The fix is in
Thursday, Aug 1, 2013 - Posted by Rich Miller
* Maybe Illinois should offer S&P some more business and they’d rate our state bonds higher, too. From the New York Times…
The Wall Street ratings game is back.
Five years after inflated credit ratings helped touch off the financial crisis, the nation’s largest ratings agency, Standard & Poor’s, is winning business again by offering more favorable ratings.
S.& P. has been giving higher grades than its big rivals to certain mortgage-backed securities just as Wall Street is eagerly trying to revive the market for these investments, according to an analysis conducted for The New York Times by Commercial Mortgage Alert, which collects data on the industry. S.& P.’s chase for business is notable because it is fighting a government lawsuit accusing it of similar action before the financial crisis.
As the company battles those accusations, industry participants say it has once again been moving to capture business by offering Wall Street underwriters higher ratings than other agencies will offer. And it has apparently worked. Banks have shown a new willingness to hire S.& P. to rate their bonds, tripling its market share in the first half of 2013. Its biggest rivals have been much less likely to give higher ratings.
Sheesh.
* Meanwhile, I asked the governor’s budget office for comment the other day about something our commenter “Reality Check” noted on the site.
Check out this Illinois Procurement Bulletin for a 2011 Illinois bond sale. Then go check out the Civic Committee’s membership list.
As you know, Ty Fahner brought some heat on the Civic Committee when he revealed that he and some members of the prominent business group had met with bond rating agencies to complain that their Illinois ratings were too high, in order to create a climate for pension reform.
So far, the media has pretty much ignored the story.
Below, you’ll see the overlap between the state list of qualified firms for that 2011 bond sale and the Civic Committee membership list. The state’s list only has company names. I added Civic Committee members names to that list. Keep that in mind when reading this. The personal names listed below aren’t on the state’s site. Also, we don’t yet know if any of these folks were among the group that met with the rating agencies.
Crystal clear? OK…
Please find below a list of respondents qualified to provide senior banking/book running services to the State of Illinois through the July 12, 2011 Request for Qualifications:
ELLEN COSTELLO
CEO and US Countryhead - BMO Financial Corp.
JOHN R. ETTELSON
President and Chief Executive Officer - William Blair & Company
MATTHEW R. GIBSON
Partner, Head of Investment Banking, Midwest Region - Goldman, Sachs & Co.
JAMES T. GLERUM, JR.
Managing Director and Chairman, Regional Banking for North America - Citigroup, Corporate and Investment Banking
JOSEPH A. GREGOIRE
State Chairman for Illinois Banking - PNC Bank
TIMOTHY P. MALONEY
Illinois President - Bank of America
RICHARD S. PRICE
Chairman and Chief Executive Officer - Mesirow Financial
GLENN TILTON
Chairman of the Midwest Region - JPMorgan Chase & Co.
Please find below a list of respondents qualified to provide co-senior bank services to the State of Illinois through the July 12, 2011 Request for Qualifications:
Maybe Abdon Pallasch will finally return my messages so I can let you know what our government thinks about all this.
- Keyrock - Thursday, Aug 1, 13 @ 9:42 am:
Has anybody asked the Tribune why this doesn’t rate a story? Romanesko? Anyone??
- Roadiepig - Thursday, Aug 1, 13 @ 9:44 am:
The more that comes out about S&P and their ilk the more I believe we, as average citizens, don’t stand a chance with these people running things. Like someone said here recently (quoting Gatsby) : “The rich are different than you and me”.
- Cassiopeia - Thursday, Aug 1, 13 @ 9:48 am:
The spokesperson for the Governor’s office will call you back Rich when they come up with some way to blame it on someone else. Maybe someone connected to Daley.
- Anonner - Thursday, Aug 1, 13 @ 9:52 am:
It’s August…not exactly scandal season.
- Dirt Diver - Thursday, Aug 1, 13 @ 9:56 am:
The analysts working at the credit ratings agencies are B squad at best. They couldn’t hack it working for investment firms, so this is where they settled at. I don’t get how such agencies became the gospel. Given their bad track record, and B-sqaud composition, and now apparently a serious conflict. It’s a shame that incompetant and conflicted entities have this type of control over Illinois and it’s taxpayers.
