Ratings comedy.

We can't resist laughing at the ratings comedy we are blessed with every bear market cycle. Add this to the Madoff investors looking for a scapegoat. Common sense, like taking responsiblity and performing due diligence, is uncommon. Therein lies our opportunity.

S&P, Moodys, and Fitch will not do our thinking or due diligence for us. These ratings agencies will not be losing money if we excercise poor judgement. They have a profit motive in ignoring that "quant math" and "new paradigms" are serious red flags.

The SEC won't do our due diligence for us either. Nor will the vast majority of mutual fund and hedge fund managers, even the most legendary of whom are down between 40% and 60% this year.


From Bloomberg today.

By Elena Logutenkova

Dec. 19 (Bloomberg) -- Goldman Sachs Group Inc., UBS AG and Morgan Stanley are among a dozen financial firms whose ratings or outlooks were cut by Standard & Poor’s because of funding volatility and “significantly pressured” earnings potential.

S&P reduced ratings on 11 banks by as many as two levels, saying they faced more operational risk amid a worsening financial meltdown, according to a statement today. The agency said it “wouldn’t rule out” cutting the lenders’ ratings further if the global credit crisis and economic outlook worsen.

“The downgrades and revised outlooks reflect our view of the significant pressure on large complex financial institutions’ future performance due to increasing bank industry risk and the deepening global economic slowdown,” S&P said.

Banks worldwide have reported more than $745 billion of writedowns and losses since the credit crisis began, according to data compiled by Bloomberg. S&P expects banks to face more uncertainty in funding markets and a higher level of stress than in a “typical business-cycle trough.”

“The macro outlook in the U.K. and U.S. banking sector has worsened materially,” said Sandy Chen, a London-based banking analyst at Panmure Gordon & Co. “They’re looking at the risk of what the combination of deleveraging and deflation could do to banks’ earnings.”

Banking shares closed little changed in European trading, while UBS, Switzerland’s largest lender, fell 3.7 percent in Zurich. The Bloomberg Europe Banks and Financial Services Index has declined 66 percent this year.

Goldman Cut

Goldman earlier this week reported its first quarterly loss since the company went public in 1999. While the loss isn’t considered indicative of the bank’s profit potential, “the timing and extent of earnings recovery are currently highly uncertain,” S&P said. It cut the New York-based firm’s rating by two grades to A from AA- and kept a “negative” outlook.

Morgan Stanley, which posted a net loss for the fourth quarter this week, had its long-term counterparty rating lowered to A from A+. “The cyclical downturn in Morgan Stanley’s core investment banking, trading, asset management, and wealth management businesses could well be far more pronounced and extended than we had previously assumed,” S&P said. Citigroup Inc. had its credit rating cut to A from AA-.

“Goldman Sachs and Morgan Stanley have adequate amounts of liquidity -- for now,” S&P told analysts in a conference call today. “We’ve learned that no amount of capital can prevent illiquidity for a bank.’

Losses

UBS’s writedowns and losses of $48.6 billion since the beginning of the credit crisis, the most of any European bank, reflect “larger risk concentrations and weaker risk management than we had previously perceived,” the rating company said. Next year the bank’s “performance will be relatively subdued.”

Credit Suisse Group AG, UBS’s largest Swiss competitor, earlier this month reported a 3 billion-franc ($2.7 billion) net loss for October and November. S&P reduced its long-term rating today to A from A+.

Deutsche Bank AG’s rating was lowered to A+ from AA- on expectations of “weak” trading results in the fourth quarter and a potential “significant” reduction in 2009 pretax profits compared with 2007 levels, S&P said.

Rating cuts come at a time when banks worldwide are increasingly relying on their central banks for funding after the interbank lending market nearly ground to a halt this year. Zurich-based UBS had to accept a $59.2 billion government aid package in October to help it split off risky assets and get extra cash.

‘Get Tougher’

The downgrades “will increase the price of interbank lending,” said Michael Trippitt, a London-based analyst at Oriel Securities Ltd. “This is confirmation that in the corporate and commercial world life is going to get tougher.”

Royal Bank of Scotland Group Plc, 58 percent owned by the U.K. government, had its rating cut to A from A+. The Edinburgh- based bank’s “market position, diversity, and our view of its strategy and management, has been somewhat impaired,” S&P said.

London-based Barclays Plc had its rating lowered to A+ from AA- in light of “significant exposure” to risky assets and expectations that markdowns in the commercial mortgage portfolio may increase as the economy deteriorates.

HSBC Holdings Plc was given a “negative” outlook, while its rating was kept at AA-. Europe’s biggest bank will likely “remain capital generative,” although impairments will probably stay “elevated” in the U.S. and increase in the U.K., the rating company said.

Counterparty

Bank of America Corp.’s long-term counterparty rating was cut to A+ from AA- and that of Wells Fargo & Co. to AA from AA+ in the light of expected “credit deterioration” in the U.S. banking industry.

JPMorgan Chase & Co. had its senior unsecured debt rating lowered to A+ from AA-, and the counterparty rating on JPMorgan Chase Bank N.A. was cut one level to AA-, as the rating company said “loan quality issues” will probably depress earnings next year.


GM has been effectively insolvent for a long time. From Market Watch today, our bolding for added comedic effect.

SAN FRANCISCO (MarketWatch) -- Standard & Poor's Ratings Services on Monday cut the unsecured debt of General Motors Corp.

GM 3.52, -0.97, -21.6%) to C from CC, saying that debt holders could see a "significant decrease" in value in the event of a bankruptcy. At the same time, Moody's Investors Service cut Ford Motor Co.'s rating to Caa3 from Caa1, explaining that the company may have to restructure its balance sheet to reach the same union concessions that GM and Chrysler are likely to achieve in the wake of the federal bailout loans. Shares of GM plunged almost 22% to close at $3.52 while Ford's stock dropped 12.2% to end at $2.59.