Some quick excerpts from documents obtained by the House Oversight Committee and presented today:

In one document, an S&P employee in the structured finance division writes: “It could be structured by cows and we would rate it.” In another, an employee asserts: “Rating agencies continue to create [an] even bigger monster — the CDO market. Let’s hope we are all wealthy and retired by the time this house of cards falters.” {Emphasis added]

And another:

In 2001, Mr. Raiter [of S&P] was asked to rate an early collateralized debt obligation called “Pinstripe.” He asked for the “collateral tapes” so he could assess the creditworthiness of the home loans backing the CDO. This is the response he got from Richard Gugliada, the managing director: "Any request for loan level tapes is TOTALLY UNREASONABLE!!! Most investors don’t have it and can’t provide it. Nevertheless we MUST produce a credit estimate. … It is your responsibility to provide those credit estimates and your responsibility to devise some method for doing so."

Mr. Raiter was stunned. He was being directed to rate Pinstripe without access to essential credit data. He e-mailed back: “This is the most amazing memo I have ever received in my business career.” [Emphasis added]

Much more here.

Another excerpt from the credit rating testimony today, this one from a former senior S&P official:

This inevitably begs the question: why didn’t management see the need to keep [its ratings] model current [with respect to CDOs/subprime/etc.]? The answer is complex. First and foremost, it was expensive to build or acquire the growing data bases, perform the necessary statistical analyses, complete the IT code modifications and implement and distribute new versions of the model - this process also required significant additions to staff. By 2001, the focus at S&P was profits for the parent company, McGraw-Hill- it was not on incurring additional expense. Second, there was an intense debate within the ratings groups as to whether we needed loan level data and related analyses. The Managing Director of the surveillance area for RMBS did not believe loan level data was necessary and that had the effect of quashing all requests for funds to build in-house data bases. A third reason given was that the RMBS group enjoyed the largest ratings market share among the three major rating agencies (often 92% or better), and improving the model would not add to S&P’s revenues.

In short, S&P didn't feel like it needed to adjust its credit models -- it was making too much money.

More here.

Some quick links:

• Barney Frank calling for moratorium on Wall Street bonuses (Bloomberg)
• CDO cuts show $1-trillion in corporate debt newly toxic (Bloomberg)
• OPEC risks split on cuts as member-countries reel (Bloomberg)
• Glory days fade for U.S. farmers (WSJ)
• Pakistan looking for $4b in emergency IMF aid (Times)
• Young voters, get mad (Samuelson/WashPost)
• The FDIC is looking for office space in SoCal (L.A. Times)

Nice visualization (via Finviz) of global declines today:

Riveting brinksmanship going on at 11th hour as Fortress Investment Group works frantically to refinance $1.7-billion in Intrawest debt, which expires tomorrow. Recall that Intrawest, the owner of the Whistler ski resort -- which will host the 2010 Winter Olympics -- was purchased by Fortress in a private equity market-top transaction back in 2006.

From what I'm hearing, there is at least one hold-out among the syndicate holding Intrawest notes. They need to agree unanimously to any debt restructuring, and that is awfully tough right now. Said debt is trading at 70 cents on the dollar, implying a 9% yield, way up from the original 6.4% at issue. That, of course, creates a nasty box for the company and its investors, especially given Intrawest's massive exposure to busted consumers and broken resort real estate markets.

While it's not likely we will see a bankruptcy filing here, it is possible we will see some sort of prepackaged bankruptcy-lite deal. The next 24 hours will tell. And, more broadly, this is a drama we will see play out over and over again among private equity deals funded in the 2005/06 timeframe as their mistimed short-term debt comes due.

[Update] More here.

Some useful data from Nielsen about recession-proof and recession-vulnerable consumer categories.

Driving that point home, the largest U.S. past maker (I think) is American Italian Pasta Company (OTC:AITP), which is up a spiffy 104% this year. Granted, it's smallish-cap ad OTC, but still something to keep in mind as you think thematically.