- walkinfool - Thursday, Aug 1, 13 @ 9:56 am:
The difference is that usually the connected “insiders” and CFOs/Treasurers are lobbying for higher ratings for their own bonds, while we apparently had people doing the opposite for political reasons.
You’re pushing the edge here, Rich, since none of these named individuals might have been involved at all — as you have made clear.
Good start though.
- wordslinger - Thursday, Aug 1, 13 @ 10:03 am:
Unbelievable. How is this possible?
Here’s how the rating agencies created the moral hazard that crashed the world economy:
Unscrupulous mortgage originators wrote ARMs for anyone. Creditworthiness didn’t matter, because they immediately sold the paper to investment bankers.
The investment bankers bundled sketchy mortgages as securities. It didn’t matter if the loans were no good; they weren’t holding on to them. They sold them to investors.
The investors bought them because they carried AAA ratings from the likes of S&P. The whole scam could not have happened without the rating agencies.
They created a new product, the subprime mbs, and violated all of their principles to sell it. There was an insatiable demand for high-yield AAA securities all over the world. The rating agencies made a fortune.
Of course, when the housing bubble popped, and those securities stopped paying big interest, and their underlying values were reduced by 30% to 50%, the credit markets seized up.
That’s because banks had been holding those securities and using them as assets to make loans at ratios of 30-, 40- and 50- to one.
Housing values plummeted and foreclosures skyrocketed when folks couldn’t refinance. The stock market lost 50% of value. The banks and auto industry had to be bailed out. Nine million people lost their jobs.
And here we go again. Where is the national government?
- Ghost - Thursday, Aug 1, 13 @ 10:09 am:
The irony of Ty Fahner being a former attorney general is also being missed by the media.
- countryboy - Thursday, Aug 1, 13 @ 10:12 am:
Where is the national government? Resolving bad behavior with fines.
- x ace - Thursday, Aug 1, 13 @ 10:17 am:
In Motorcycles and High Finance , the 1%ers are bad news.
- walkinfool - Thursday, Aug 1, 13 @ 10:20 am:
Word: “I guess you just don’t understand the Free Market”
– as said to a (perfectly correct) economist by some Fox News pretty-face personality last night. The rest of the Fox panel chuckled and smirked.
Where are we? The Senate Republicans made sure Elizabeth Warren couldn’t get directly involved in financial industry regulation, and delayed filling the Congress-approved senior regulatory post for over a year with behind-the-scenes “filibuster”.
The story of LIBOR - which sets worldwide lending rates, and was secretly manipulated by six giant banks, is similar.
- PublicServant - Thursday, Aug 1, 13 @ 10:22 am:
We’re innundated with ever more details discovered by the well-financed investigate arms of the media regarding Anthony Weiner’s (great name by the way) sexploits. The negative publicity is killing his chances in the NYC Mayoral race. Good! He deserves to be exposed, no pun intended (well, actually, it was).
I applaud Rich for doing his best to keep the really outrageous story of the Civic Committee’s direct manipulation (possibly for personal gain, and at least for political gain) of the bond rating agencies in regards to Illinois Bond rating. Maybe, hopefully, an investigation or three from several state/federal sources might reveal whether the manipulation was politically and/or personally motivated. One thing I know for sure is that we won’t be hearing from the Civic Committee or Ty for a while as they “hole up” until the heat (or lack thereof) subsides. And with IPI and other “non-partisan” groups ready to fill the void, there’s no overall loss to the attack on earned, constitutionally-protected pensions.
So thanks Rich for trying to keep a real story alive.
- DanL60 - Thursday, Aug 1, 13 @ 10:43 am:
Second on the kudos to Rich. Run up the points on bonds to make more money as brokers. So far that seems legal in Illinois.
- RNUG - Thursday, Aug 1, 13 @ 10:43 am:
OK, this is mostly snark … Assuming some regulatory agency wakes up and decides to take action, instead of fining these people, they should be ordered to immediately buy $100B of zero fee 50 year zero interest IL Pension Bonds.
- Frank - Thursday, Aug 1, 13 @ 10:53 am:
Has anyone asked the AG if she’s checking into this? I’m not looking to middle her for political purposes like many others do…this just seems like something that’s ripe for a review.
