purealpha Wrote: ------------------------------------------------------- > These guys are a joke. > > As an analyst you gotta think for yourself, they > are useful as long as you don’t take them too > seriously. Of course you need to think for yourself. However, having a statistical base to your coverage decisions for ABS, or having estimation of losses, is a good idea. There is nothing wrong with the RA, I think they provide a needed service and have done well over many decades. That they got away from their roots and relied on limited static-pool data, drastically changed underwriting guidelines, and modeled out perpetual increases in RE prices, is not indicative of the failure of the entire system. I have yet to see widespread defaults and principal loss on asset classes outside of the MBS situation. I’ve participated in the underwriting and rating of dozens of deals and not a single one of them has blown up.
Agreed, I used to use AM best databases and stuff. The raw data is good as far as I know, the ratings just don’t always seem in tune with reality.
spierce Wrote: ------------------------------------------------------- > LBriscoe Wrote: > -------------------------------------------------- > ----- > > How long it take to replace “must be AAA rated” > > with “must be within 100 bps of the fed funds > > rate.” Playing devil’s advocate here. The AAA > > standard is all over the place in financial > > contracts and any changes to it are as likely as > a > > complete overhaul of of the US tax code. > > > That’s such a silly way to set ratings. You > seriously think the market can determine the > correct price even 60% of the time versus using > historical loss rates (maintaining consistent > underwriting) and statistical modeling of events? > > Keep in mind, the “market” thought companies like > eToys were worth far more than they What is the “correct price”? It would be interested to know what corporate bonds in the dot-comers were yielding before their bubble. I would guess they were higher than GE’s or XOM’s, and that their yields adjusted accordingly prior to rating changes. I know that MBSs and CMOs were yielding higher than blue chips all along this last bubble and their yields adjusted before their ratings changed. Under this structure, businesses involved in the mandatory AAA financing (which is a $hit load) would either be out of the risky stuff sooner or never in it in the first place. The way I see it if a bond is yielding high it can’t be AAA; it just doesn’t make sense. I may just be bitter because a few years back a rating agency rejected me.
LBriscoe Wrote: ------------------------------------------------------- > spierce Wrote: > -------------------------------------------------- > ----- > > LBriscoe Wrote: > > > -------------------------------------------------- > > > ----- > > > How long it take to replace “must be AAA > rated” > > > with “must be within 100 bps of the fed funds > > > rate.” Playing devil’s advocate here. The > AAA > > > standard is all over the place in financial > > > contracts and any changes to it are as likely > as > > a > > > complete overhaul of of the US tax code. > > > > > > That’s such a silly way to set ratings. You > > seriously think the market can determine the > > correct price even 60% of the time versus using > > historical loss rates (maintaining consistent > > underwriting) and statistical modeling of > events? > > > > Keep in mind, the “market” thought companies > like > > eToys were worth far more than they > > > What is the “correct price”? > > It would be interested to know what corporate > bonds in the dot-comers were yielding before their > bubble. I would guess they were higher than GE’s > or XOM’s, and that their yields adjusted > accordingly prior to rating changes. I know that > MBSs and CMOs were yielding higher than blue chips > all along this last bubble and their yields > adjusted before their ratings changed. Under this > structure, businesses involved in the mandatory > AAA financing (which is a $hit load) would either > be out of the risky stuff sooner or never in it in > the first place. > > The way I see it if a bond is yielding high it > can’t be AAA; it just doesn’t make sense. > > I may just be bitter because a few years back a > rating agency rejected me. Why can’t it be? You do realize that a rating indicates risk of principal loss, not of liquidity, right? Don’t prices indicate not only risk free, risk, but also liquidity? Thus, if you are an issuer of illiquid bonds you get charged more spread? Is liquidity difficulty an absolute indication of equivalent principal loss risk? I see plenty of AAA ABS bonds that I highly doubt will have $1 of principal loss trading in the 10% area right now. They were trading at 15-20% a month ago. You have some odd ideas at looking at pricing equating to principal loss.