The actual soon-to-be-infamous "cows" IM exchange from credit rating agency S&P:

Nice comments from a pissed Fortis investor excerpted in an internal Moody's email in 2007:

This came up, indirectly, while I was on CNBC this morning, so here is a table of the top 30 countries worldwide as measured by external debt leverage. In other words, I'm looking at the ratio of total public and private debt owed to non-residents divided by the GDP of that country.  Obviously, fast-changing exchange rates and massive increases in bailout-inspired government debt issuance make this a ratio to watch.

Graphic removed

[Update] Had some stale data for Europe, but think mostly fixed now. Still some trouble with emerging market data, with damn external debt numbers changing too quickly. In answer to other questions, the debt is on an exchange rate basis as 1/1/2008, while the GDP is PPP.  This was just intended to give a general sense, not to be authoritative. If I get a chance, will wade back in at some point with JEDH/Worldbank data.

[Update 2] Okay, while the idea is broadly right –- people need to pay closer attention to debt/gdp ratios, and we need less chatter about total debt -- there are issues galore popping up with this dataset. My fault, and I'm taking the image down until I can get better data. I'll leave the post itself up.

Some back-door data on the California real estate market via rebuilding statistics from the 2007 wildfires in southern California. A year later, only 150 homes out of the 1,646 burned -– roughly 9% -– have been rebuilt. While it looks we will make it to at least 36% before too long, a surprisingly large number of people are simply dropping out of the housing market.

The issues? Manifold, but too little insurance to build in price-inflated California is right up there.

More here.

My book recommendation du jour is Niall Ferguson's overlooked The Cash Nexus. It is a prodigiously researched and and authoritative look at the relationship between money and power from 1700-2000.

Ferguson's book should be required reading for anyone trying to understand the long and difficult relationship between economic cycles, debt (both public and private), financial innovation and political systems in this world of ours.

It never rains, but it pours. I have had a few people email me saying an International Monetary Fund image in this post was causing their security scanners to warn of a possible Win32 image trojan. I have left the post up, but removed the IMF graphic. Meanwhile, I'm looking into it.

Folks, an update on the trojan alert I posted here a short while ago. A few people had emailed me that their antivirus apps flagged an International Monetary Fund graphic I had reposted here as possibly contained an image trojan. I took the image down, posted a note here, and began investigating.

So far, here is what I have done. I have extensively scanned systems here for trojans and viruses, with nothing showing up whatsoever. Further, I have multi-scanned the image file in question, with the following results:

Most of the scanners found nothing, but two said they had found Exploit.Win32.IMG-GIF.b in the IMF image. Note, however, that F-Secure uses the Kaspersky engine, so what we really have is one engine out of the group that found anything in the image. Given that there was nothing on my system, given the credible source (the IMF), and given that false positives are surprisingly common among virus scanners (cf., "Goddammit – It's Kaspersky again"), my current inclination is to cautiously say there is no problem here.

I have, nevertheless, done two things:

1. In a spirit of caution I am keeping the image down.
2. I have emailed the people at Kaspersky and asked them to re-check the claim of a trojan in the above image file.

I will keep people apprised.

If you recall, some time ago I agreed to a just-for-entertainment bet with Arik Hesseldahl at BusinessWeek about Apple's Q4 2008. If the company missed its quarter or guided down, I won, and if it did neither, he won. The winner would donate $50 to the loser's charity.

Well, Apple's quarterly results are now in, so we need a verdict.

The result? I won, but it was admittedly closer than expected. Apple made its Q4, but guided down for the current quarter. That still qualified as a win under our agreed criteria, so Arik is graciously writing a check to the Natural Resources Defense Council.

Here is Arik's post on the subject.

I wrote a guest column this week over at Tina Brown's new The Daily Beast on whether fiscal stimulus is a good idea. Along the way, I noodled numbers about how much stimulus you'd need in the U.S. to make a difference anyway.

Read it here.

The S&P 500 has predicted nine of the last five recessions, but now that we're undeniably in one, it's worth reminding yourself of the relationship between S&P 500 index moves and the economy itself. The relationship is generally leading, with it a mistake to be surprised at positive market moves long before a recession is over.

[via Northern Trust]