- Michelle Flaherty - Thursday, Aug 1, 13 @ 11:04 am:
“Maybe Abdon Pallasch will finally return my messages so I can let you know what our government thinks about all this.”
Makes me long for Kelly Kraft.
- walkinfool - Thursday, Aug 1, 13 @ 11:09 am:
Nothing for the AG or any regulator to look at yet, as far as I can tell. Just embarrassingly bad behavior.
- langhorne - Thursday, Aug 1, 13 @ 11:09 am:
this avenue of inquiry needs to be pursued until an answer is reached. who went to the ratings agencies, what is their political pedigree, and did they benefit from the downgrade?
the silence is deafening. if the answer was it didnt happen, or didnt involve anyone acting improperly, a simple denial would be forthcoming.
- MrJM - Thursday, Aug 1, 13 @ 11:12 am:
And the solution to this problem is obviously a new governor with strong connections to the world of high finance.
– MrJM
- Federalist - Thursday, Aug 1, 13 @ 11:35 am:
This is a big story, and yet despite the fact of Miller’s well known name in Illinois political reporting, it is getting little traction.
Very few media outlets are reporting it. By not reporting it it is hoped that it will go away. And that is the way it usually works.
Conspiracy? Sometimes it becomes rather obvious that conspiracies (at various levels) are for real.
Why in this case? Hard for me to tell but I will conjecture that it has to do with the pension issue. Virtually all the newspapers in the state want to go after state employees and retirees. To comment upon this issue would weaken their case and they want to avoid that. So they suppress it. Hard to prove, but YOU be the judge.
- Joan P. - Thursday, Aug 1, 13 @ 12:19 pm:
@ Keyrock: “Has anybody asked the Tribune why this doesn’t rate a story? ”
Maybe because the Trib’s CEO is also a member of the Civic Committee?
- Southern gentleman - Thursday, Aug 1, 13 @ 12:20 pm:
Rich… Your integrity stands in sharp contrast to the rest of the media. Please keep exposing this corruption.
- Cheswick - Thursday, Aug 1, 13 @ 12:23 pm:
When this story made Alternet, but not the Illinois press, I started to think the corporations that own the Illinois press may just have some board members or big shareholders on the Civic Committee.
- Arthur Andersen - Thursday, Aug 1, 13 @ 12:53 pm:
This list should also be cross-referenced against the roster of State pension fund money managers.
I’ll bet there are quite a few matches, and the take there is better than a bond deal.
- Anonymous - Thursday, Aug 1, 13 @ 12:54 pm:
For those like Ty who have law licenses, the Attorney Registration and Disciplinary Commission is the place, not the AG.
- wordslinger - Thursday, Aug 1, 13 @ 1:00 pm:
–This list should also be cross-referenced against the roster of State pension fund money managers.
I’ll bet there are quite a few matches, and the take there is better than a bond deal.–
AA, 2% off the top and 20% of earnings, is that the norm? Unless you’re Citadel, of course, and get more.
We should ask Farmer Bruce. For an “outsider” who’s down on pension beneficiaries, he has an insider’s knowledge of the lucrative business of investing their money.
- Raymond - Thursday, Aug 1, 13 @ 1:23 pm:
So much for the constant banter about the “liberal media” dedicated to protecting and promoting labor unions and other liberal interests. I guess that’s trumped by protecting super-wealthy elite Republicans.
- Judgment Day - Thursday, Aug 1, 13 @ 1:27 pm:
“And here we go again. Where is the national government?”
Where do you think they are? The feds are firmly on the sidelines for this one, and they have no plans to move. The feds want everything to go back to the way it was pre-2008. Why do you think the Fed is still pumping $85 bil a month into buying up all sorts of debt?
The Street has to provide $85 bil in investment grade debt every month to the Fed. You seeing large scale loans and investments to Main Street? Didn’t think so.
So, some of it (high grade securities) gets ‘manufactured’. There’s no choice - there just isn’t that much (honestly) high quality debt being pushed out into the marketplace month after month in this economy. So that extra cash goes into things like commodity (manipulation) trading, etc. And everybody playing goes home flush with lots and lots of cash in their pockets. Which is how the Fed Reserve ends up carrying around $4+ trillion on their books (and growing).
It’s not political, and it’s not business. It’s crony capitalism at it’s finest. And it’s going to end badly, some day.
