (Don't forget, the companies who get the ratings are the ones who PAY Moody's, S&P and Fitch.)
This goes to the heart of the cause of the credit crisis
Everyone has their own piece of the puzzle they like to zero in on and complain about as the cause of the crisis – even me. I’m sitting here harping on the SEC and Moody’s, right? But the real problem is that virtually everyone who had a major influence on the situation had the luxury of somehow escaping responsibility by a small margin, but big enough to continue the snowball effect without having to pay the piper.
They were pointing to someone else and saying “Hey, if they are saying it’s okay, then why the heck not! Just look at our paychecks!”
In this case, Citibank relied on the fact that Moody’s said $43 billion of their assets are highly rated (crap). So Citigroup, who knew enough to hide it from shareholders, convinced themselves the higher ratings made it okay (or so they'll have you believe).
And how much punishment does Citigroup get for hiding what ultimately resulted in over $30 billion in losses (and hundreds of billions in shareholder value)?
That’s right. As of Friday’s close, Citi was at $3.91. Shave the $0.00258 off its price and that’s the amount of the fine in terms of market capitalization of the company.
It’s actually six one-hundredths of one percent of their market cap. Said differently, they got a $75 million slap on the wrist. Said differently again, a $75 million slap in the face to shareholders that rode the stock down from $30.00 to the low single digits and families who used to live off of dividends. (Remember, in the Fall of 2007, Citi also said they wouldn't cut their dividend... right before they cut it).
But have no fear! This time, for the first time, executives of the company who were involved were fined too! Finally, some accountability right?
Boy oh boy this is going to embarrass them…
The two named in the case were former chief financial officer Gary L. Crittenden and and former investor relations head Arthur Tildesley. Got’em!
Gary Crittenden was fined $100,000.00! BOOYA! Take that you… you.. Citi exec you! Let that be a lesson to… Wait… What’s this?
He took home almost $20 million in compensation that year (2007)? $14 million was in bonus? What about his salary? He's the second highest paid guy at the company under the CEO Vikram Pandit, right? No?
Look below and you can see that in 2008 he was second to the CEO. But in 2007 he had a higher salary and total compensation package than the CEO. Not bad! I guess we know why he said whatever he had to say to keep the stock price up!
Oh dear. Well, at least the stock he got was the same stock that declined about 95% since he started. Surely that will "learn him a good lesson".
Out of the $32 million in compensation for 2007 and 2008, I’m not sure what he ended up with. But that $100,000.00 fine for the CFO, or $75 million for the company for “not admitting to” $43 billion in toxic assets, resulting in over $30 billion in losses and hundreds of billions in lost market cap, just isn’t enough for me.
My mother always taught me that not telling the truth is the same as telling a lie.
Back To Moody’s
These guys have done a lot of bad things. You know things are bad when you have to fall back on the excuse that you were negligent. Moody’s didn’t realize this or that. The SEC gave Moody’s “a good talking to” after Moody’s did both of the dirty deeds discussed above: They were negligent and they omitted their mistake.
In the same year (2007), a Moody's analyst found that a computer error at a European affiliate resulted in bonds getting ratings that were too high, thus downplaying their level of risk. Okay, it’s a mistake. They happen.
But then, instead of admitting it, a Moody's rating committee later voted against changing the rating, partly out of concern that it would harm the firm's reputation.
But wait a minute! Moody’s didn’t seem to have a problem, only months later, with slicing up Bear Stearns like Julius Caesar when they literally cut fifteen different mortgage-backed debt issues that Bear Stearns owned, including "Alt-A bonds", to "JUNK-STATUS" immediately! And they did it just 10 days before the stock went to $2.00 (from the mid $70s!).
That wasn’t embarrassing? I ask again: What happened here? Did Bear forget to pay-off... oops, I mean pay their Moody's rating bill?
"Alt-A" designation on those assets owned by Bear Stearns was supposed to indicate solid quality and safety. In the stroke of a pen they downgraded them to junk-status, castrating Bear and its ability to borrow overnight against its own stock!
What a fitting name, huh? If their name were any more fitting it would be “Moody the Blade”. I say “the blade” because of the way they cut ratings, but most of my old neighbors in New York and New Jersey understand the pun whenever we say someone has the middle name “the”.
These guys are as crooked as can be, but to make matters worse, they are moody, manic-depressive lunatics! You just don’t give someone like that the ability to cut you at will.
Chief Investment Officer
Technical Analysis Millionaire