http://alephblog.com/2007/12/25/in-defense-of-the-rating-agencies-ii/ Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control Thu, 18 Mar 2010 05:20:57 -0400 http://wordpress.org/?v=2.8.4 hourly 1 http://alephblog.com/2007/12/25/in-defense-of-the-rating-agencies-ii/comment-page-1/#comment-16279 PaulinKansasCity Thu, 27 Dec 2007 01:38:21 +0000 http://alephblog.com/?p=419#comment-16279 Great post David and interesting comments Jason. It appears to me that credit risk will be repriced and the cost of a lot of loans/bonds/etc. will have to increase to the borrower. Once that happens we may see liquidity return and the end of the "sell anything with ABS exposure" trade. See FMD for my 2007 lesson in personal humility of not respecting the psychology of the market enough; yikes! Great post David and interesting comments Jason. It appears to me that credit risk will be repriced and the cost of a lot of loans/bonds/etc. will have to increase to the borrower. Once that happens we may see liquidity return and the end of the “sell anything with ABS exposure” trade. See FMD for my 2007 lesson in personal humility of not respecting the psychology of the market enough; yikes!

]]> http://alephblog.com/2007/12/25/in-defense-of-the-rating-agencies-ii/comment-page-1/#comment-16257 Jason Pratt Wed, 26 Dec 2007 04:17:44 +0000 http://alephblog.com/?p=419#comment-16257 Look, it's holiday time so this won't have the punch it deserves (and I'm a novice at blogging) but this high horse nonsense with calling the rating agencies out is getting old. It's everything I can do to not write angry letters to the idiots in the media covering this stuff as though it were Watergate all over again. I've been doing this for 15 years so (managing fixed income portfolios) and I recognize I'm no sage, but why isn't anyone talking about the bigger picture? AAA credit at 3M Libor + 25 basis points??? C'mon. Sure, we'll lever it up 10 times and be happy! Securitization isn't the problem - investors have not been willing to pull their heads out of the sand and ask if they are getting paid enough for the risk. Relative value investing carries some or a lot of the burden here. Investing for the sake of investing/out of fear that it may not all go wrong makes people weak. But it's simply too easy to Monday morning QB here. Everyone involved at the institutional level absolutely understands that the data backing the ratings on these vehicles is limited. That's why they were participating. By the way, a prolonged low interest rate environment with little or no credit/default risk since 2002 doesn't hurt either. How many "traders" have been putting capital at risk (read, waiving it in) since then thinking they were brilliant? What part of sub didn't you understand? "No brainer trades?" Cheap leverage too? Ah! But to blame the rating agencies? Look, I understand the acedemics plugging competition but Fitch tried to enter the dualopoly and all they could muster was a platform which provided ratings for ABS securities that the other guys wouldn't rate quite as high. Now it's a reaction game of who can downgrade harder and faster. In the mean time, Moody's just fired a bunch of their talent at a time where they need all hands on deck. So, I'll just say that everyone is involved here at some level - and the market will figure out a way to digest all of this just like it has every other time the sun was compromised temporarily in the past. Risk premiums will rise, investors rather than traders will carry the day and we can reset the table in about a year. Happy Holidays... Look, it’s holiday time so this won’t have the punch it deserves (and I’m a novice at blogging) but this high horse nonsense with calling the rating agencies out is getting old. It’s everything I can do to not write angry letters to the idiots in the media covering this stuff as though it were Watergate all over again. I’ve been doing this for 15 years so (managing fixed income portfolios) and I recognize I’m no sage, but why isn’t anyone talking about the bigger picture? AAA credit at 3M Libor + 25 basis points??? C’mon. Sure, we’ll lever it up 10 times and be happy! Securitization isn’t the problem – investors have not been willing to pull their heads out of the sand and ask if they are getting paid enough for the risk. Relative value investing carries some or a lot of the burden here. Investing for the sake of investing/out of fear that it may not all go wrong makes people weak. But it’s simply too easy to Monday morning QB here.
Everyone involved at the institutional level absolutely understands that the data backing the ratings on these vehicles is limited. That’s why they were participating. By the way, a prolonged low interest rate environment with little or no credit/default risk since 2002 doesn’t hurt either. How many “traders” have been putting capital at risk (read, waiving it in) since then thinking they were brilliant? What part of sub didn’t you understand? “No brainer trades?” Cheap leverage too? Ah! But to blame the rating agencies? Look, I understand the acedemics plugging competition but Fitch tried to enter the dualopoly and all they could muster was a platform which provided ratings for ABS securities that the other guys wouldn’t rate quite as high. Now it’s a reaction game of who can downgrade harder and faster. In the mean time, Moody’s just fired a bunch of their talent at a time where they need all hands on deck. So, I’ll just say that everyone is involved here at some level – and the market will figure out a way to digest all of this just like it has every other time the sun was compromised temporarily in the past. Risk premiums will rise, investors rather than traders will carry the day and we can reset the table in about a year. Happy Holidays…

]]>