Comments on: CPDOs: Can Profit-lust Destroy Obligations (to Honesty?) http://alephblog.com/2008/05/21/cpdos-can-profit-lust-destroy-obligations-to-honesty/ Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control Fri, 25 May 2012 21:31:47 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: David Merkelhttp://alephblog.com/2008/05/21/cpdos-can-profit-lust-destroy-obligations-to-honesty/comment-page-1/#comment-17635 David Merkel Thu, 22 May 2008 00:11:48 +0000 http://alephblog.com/?p=703#comment-17635 Lilguy -- If we can criticize them for using their CDO models, then a criticism on CPDOs was fair, because the model was worse than their CDO model from a theoretical point of view. PK -- Every rating agency has weak spots. Sophisticated investors use ratings as a jumping off point for real analysis. Anyone who has traded corporate bonds knows that ratings reflect spreads on average, but individual credits are often mis-rated. Dominion got CPDOs right; they got Canadian style liquidity wrong. Rating agencies make mistakes -- they always will, so investors have to do their own due diligence. Lilguy — If we can criticize them for using their CDO models, then a criticism on CPDOs was fair, because the model was worse than their CDO model from a theoretical point of view.

PK — Every rating agency has weak spots. Sophisticated investors use ratings as a jumping off point for real analysis. Anyone who has traded corporate bonds knows that ratings reflect spreads on average, but individual credits are often mis-rated. Dominion got CPDOs right; they got Canadian style liquidity wrong. Rating agencies make mistakes — they always will, so investors have to do their own due diligence.

]]> By: Lilguyhttp://alephblog.com/2008/05/21/cpdos-can-profit-lust-destroy-obligations-to-honesty/comment-page-1/#comment-17634 Lilguy Wed, 21 May 2008 19:14:39 +0000 http://alephblog.com/?p=703#comment-17634 I share your concerns about CPDOs and especially what happened at Moody's. However, I would be wary of criticizing them "because the agencies deviated from their normal way of rating debt." Whether or not they were motivated by profit remains to be seen and is a premature judgment at this time. More importantly, Moody's and their ratings lot were criticized madly for NOT adjusting their models to account for the differences in handling the mortgage risks of RMBSs and their CDOs. You can't have it both ways. I share your concerns about CPDOs and especially what happened at Moody’s.

However, I would be wary of criticizing them “because the agencies deviated from their normal way of rating debt.” Whether or not they were motivated by profit remains to be seen and is a premature judgment at this time. More importantly, Moody’s and their ratings lot were criticized madly for NOT adjusting their models to account for the differences in handling the mortgage risks of RMBSs and their CDOs.

You can’t have it both ways.

]]> By: PKhttp://alephblog.com/2008/05/21/cpdos-can-profit-lust-destroy-obligations-to-honesty/comment-page-1/#comment-17633 PK Wed, 21 May 2008 17:51:15 +0000 http://alephblog.com/?p=703#comment-17633 You should mention Dominion in the same breadth as the other rating agencies. What they did in Canada was the most ignorant and inept ratings process ever. No other agency permitted Candadian style liquidity recognizing it as a worthless liquidit arrangement. They were the only ones to permit it and it was their core business. That ineptitude cost Canadian pension holders about $6billion out of a $32billion business. Relative to the scale of Canada its on par with the subprime crisis. Worse since everyone else outside Canada told them it was idiotic and the subprime crisis it can't all be chalked up to ratings. Here is an article by Pimco on DBRS's stupidity. http://www.pimco.com/LeftNav/Global+Markets/Canadian+Perspectives/2007/Canadian+Perspectives-+05-2007.htm You should mention Dominion in the same breadth as the other rating agencies. What they did in Canada was the most ignorant and inept ratings process ever. No other agency permitted Candadian style liquidity recognizing it as a worthless liquidit arrangement. They were the only ones to permit it and it was their core business. That ineptitude cost Canadian pension holders about $6billion out of a $32billion business. Relative to the scale of Canada its on par with the subprime crisis. Worse since everyone else outside Canada told them it was idiotic and the subprime crisis it can’t all be chalked up to ratings. Here is an article by Pimco on DBRS’s stupidity.

http://www.pimco.com/LeftNav/Global+Markets/Canadian+Perspectives/2007/Canadian+Perspectives-+05-2007.htm

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