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Wall Street Whispers: Ratings, Derivatives and Andrew Ross Sorkin

Ratings agencies are notorious for arriving late to the game.

NEW YORK (

TheStreet

) --

Editor's Note: This is a new column at TheStreet, called "Wall Street Whispers." It will take a look at what various media -- news sites, blogs, notes from analysts and investment firms -- are buzzing about, and run down the latest chatter we're hearing about Wall Street.

Four Notches Lower, One Step Behind

It's funny how ratings agencies work.

A terrible calamity is realized by just about everyone in the market. Everything falls apart and it's clear that either a debt-laden entity has gone bankrupt or is on the verge of doing so. (Sometimes the government takes action to stabilize said entity.) Then, the entity's ratings are downgraded.

This happened again on Monday, when

Moody's

(MCO) - Get Report

cut Greece's credit rating to "junk" status.

Apparently, Greece's debt had been investable at an "A3" level the previous day, because Moody's dropped the rating not one notch ... not two notches ... not three notches ... but four.

And not before the markets sensed a crisis was afoot, but weeks after the European Union announced a giant austerity plan, and the Greek government started implementing harsh measures to get the country's finances back in shape. In fact, the ratings cut came just as the market was starting to get its bearings back. Moody's actually cited the solution to Greece's problems as a reason for the downgrade.

The ratings action sounds more than a little familiar. Moody's, S&P and Fitch are notorious for realizing that investors shouldn't be investing in something long after investors realized it on their own. It happened with subprime mortgages, with failed banks and with so-called "zombie" institutions like

AIG

(AIG) - Get Report

,

Fannie Mae

and

Freddie Mac

. Not much seems to have changed.

The U.S. stock market closed lower on Monday, with news outlets citing the bearish Moody's report, but that's questionable. Earlier in the day, markets across the pond made gains on bullish news about the eurozone economy. And it seems evident that ratings firms have been following the market and not the other way around.

Speaking of which, it will be fun to see how Congress

decides to handle

the ratings-agency situation, given the government's reliance on triple-A ...

Congress to Swaps Dealers: I Hardly Knew Ye

If there's one thing you can derive from the latest news on derivatives reform it is this: When high-profile regulators are happy with it, there's little chance Wall Street will get further concessions.

It became clear on Monday that Sen.

Blanche Lincoln is willing to modify her hard-line proposal just enough to get Ben Bernanke, Tim Geithner, and

maayyybe

even Sheila Bair on board. (That would be a coup for anyone wanting to look tough on big banks.)

Lincoln's latest draft would let banks keep dealing in derivatives as long as they place the businesses into affiliates that aren't backed by taxpayer support. Banks would also get up to two years to implement the new rules.

As a result of those type of concessions, it seems that

politicians,

regulators and

a key former regulator may now support Lincoln's proposal. Bill Clinton

already supports her election fight, and that's enough to give any enemy the shivers.

Of course, Wall Street (read:

JPMorgan Chase

(JPM) - Get Report

,

Bank of America

(BAC) - Get Report

,

Citigroup

(C) - Get Report

,

Goldman Sachs

(GS) - Get Report

,

Morgan Stanley

(MS) - Get Report

) still isn't happy with Lincoln's amendment. Big banks (and

their counterparties) don't just want to be safe, they want to be immensely profitable, too. Recapitalizing the affiliates will require big bucks -- as will ensuing margin and capital requirements -- however long the rule takes to implement.

But despite their best efforts in lobbying and campaign donations, it doesn't seem like lawmakers have much interest in helping their friends on Wall Street anymore. Mid-term elections will be tough for incumbents on either side. Voters want to hear -- in Obama's words -- that someone's "ass" is getting "kick"ed.

TST Recommends

Therefore, as soon as the folks responsible for the system's safety and soundness say Lincoln's amendment is a "go," there's a good chance it will be.

The Whisper Finally Echoes

I've been saying this for awhile, and so have some analysts, but the truth about Goldman Sachs seems to have reached the "MSM": Goldman's clients

aren't fleeing the firm.

In fact, there's a case to be made that the

Securities and Exchange Commission's

charges against Goldman show why clients do business with the firm: Goldman has a reputation for being smarter -- and more cutthroat -- than the rest of the Street. (Of course, the government's claim that Goldman "bets against its clients" also shows why someone would not want to be a client, of course.)

Either way, Goldman seemed to have already been tried in the court of public opinion. The fact that a well-respected, high-profile columnist in the

New York Times

(of all places?!) decided to write a column that is somewhat favorable to Goldman Sachs may mark a shift in the debate.

In other words, traders, pollsters, interested observers, take note: The same publication that wrote an op-ed blasting the firm for withholding untold secrets last week has now trumpeting the fact that its clients are still around. Those clients are what have kept Goldman profitable through (

most of

) the financial crisis and its aftermath.

At the same time, a handful of those clients are not happy with Goldman, have joined forces with U.S. regulators and are trying desperately to bring the firm down. Those who have reportedly

ended relationships with Goldman

or shunned its business --

foreign government entities

, domestic government entities,

the MTA

,

AIG

,

GM

-- have had publicity surrounding the situation, and are all either a) linked to a government or b) firms that

lost money on a deal

. Meanwhile,

Berkshire Hathaway's

(BRK.B) - Get Report

Warren Buffett

,

General Electric's

(GE) - Get Report

Jeff Immelt, the chairman of

Hyatt Hotels

and other high-profile clients that are less eager to appear in the press -- I'd bet

John Paulson

is among them -- are still backing the firm.

I'm not a legal expert and don't know definitively whether Goldman did anything illegal or not. (I think there are a bunch of esteemed guys and gals in robes doing that work.) But I'm glad that all cases aren't tried in the court of public opinion either way.

There are two questions at play here: If the SEC has a red flag, why hasn't the regulator been waving it around? Then again, the same can be asked if Goldman has a white flag, especially as its stock price gets hammered.

Either way, if I were betting on the outcome, support from

Times

columnist Andrew Ross Sorkin would lead me to rethink any short positions.

Odds & Ends

Consolidation: Small banks are either dying or buying, while big banks are letting go of noncore assets. Where do the opportunities lie for investors in all this?

Earnings: Results are (at least) a few weeks away, yet when I ask people who are trading "What will break the trading range?" this is what they mention. Is this a sign that people actually care about traditional valuation methods, or a sign that they need some kind of reassurance -- any kind of reassurance -- that the world isn't actually falling apart?

Earnings, take 2: With all the worries about how banks (and other financial-services firms) will

lose

money, I keep asking people how they will finally, consistently, be able to

make

money once again. I've been doing this since January, trying to make it into a theme for 2010 coverage. "Lending" gets laughed at. "Trading" was first written off as inconsistent, and is now laughed at, given FinReg.

So ... what's the next hot pocket for banks to make money? There's an argument to be made for small-business lending (which I've

made in the past

) but seems like there's no clear signal of what's to come until the headwinds die down. For the record,

Wells Fargo

(WFC) - Get Report

has been honing its small-business chops for quite some time -- a bank worth noticing when it comes to smart, "thumb-to-the-wind" lending practices -- while Bank of America has been following suit.

-- Written by Lauren Tara LaCapra in New York

.