2012-04-29

European Financial Companies to Fund European Ratings Agency — Denmark Is a Massive Subprime Base of Mortgages and Hosting One the Biggest Real Estate Bubbles in the World

I guess when you're not happy with the ratings you have because you cannot control the rater, you should fund your own rating agency. Note that in the US, only rating agency has dared to lower the rating of Uncle Sam, which gives them their oligopoly and hence funds their very useless but very lucrative business.
(Reuters) - European financial companies have agreed to back the creation of a European Rating Agency to compete with Standard & Poor's, Moody's and Fitch, a strategy consultants involved in setting up the new agency said on Thursday. 
"Following intensive talks conducted across Europe, a number of financial companies have now agreed to support the establishment of a global rating agency of European origin," said Markus Krall, a partner at Roland Berger Strategy Consultants. 
"We will soon wrap up the fundraising and complete operational realization of the new independent agency. We are currently in the process laying the institutional and corporate groundwork," he added, declining to name the companies that will provide the financial backing. 
A number of organisations are evaluating how to launch a new European rating agency after European policymakers criticised Standard & Poor's, Moody's and Fitch during the euro zone debt crisis, saying they have been too quick to cut the credit ratings of indebted European Union states despite bailouts and austerity drives. 
In a recent move, S&P downgraded the credit ratings of nine euro zone countries, stripping France and Austria of their coveted triple-A status. 

Markus Krall will relinquish his role as senior partner at Roland Berger to become the founding chief executive of the new agency, Roland Berger said in a press release. 
Efforts to launch a European rating agency are also being made by the Bertelsmann Foundation which is seeking to overhaul the way rating agencies rate sovereign debt.
The Bertelsmann Foundation has said it will lead a group of international experts to develop a model for a non-profit rating institution. 
The foundation, based in Guetersloh, Germany is a politically nonpartisan think tank dedicated to making an "enduring contribution to society" including a "just and efficient economic system." 
Funded from its income from shares in publishing giant Bertelsmann AG, the foundation has offices in Brussels and Washington. (Reporting by Edward Taylor; Editing by Mark Potter)
Personally, I would be more supportive of simply ditching the ratings agencies, or making them a creation of the free market: that is, they should be created by entrepreneurs, and they should be selling their reports to the investors who want to invest in company X.

Currently, ratings agencies are an oligopoly created the US government (and the Chinese) ; and company X fund the report (basically, meaning that there's a massive conflict of interest).

Looks like investors in Denmark are getting there, but because their investments have been downgraded (meaning they are about to lose or have already lost money as a result of falling prices of their bonds).

The report below contains a few extra interesting points:

  • Denmark has the 3rd largest mortgage bond industry in the world, for such a tiny country — expect a massive bubble to pop
  • Investors don't care about the ratings, because those mortgages are safe — we all know how this story ends
  • Marc Stacey explains why ratings agencies have to herd — meaning they are basically non-independent, due to conflicts of interest and lack of independent thinking as well.
  • Adjustable-rate loans, as well as loans that delay principle payments by as much as 10 years, make up more than half Denmark’s outstanding homeowner debt — meaning that the whole mortgage industry is a massive subprime one, based on a pyramid of debt with delayed repayment 

(Bloomberg) — 2012-04-19 Denmark’s biggest banks are firing Moody’s Investors Service as they win assurances from some of the country’s biggest investors that the opinions of ratings companies hold limited value. 
Nykredit A/S, Denmark’s biggest mortgage lender and Europe’s largest issuer of covered bonds backed by home loans, terminated its contract with Moody’s on April 13, citing its “volatile” views. Danske Bank A/S (DANSKE)’s mortgage unit Realkredit Danmark A/S, the country’s second-largest home-loan provider, dropped Moody’s in June. Jyske Bank A/S, Denmark’s second- biggest listed bank, is looking into ending its dealings with Moody’s, according to Steen Nygaard, its head of treasury. 
They have just crossed the line for fairness,” Nygaard said in an interview. “It’s not just that we have an opinion and if they rule against us, we are mad and walk away. It is about the fundamentals where we simply cannot follow Moody’s arguments.” 
Moody’s in June criticized Denmark’s $470 billion mortgage- bond industry, the world’s third largest after the U.S. and Germany, for failing to curb refinancing risks fueled by a mismatch in funding and lending maturities. Since then, Nykredit’s benchmark index of Denmark’s most-traded mortgage bonds has risen 6.3 percent to a record, signaling investors are disregarding the warnings. 
[...] “It’s not that ratings don’t matter. Of course they do,” said Inger Huus Pedersen, head of fixed-income investments at Hellerup, Denmark-based pension fund PKA, which oversees about $27 billion in assets. “These mortgage bonds, we feel pretty secure about. It’s an old system that’s gone through a lot, which is why I’m quite secure about the system. History has shown us that ratings agencies make mistakes as well.”
[...] In Denmark, Moody’s has been tougher on mortgage banks than other rating companies. [...] “Moody’s has shown a harsh stance on banks ratings compared to the other agencies,” said Marc Stacey, a fund manager at BlueBay Asset Management Ltd. in London, which oversees $42 billion in credit. “If Moody’s upcoming announcements show that they are an outlier, compared to where the other two rating agencies are, then you may find the Moody’s rating being dropped by more and more issuers.” 
[...] Denmark’s two-century-old mortgage market has moved away from traditional, fixed-rate 30-year loans and started offering adjustable rates in 1996 and interest-only loans in 2003 to attract more customers. The country is still struggling to emerge from a recession triggered by a burst housing bubble in 2007. A regional banking crisis claimed three lenders last year. 
“We agree there are risks, but they are less than when the house prices were in a bubble phase,” Nygaard said. “We cannot see the huge risk to the Danish economy. Jyske Bank is much stronger today that it was in 2007.” [...]  
While Denmark’s government debt is half the euro-area average at 44.6 percent of gross domestic product in 2012, the European Commission estimates, its private debt is the world’s highest. Household debt reached 310 percent of disposable incomes in 2010, according to Exane BNP Paribas. Danes’ savings, while high, are mostly “locked up” in hard-to-access pension and real estate assets, central bank Governor Nils Bernstein has said. 
Adjustable-rate loans, as well as loans that delay principle payments by as much as 10 years, make up more than half Denmark’s outstanding homeowner debt, according to the Association of Danish Mortgage Banks. Bernstein has urged the industry to phase out interest-only loans, which he says erode economic stability. 
Foreclosures jumped an annual 32 percent last month to a 17-year high, after Denmark’s economy fell into a recession in the second half and house prices sank an annual 8 percent in the fourth quarter. 
“What Moody’s is doing is putting pressure on the system, and that is not necessarily a bad thing,” said Peter Lindegaard, head of investments for Danica Pension, a unit of Danske Bank. Still, Lindegaard said Danica, which holds 20 billion kroner in mortgage debt, won’t exit Nykredit’s bonds after the lender dropped Moody’s. 
We think we know as much as Moody’s about how the system works,” Lindegaard said in an interview. “We still deem them a very secure investment.
Thanks for my friend Blbl for sending me the links a while ago! 

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