Dontcha just love the smell of subprime in the morning? If you haven't done so yet, consider signing up to not-so-maudlin John Mauldin's informative (and free) newsletter covering the latest investment trends in the United States. I was struck by Mauldin's latest finding: many US banks--especially those heavily exposed to the housing contagion--now have debt issuances with yields higher than those of Iraqi sovereign paper [!] Providing evidence that credit rating agencies have lost even more credence than previously thought, the Cleveland-based FIs mentioned are actually rated "A" despite their fat spreads of Treasuries. In contrast, Iraqi debt isn't even rated by the agencies. This is from Mauldin's newsletter dated August 29:
And it can get much worse for some banks. In the "for what it's worth" department, Iraq's bonds are now considered safer than those of many US banks. The country's $2.7 billion of 5.8% bonds due 2028 have gained 45% since August 2007, according to Merrill Lynch & Co. indexes. Investors demand 4.84 percentage points more in yield to own the debt instead of Treasuries, down from 7.26 percentage points a year ago. The spread is narrower than for notes of Ohio banks National City Corp. and KeyCorp, suggesting Baghdad may be safer for bond investors than Cleveland. National City and KeyCorp, based in Cleveland, have debt ratings of A and spreads of 959 basis points (9.59%) and 7.55 basis points (7.55%), respectively. Iraq debt has no ratings. Clearly the market is ignoring the rating agencies which give the banks an "A" rating. Their debt is priced at the junk level. Go figure. (Source: Bloomberg)