Zillow Expert Survey Predicts Continued Decline in Housing Prices

Zillow Chief Economist Stan Humphries reports that the March 2012 Zillow Home Price Expectations Survey predicts that home prices will continue to decline in 2012. These are economists making predictions, not markets clearing. It would be interesting to see what the market clearing predictions would be. Probably they would be more volatile than the economists’ predictions.

Sovereign Credit Ratings

With the default of the Greek government and the general concern on the part of investors about the creditworthiness of European governments, many of the credit ratings agencies have downgraded various European sovereign debt issues. As credit default risk increases, the interest rates paid by these governments has increased and borrowing money has become more difficult.

This has led to a variety of European politicians comments on the credit ratings agencies that seem mired in misunderstanding of the role of credit rating agencies and what they are striving to accomplish. Myriam Fernandez De Heredia of Standard & Poor’s responds to some of these critiques in the attached article.

Greeks Experiment with Online Currency

In Greece, there is a scarcity of Euros and a desire to continue to have a currency to facilitate trade. As people in other parts of the world have done, some Greeks are moving to a digital currency, Local Alternative Units. The Greek government has defaulted on its debts, so it is difficult for normal Greek citizens to engage in normal banking functions. One suspects that tax avoidance is another reason for the interest in the alternative currency.

CFA Institute Weighs in Credit Ratings Industry

The issuer-pay credit ratings industry has taken quite a few hits from Congress, the regulators and the media in the aftermath of the subprime mortgage crisis. Now the independent industry group, the CFA Institute, has written about where the issuer-pay credit ratings industry is today and where investors should go for their credit analysis.

The article discusses various alternatives to using S&P, Moody’s and Fitch as the basis of an investor’s credit analysis. One alternative omitted from the discussion is an investor-pay credit rating agency such as Egan-Jones. In various academic papers, the investor-pay ratings have been shown to have better predictive power than the issuer-pay ratings. Some of the papers speculate that this difference is due to the difference in the business models of the firms generating the ratings.

Virtual Currencies, Online Transactions and the Future of Cash

Marco Rabinowitz has written a speculative article about the future of currencies being affected by technology companies. He starts with talking about the trend towards the disappearance of bank notes. The replacement with debit cards, credit cards and services such as PayPal’s Digital Wallet.

After going through the digital currencies in the market such as BitCoin and FaceBook Credits, he goes on to speculate that retailers such as Google or Amazon might be the most effective companies to issue currencies that break into the mainstream. Interesting speculation.

PayPal’s Digital Wallet Expanding Its Capabilities

PayPal will be rolling out more functionality on its digital wallet product. The new app will allow a consumer to pay with a variety of different payment options. The functionality is moving beyond the services provided by banks now to help consumers manage their financial affairs with greater efficiency.

It’s Official: Greece Has Defaulted….Again

Private holders of Greek government debt have agreed to restructuring their holdings accept new securities with face value of less than half the original amount. The new agreement triggered the credit default swap payments for those participating in such swaps.

According to This Time Is Different, the last time Greece defaulted on its sovereign debt was 1932. 80 years between defaults is pretty good for Greece. It provides reminders to others that sovereign debt has its risks as well as other types of debt.

BRICS Finance Ministers To Meet On Lending

The finance ministers of Brazil, Russia, India, China and South Africa are meeting on March 29 to discuss creating a mechanism for lending in local currencies to maximize trading between the five countries. This mechanism would reduce the dependence of the world economy. It would represent a step away from using the US dollar as the world’s reserve currency.

Brief History of Credit Rating Agencies

In Investopedia’s Brief History of Credit Rating Agencies, they trace the history of Fitch, Moody’s and S&P. Below they outline the seminal event that has led to the structure of the industry we see today.

“In 1975, financial institutions, such as commercial banks and securities broker-dealers, sought to soften the capital and liquidity requirements passed down by the Securities and Exchange Commission (SEC). As a result, nationally-recognized statistical ratings organizations (NRSRO) were created. Financial institutions could satisfy their capital requirements by investing in securities that received favorable ratings by one or more of the NRSROs. This allowance is the result of registration requirements coupled with greater regulation and oversight of the credit ratings industry by the SEC. The increased demand for ratings services by investors and securities issuers combined with increased regulatory oversight has led to growth and expansion in the credit ratings industry.”

Read more: http://www.investopedia.com/articles/bonds/09/history-credit-rating-agencies.asp#ixzz1p0vwIjyk

Over time, pension funds, mutual funds, trusts and other pools of capital adopted the use of credit ratings in investment guidelines for their portfolios. This institutionalization of the use of credit ratings led to bond issuers needing a rating to be able to sell their bond in the market. Bond issuers then become the primary revenue source for S&P, Moody’s and Fitch’s credit rating services.

The government has studied the business models of these firms here, here, here and here. The various government entities have laid part of the blame for the financial crisis with S&P, Moody’s and Fitch as well as their business models.

S&P loses rating assignments to Kroll and Morningstar

Large banks such as JPMorgan Chase, Citibank and Goldman Sachs are now using credit ratings firms such as Kroll and Morningstar to rate their Collateralized Mortgage Backed Securities (CMBS) offerings rather than S&P. The large banks are making the credit ratings market more competitive by straying outside of the big 3 firms of S&P, Moody’s and Fitch. For the credit ratings firms, the fees for doing these ratings are quite high and this represents a very positive revenue boost for Kroll and Morningstar.