You want to start to fix this mess? As long as the regs basically make the credit ratings pond into a ‘three fish’ (S&P, Moody’s, & Finch) environment, there’s not going to be any changes. It’s got to be an open market (any and all new players welcome) - if not, there’s going to still be too many ways for the existing players to ‘game’ the system.
- Judgment Day - Thursday, Aug 1, 13 @ 1:31 pm:
“AA, 2% off the top and 20% of earnings, is that the norm? Unless you’re Citadel, of course, and get more.”
That’s (2%/20%) standard charge by the Hedgies. Unless you are SAC, and then it’s more.
Citadel charging more than that? Don’t know for sure, but there weren’t many charging more than the 2%/20%. You got to have pretty spectacular returns consistently to get more than that.
- Norseman - Thursday, Aug 1, 13 @ 1:35 pm:
We probably won’t see a groundswell of suggestions for an investigation by the Governor and Solons is because the’re afraid of offending the money guys who provide the lifeblood of their campaigns.
- Keep Calm and Carry On - Thursday, Aug 1, 13 @ 1:49 pm:
Pension funds could begin making investment decisions in-house. Their annual reports tend to include at least a page full of directors, board members, staffers, and so on.
If the funds suffer from a dearth of talent, then use the commissions we are paying these firms to invest our money and simply hire new talent. I’m pretty sure there are talented individuals willing to work for TRS, etc. at $250,000+ per year. They couldn’t do much worse than the “pros” have in recent years. Can you imagine draining, say, $50 billion in assets from one of the firms on this list? That might send a message, even if only done once.
- Keep Calm and Carry On - Thursday, Aug 1, 13 @ 1:54 pm:
heehee, I could actually see Gov. Quinn “the populist” stealing this idea.
Abdon, please make sure the good Governor gives credit where credit is due: CapitolFacx + KC&CO.
- Ruby - Thursday, Aug 1, 13 @ 2:31 pm:
TRS board of trustee member Bob Lyons represents retirees. He shares the latest information of TRS investment returns…”For the most part our investment gains for the past fiscal year were known by July 1…TRS needs to earn at least 3% on our money just to break even..These return are net, that is after investments fees are subtracted.
FY 2013 12.3%
3 Year 11.8% (annualized)
http://preaprez.wordpress.com/2013/07/30/trs-trustee-bob-lyons-investment-returns/
- Rod - Thursday, Aug 1, 13 @ 2:39 pm:
The silence from our muckraking friend Kass on this issue is deafening.
- Raymond - Thursday, Aug 1, 13 @ 2:45 pm:
=== The silence from our muckraking friend Kass on this issue is deafening. ===
The Trib has to first publish a story about it. Then Kass can just copy and paste the text, throw in some swollen ego, a few juvenile nicknames and a dash of Greek oregano, and - Voila! - a column.
- Slander and defame - Thursday, Aug 1, 13 @ 3:57 pm:
Why wouldn’t this rate an sec investigation?
- Loop Lady - Thursday, Aug 1, 13 @ 4:46 pm:
Thanks for your frank description of the financial playing field and the powers that be. I also am curious as to how our AG is protecting the average citizen in this very tangled web…
- Belle - Thursday, Aug 1, 13 @ 5:04 pm:
Not to be picky but I believe Ellen Costello has retired from BMO/Harris/M+I.
- Arthur Andersen - Thursday, Aug 1, 13 @ 5:31 pm:
word, for the public securities, the fee structure is lower, but the assets managed are much higher on average than the private markets, e.g. hedge funds or private equity.
A US bond account might bring 20 bps, and an international equity account might go 50-80 bps. On $500 million, that’s a nice piece of change, plus a chunk of the securities lending money. Very few managers for a fund the size of TRS make less than $1 million per year.
PS: kudos to TRS on the good returns this year.
- circular firing squad - Thursday, Aug 1, 13 @ 7:03 pm:
But you must admit the coverage of the $400 million Chase fine for stealing over $125 million from CA and midwest electric users has been great
- MarkT - Friday, Aug 2, 13 @ 9:34 am:
You’ve described a group,that includes bond market makers working actively to lower bond ratings, which forces issuers into higher points, which results in higher commissions when the same bond market makers take the more profitable offering to market.
Am I getting the right read on this? This is legal?