Credit Agencies Awaken From Coma And Citigroup Drops Another Bomb

It looks like the credit agencies awoke to the realization that they should make it look like they are doing something meaningful after contributing to the toxic waste created by financial institutions. Fitch has downgraded Yum Brands' credit rating due to its plan to use debt in an announced share repurchase plan. I see the senior management at Yum has the same PhD in risk management that is so pervasive this cycle. A PhD that Fitch seems to have received as well. That would be a vaunted PhD from the Bozo the Clown School of Risk. Does this mean we can expect to see a retroactive downgrade to all of the other clowns who are using huge amounts of debt to repurchase stock? Including IBM, the second most expensive Dow component that I have highlighted as such, who is taking on over $11 billion in debt to buy back shares? Because their finance executives believe the company is underleveraged? Is the once fiscally conservative IBM falling prey to Wall Street shenanigans? This practice of using debt for buybacks has become so common it's almost a standard part of doing business thanks to the Wall Street version of capitalism so pervasive in the world. How great is that? Is this really any different than taking out a second mortgage on your home to buy stocks? Are you under leveraged? Need a few more credit cards? Follow the lead of corporate America and Europe and lever it up.

Of course, the flip side is that the companies who actually were conservative in their use of corporate funds were the targets of hedge funds and private equity attempting to raid the corporate coffers for cash as discussed in the private equity post.

Those darn banks just can't get out of the headlines. Now we see Citigroup is suspending its stock buy back to rebuild its capital levels. Ya think? Of course, at the same time they want to be a lender of last resort in a new scheme to fix the off balance sheet commercial paper market they probably shouldn't have been involved in in the first place. At least shouldn't have been involved in its current structure. How might they be the lender of last resort when there are reasonable probabilities the lender of last resort will have to save some of the banks who want to be lenders of last resort before this cycle is complete?! Is that confusing enough? A little bit of attempting to save their own butts given Citi's exposure to that market. These won't be the last announcements from major banks on any of these topics. In fact, it's more likely the first. Nor will this likely stop at share buy backs but will also likely spread to dividend cuts. Banks will be lucky to stop the bleeding at dividend cuts.