Warren Buffett Needs to Take Over Moody's
Second, the rating agencies need to restore their credibility. Warren
Buffett's Berkshire Hathaway owns about 19% of Moody's. I would suggest
that Mr. Buffett step in take over the company (much as he did with
Salomon years ago) and put his not inconsiderable credibility on the
line for all future ratings and the inevitable re-ratings that are going
to be done.
The Panic of 1907 was solved by the credibility of one man, J. P.
Morgan, who stepped in to provide liquidity. The Panic of 2007 is not a
problem caused by lack of liquidity. It is a problem caused by lack of
credibility. Morgan could (and did) provide liquidity. Buffett can (and
should) provide credibility.
And someone of similar stature needs to step in at S&P and Fitch. (Can
Volker be summoned into the trenches yet one more time?) This is not
about whether some person or group at the ratings agencies necessarily
did anything wrong, although more than a few lawyers will suggest just
that. This is about restoring credibility to the ratings and markets as
soon as possible. Without someone new at the head, future ratings are
likely to be viewed with the skeptical (and correct) question, "Is this
from the same group of people who rated that bond that I bought just a
few months ago that is down 50%? Why are they right now? Where is the
adult supervision? Who has made sure the process is now working?"
The SEC has announced that they will allow mortgage lenders to work out
resetting mortgages with borrowers in cases where there is an obvious
default about to happen. In many cases, that will mean extending the
lower coupon rate another year. That may just put off the problem, but
it will keep a home off the market and allow for a more orderly
solution.
Will a Fed Rate Cut Make a Difference?
A rate cut will not make a difference as to the credibility of the
ratings, nor will it transform bad debts into good ones. But my view has
been for a year that the economy is heading for a recession due to the
housing market problems. Given the turmoil in the markets, a rate cut
may be in the offing later this year. And given that lower rates will
make mortgages cost less, that will help.
The significance of today's cut of the discount rate, and the
willingness to look at up to 30 days of loans and high-quality
asset-backed paper, is not the actual cut but more the boost to
confidence. It is the Fed saying to the market, "Daddy's home.
Everything is going to be all right."
Beyond that, let's look at what Nouriel Roubini says today in his blog
about the Fed move to cut the discount rate:
"More important than the symbolic 50 basis point cut in the discount
rate was the move in today's FOMC statement from the semi-neutral bias
of the last few months ('semi' as inflation was still their predominant
concern until recently) to a clear easing bias today. Essentially today
the Fed telegraphed a certain Fed Funds rate cut at the September
meeting and possibly more cuts in the months ahead.
"The statement was very clear in signaling an easing bias and a policy
cut ahead: 'Financial market conditions have deteriorated, and tighter
credit conditions and increased uncertainty have the potential to
restrain economic growth forward. The statement also pointed that 'the
downside risks to growth have increased appreciably.' And it clearly
signaled that the FOMC is 'prepared to act as needed to mitigate the
adverse effects on the economy arising from the disruptions in financial
markets.'
"The stress on the downside risks to growth and the failure of the
statement to even mention the 'I' word (Inflation) suggests that, in
about a week since the previous FOMC meeting, concerns about inflations
as the predominant risk have faded and concerns about growth have
sharply increased. For a Fed that until recently was in the soft landing
camp (slowdown of growth but still moderate pace of growth) today's
statement is a signal that they are starting to worry about a hard
landing of the economy.
"For the first time in over a year the Fed is now implicitly admitting
that they underestimated the downside growth risk: until now the
official Fed view was that the housing recession was contained and
bottoming out and not spilling over to other sectors of the economy; and
that the sub-prime problems were also a niche and contained problem. The
sudden shift to a strong easing bias suggests that the Fed miscalculated
until now the damage to the economy and to financial markets of the
housing recession and its real and financial spillovers."
While I am not so sure that the Fed will cut in September, they have
signaled that they are aware of the problems, as noted above.
As an answer to my opening question, I think we are in for a return of
the Muddle Through Economy rather than the End of the World. Credit
markets will get back to normal, as there is a lot of money that needs
to find a home. It is just looking for a credible home and one that will
feature higher risk premiums and spreads.
Vacation, Europe and Reading
I am off to Europe (London, Denmark, Poland, and the Czech Republic).
Other than a speech and a few meetings, I actually intend to take a
vacation and do some sight-seeing. In my absence, though,
Thoughts from
the Frontline will still be coming your way. Next week, it will be
written by Barry Ritholtz and the following week by Rob Arnott, so you
are in better hands than mine. And Michael Hewitt is going to do the
Outside the Box on September 4, about how the credit markets are doing.
And thanks to the hundreds of readers who sent in suggestions as to what
books to read on my vacation. I made a new folder to save them, as many
of you suggested books that I have always intended to read but not
gotten around to.
Tonight I have to hurry home, as I have dinner with friends and then off
to The House of Blues. I see margaritas and tacos in my near future, and
some much-needed rest in the next few weeks.
All the best, and remember that the world is not in all that bad a
shape. We just have to work through a few kinks, and Muddle Through is
still moving forward.
Your enjoying the ride analyst,
John Mauldin
John@FrontlineThoughts.comCopyright 2007 John Mauldin. All Rights Reserved
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