The GM Saga Continues

GM was downgraded by Moody"s from Baa2 to Baa3 in an action that caused a temporary selloff in the S&P futures today. Mish readers will note that Baa3 is still one notch above junk as can be seen from this chart.

Since Lehman changed the rules on junk ratings to require two of three rating agencies to have junk status before it no longer hypes a company"s debt as investment grade, there was little immediate impact to today"s ratings change and the futures quickly recovered.

Is Lehman trying to protect their corporate bond business with that change?
Let"s take a look at what Credit Magazine has to say.

"In late January, reportedly after consultation with investors and amid considerable volatility surrounding General Motors bonds, Lehman Brothers joined the pack and added Fitch to its index criteria. it was the timing of the change to Lehman�s index rules that provoked debate. The new methodology assigns each security the middle rating of S&P, Moody�s and Fitch, implying that two out of the three agencies need to rate a security investment grade for the security to be eligible for Lehman Brothers� Investment-Grade Aggregate indices.

This was of immediate benefit to owners of bonds issued by General Motors, which had taken a week-long pounding in the secondary markets after poor financial results prompted S&P to announce a review of GM�s debt rating, which currently stands just one notch above junk. Under Lehman�s former rules, inclusion in the investment-grade index was calculated according to the lower of the two ratings. A downgrade to junk from S&P would have consigned General Motors to Lehman�s high-yield index, produced considerable forced selling from investment-grade-only portfolios and swamped high-yield investors with supply from America�s third-largest corporate debt issuer."

That action was a life line for GM and quite possibly a fraudulent one as well. This idea was previously suggested in my previous article MBIA , FNM, & GM . Even with today"s downgrade, there still needs to be two more downgrades before GM"s debt trades at the junk level it has more than deserved for quite some time.

In just the last month, the value of GM"s long term bonds have fallen 27%. That is a quite a huge hit for someone to be taking just so Lehman can keep making huge profits touting total garbage as "investment grade". Right before the fall, I had people telling me that brokers were calling them out of the blue pushing GM bonds. Coincidence? I doubt it.

I suspect there will be well deserved lawsuits against Lehman, S&P, Fitch, and/or Moody"s after all is said and done and GM"s long term debt ultimately proves to be worthless. Then again, we have already seen "bankruptcy reform" that will keep debtors in hock for something close to forever, so perhaps by the time GM"s debt implodes to total worthlessness, there will be some sort of "liability reform" protecting brokers from litigation as well.

Mish