I wonder why something that has the same rating (risk?) as a US treasury and is yielding 10% is illiquid?
The part that is broken about the ratings agencies model is that they are paid by those who want to be rated-and that the ‘ratees’ can shop around for the best rating money can buy. that is a moral hazard which cant be eliminated by arguments such as ‘it used to work thus far’. nobody is doubting the competency of the rating agencies,only the moral hazard their business situation brings about. unless a business model where the users of the ratings (investors) can be made to pay (and thereby hold the rater accountable) is evolved ,the next bubble will see similar situations arising. how come geithner has no plans in this direction?
LBriscoe Wrote: ------------------------------------------------------- > I wonder why something that has the same rating > (risk?) as a US treasury and is yielding 10% is > illiquid? Plenty of reasons why. Again, you aren’t measuring liquidity with ratings, you are measuring the possibility of losing $1 of principal. You can have any number of exotic asset classes that have plenty of protection but are structured in such a way that the general market wouldn’t want it (or maybe couldn’t invest in it). Perhaps the general market is looking at other asset classes they prefer more, thus, more esoteric ones get shunned. That doesn’t mean they can’t be structured to make principal loss very unlikely for the investor. You’re confusing two different concepts.
Dsylexic Wrote: ------------------------------------------------------- > The part that is broken about the ratings agencies > model is that they are paid by those who want to > be rated-and that the ‘ratees’ can shop around for > the best rating money can buy. that is a moral > hazard which cant be eliminated by arguments such > as ‘it used to work thus far’. nobody is doubting > the competency of the rating agencies,only the > moral hazard their business situation brings > about. > unless a business model where the users of the > ratings (investors) can be made to pay (and > thereby hold the rater accountable) is evolved > ,the next bubble will see similar situations > arising. > how come geithner has no plans in this direction? You get that “moral hazard” (people love that statement now) with most circumstances where a buyer relies on a seller’s honesty. Everything from used cars to diamonds to computers. It’s impossible to get rid of and the only way to mitigate the situation is to either regulate the industry or put the industry on notice that it must police itself, or, have people sue the heck out of the most guilty and they go under. Ultimately, the people buying the securities must do their own due diligence and not rely on just the rating. It is nothing more than a guideline. It is not an autopilot or single point decision machine. I do love how people blame the RAs for this problem but forget that the investors were just as, if not infinitely more, stupid than the RAs.
investors were stupid - yes and thats why they deserve to lose all that money. but pray how are regulators capable of regulating away this hazard. what economic incentive (some dont get it that incentives are what drive human behaviour) will make the regulator (in all probability,a career bureaucrat) exert the required level of due diligence. regulators are no less subject to moral hazard. in most cases, it is only an ex post bogus analysis which leads to the false (but easy conclusion) that regulation was the missing piece in the puzzle. i am not saying that regulators are unnecessary -but one without an economic incentive is as susceptible to failure as any other . regulators including SEC ,BIS,Fed require that RBC for banks/insurance cos. be determined on the basis of ratings assigned by these RAs. the regulators mandate essentially makes it an implicit seal of approval by them -thats not so difficult to fathom because thats exactly how institutions regarded them . just like the implicit guarantees on freddie etc
It’s interesting to see that the rating agencies are mainly the ones being blamed for being short sighted and generally incompetent when it comes to ABS CDOs. The IBs all held onto the super senior AAA notes in the deals they structured because their pricing models indicated a spread of 0.10% is appropriate for the risk of the tranche. See Bear Stearns, Lehman, Citi, etc. AMBAC, MBIA, and the other insurers sold protection on super senior, senior and sometimes mezz tranches in notional amounts that leveraged their balance sheets to ridiculous ratios assuming that there would be few losses. Now these firms are all in runoff mode with no hope of raising new capital. Basically, the majority of the street did not see this coming. I don’t see why one would expect the rating agency analysts to be anymore intelligent or insightful in their analysis.
I view them as I would sell-side equity reports…good for basic info and getting a big picture snap shot in a short amount of time.