|
As the subprime mortgage debacle has unfolded over the past nine months, investors have pummeled the stock prices of some of the nation’s premier financial institutions. As Chart 1 shows, Countrywide, the nation’s largest mortgage originator, saw its stock plunge by 86 percent from $42.24 to $5.93 on March 4th. Citigroup, the largest U.S. bank (as measured by assets), had a decline in its stock price of 60 percent, or almost twice as steep as bank stocks generally. From a 12-month high of $55.55 last May 18th, its stock had fallen to $22.10 by March 4th. (The S&P 500 stock index is down about 16 percent from its 12-month high last October.)
Beyond that, the shares of the big three bond raters (more accurately, of their parent companies) have been cut roughly in half. Chart 2 focuses on the parent companies of the two largest ratings firms, Moody’s and Standard and Poor’s. Moody’s Corporation’s stock fell from a 12-month high in May 2007 of $73.79 to $37.46 March 4th. McGraw-Hill, S&P’s parent, had its stock fall almost as sharply, from $72.50 last June to $40.46, a 44 percent drop. (A third, smaller ratings firm, Fitch, is owned by a French company, Fimalac, whose stock price has been cut in half over the past 10 months.)
Is this a matter of “killing the messenger”? Or have investors had objective reasons to expect the earnings of Moody’s, S & P, and Fitch to tail off as Congress and the regulators react to the current financial crisis? (A detailed analysis of the bond ratings agencies may be found in our Research Reports, December 3, 2007. To receive our Research Reports, become an Annual Sustaining Member).
At a glance, three factors would seem to signal lower future earnings for the ratings agencies. First, a hefty chunk of their earnings in the last few years has come from their role as advisors on the packaging of so-called Collateralized Debt Obligations (CDOs), which are now being shunned by the investing public. Second, in December the SEC chartered a new ratings agency, Egan-Jones, which not only adds competition to what had been a cozy club, but also introduces a new business model whereby investors, not bond issuers, pay for the ratings. Third, the SEC has announced that it wants to write new and tighter rules for the ratings industry, a further sign of a regulatory sea-change.
In short, the sharp drop in stock prices for the parent companies may simply reflect the fundamentals: market expectations of falling earnings for the ratings agencies.
|
