(2002-02-27) d

In terms of the Enron bankruptcy, we expect the equity analysts to (a) never say bad things about a company that could generate underwriting fees, and (b) never pooh-pooh a company just because they can't understand its finances, but where were the Credit Rating analysts (like Moody's and Standard And Poor's)? These are the conservative guys who should have been noting the sheltering of liabilities Off Balance Sheet. It took Moody's until late October 12 to downgrade, due to significant write-downs as well as equity charges in previously undisclosed partnership investments. I'm sure those partnerships were disclosed, in the sense that they were listed somewhere; but nobody had the brains or patience to look into them carefully. Since Enron, Moody's has asked for more information from 4,000 companies that use accounting methods that Moody's believes make it harder to judge their creditworthiness.

Who were the biggest creditors left in the lurch? CitiBank ($3B), Bank Of New York ($2B), J P Morgan-Chase ($2B). But lots of these loans were syndicated out to others.

I'm reminded of Tom Wolfe's Man In Full novel, where the conversative risk-management guys get rolled over by the loan "salesmen" in the bank who get rewarded for closing giant loans. Years later, when the debtor goes under, things aren't so rosy. But nobody seems to be any good at evaluating risk. Remember Long Term Capital Management?

Dec'2007: amusing speculative conversation between risk and sales people based on Sub-Prime Mortgage Debt risk.