Moody's must face whistleblower analyst's claim (Reuters)

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Moody's managers pressured analysts: ex-staffer (Reuters)

By Sarah N. Lynch Sarah N. Lynch – Fri Aug 19, 4:50 pm ET

WASHINGTON (Reuters) – An ex-Moody's Corp derivatives analyst said the credit-rating agency intimidated and pressured analysts to issue glowing ratings of toxic complex, structured mortgage securities.

In a 78-page letter to the Securities and Exchange Commission, William Harrington outlined how the committees that make the ratings decisions are not independent and how managers often intimidated analysts.

"The management of Moody's, the management of Moody's Corporation and the board of Moody's Corporation are squarely responsible for the poor quality of previous Moody's opinions that ushered in the financial crisis," he wrote.

"The track record of management influence in committees speaks for itself -- it produced hollowed-out (collateralized debt obligation) opinions that were at great odds with the private opinions of committees and which were not durable for even a short period after publication," he added.

Harrington's August 8 letter, which was sent in response to a 517-page proposal by the SEC on credit-rating regulations, raises similar issues that are already at the heart of a Justice Department probe into McGraw-Hill's Standard & Poor's.

"We cannot emphasize strongly enough the importance Moody's places on the quality of our ratings and the integrity of our ratings process," said Moody's Corp spokesman Michael Adler. "For that very reason, we have robust protections in place to separate the commercial and analytical aspects of our business, and our ratings are assigned by a committee -- not by any individual analyst."

The Justice Department has been looking into what S&P analysts wanted to do with ratings during the financial crisis, and what they were told to do, according to one source familiar with the matter.

A second source has said the department also has been investigating Moody's in connection with structured product ratings during the crisis, although the exact focus on that probe is unclear.

Earlier this year, a U.S. Senate panel led by Michigan Democrat Carl Levin found that Moody's and S&P helped trigger the financial crisis after the two rating agencies gave overly positive ratings to toxic mortgage-related products and then later downgraded those ratings en masse.

Last year's Dodd-Frank Wall Street overhaul law tightens regulations for raters, including improving the transparency of the methodology used and curbing potential conflicts of interest. The SEC in May issued a proposal seeking comments on many of the Dodd-Frank provisions on rating agencies.

Harrington, who said he worked as an analyst in the derivatives group from 1999 until July 2010, said he thinks that if the SEC's proposed rules had been in place in 2002, they would still not have gotten to the heart of the problems at Moody's.

"Many of the proposed rules still give more license to the management of Moody's to step up its long-standing intimidation and harassment of analysts, to the detriment of opinion formation," he said.

(Additional reporting by Jeremy Pelofsky)

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BofA mortgage woes do not crimp capital: analysts (Reuters)

CHARLOTTE, North Carolina (Reuters) – Bank of America Corp (BAC.N) will not likely need to raise capital unless it is forced to recognize mortgage losses sooner than expected or is required to boost capital levels faster, a Sanford Bernstein analyst wrote on Monday.

But in the short-term, another veteran bank analyst projects mortgage issues will cut the bank's 2011 earnings in half.

The largest U.S. bank by assets will likely be able to increase its book value and build capital to meet new industry rules while absorbing an estimated $27 billion in additional housing losses, Sanford Bernstein analyst John McDonald wrote in a note to clients.

BofA has already recognized $46 billion in housing-related losses, according to the note.

Recovering from the U.S. housing market collapse will be long and painful, but with BofA shares about 20 percent below their tangible book value -- a measure of net value excluding intangible assets like goodwill -- the shares are set to perform better than the overall market in the year ahead, McDonald wrote.

He continues to rate the shares "outperform," with a 12-month price target of $16.00. The shares were up 2 cents to $10.82 in Monday morning trading on the New York Stock Exchange.

Separately on Monday, veteran bank analyst Mike Mayo, at CLSA, cut his research firm's 2011 earnings estimate for BofA shares to $0.50 from $1.00 because he expects the bank to settle with private investors over toxic mortgages bundled into mortgage-backed securities.

Mayo's share price target remains unchanged at $14 per share.

Investors have been pushing the bank to rebuy billions in mortgages pooled into securities.

CLSA's Mayo said in the note he projects the bank will settle those claims this year for $7 billion.

Mayo projects the settlement figure based on a $5 billion present-value for the mortgages, with a $2 billion premium to entice a settlement.

In the longer term, Sanford Bernstein's McDonald said BofA would be able to build both its book value and capital unless toxic mortgage or other housing losses top an additional $55 billion -- more than double Sanford Bernstein's current estimate -- or if the bank is required to recognize losses faster than expected over the next three years.

Much of BofA's mortgage losses stem from the acquisition of Countrywide Financial Corp in 2008. The California-based company was one of the most aggressive U.S. subprime mortgage lenders before the domestic housing market's boom ended that same year.

BofA bought the ailing mortgage company for $4 billion in 2008.

Faster loss recognition could come, for example, from settling claims with mortgage bond investors over home loans that were bundled into securities. Regulators could also force the bank to attain a particular capital level earlier than the current timeline, which for global capital rules under Basel III is 2013 to 2019.

U.S. banks are boosting their capital reserves in advance of Basel III, for which rules are still being finalized.

Within the last year, BofA has shed investments and operations to increase its capital ratios under the looming rules.

(Reporting by Joe Rauch; editing by John Wallace, Dave Zimmerman and Bernard Orr)

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Mortgage debt is down, Americans' net worth up, but analysts call gains fragile (The Christian Science Monitor)

An increase in household net worth appears to be improving the financial condition of American families, but slowly.

That's the message from a report released Thursday by the Federal Reserve, which showed a rise in household net worth and a decline in the level of mortgage debt.

The Fed’s report follows less than a week after the Labor Department reported that the unemployment rate rose in May to 9.1 percent, a sign that the economic recovery is still fragile and hasn’t reached all American households.

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In this year's first quarter, the total of all US mortgage loans fell below $10 trillion, after being above that level for about four years, the Fed reported. Family assets rose in value, as a fall in home prices was more than offset by gains in financial assets like stocks and mutual funds. The net worth of all US households reached a total of $58 trillion, up about $1 trillion from the previous quarter. Essentially, American net worth is back to 2005 levels, but still below its 2007 peak of $64.2 trillion. A catch: As of Thursday, the stock market has lost value since the beginning of April, so economists say the next quarterly numbers probably won't be as positive. "Private finances are slowly improving as deleveraging continues and the labor market improves," Gregory Daco, an economist at IHS Global Insight, wrote in an analysis of the new numbers. But without more gains in financial assets, he said, "the depressed housing market will be a drag on household net worth in the second quarter."

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The overall numbers mask a wide disparity in the financial health of US households, which vary widely based on families' levels of income, debt, and ownership of homes or stocks. A separate report earlier this week, from the information firm CoreLogic, estimated that 22.7 percent of US mortgages are "under water," with the borrowers owing more than their homes are worth. That's a bit lower than in last year's fourth quarter. And when the five hardest-hit states are excluded (those are Nevada, Florida, California, Arizona, and Michigan), that percentage falls to 16 percent. Across the US, many households have "deleveraged" by either paying down debts or defaulting on home loans. Another challenge for households is that when they do want to borrow, it can be hard to obtain credit. Banks are cautious about making new loans when home prices may fall further and many properties are still in the foreclosure pipeline. Still, banks are expanding their loans to businesses, and other loans to consumers (such as credit card debts) have been rising as well. Although many households have too much debt, relative to their income, the general availability of credit is an important indicator – with new loans and economic growth typically rising hand in hand.

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