Ratings QOTD
From Crash of the Titans, pp. 33-34:
The largest chunks of these [created by Merrill in the winter of 2006-2007] CDOs still carried triple-A ratings, at least in name, because the credit rating agencies hadn’t bothered to recalibrate their antiquated ratings models. But almost no one was willing to buy the triple-A portion of these bonds from Merrill because the rest of the marketplace knew what the credit rating agencies and [Osman] Semerci [then Head of Merrill’s FICC area] didn’t know: that the entire world of mortgages had turned into radioactive waste. [UPDATE: emphasis mine]
Two quick reactions:
- Sh*t, I knew that by late January of 2007, and I wasn’t being paid to know it.
- Note that this paragraph actually highlights an implicit disagreement that Robert and I have been arguing through on this blog for the past few years: whether ratings are a signal or the primary signal that investors use. Or, as Andrew Samwick—yes, this is my day for agreeing with conservatives (though not libertarians) on root-cause analysis—points out:
I don’t think potential investors in U.S. Treasuries relied too much on its previous AAA rating in actively valuing the bonds and bills. And even if they did, they should be only minimally bothered by its current AA+ rating. Potential investors have plenty of public information on current and projected cash flows of the U.S. government. In those circumstances, there is little value added by a ratings agency’s grade.
When the market disagrees with the ratings, the ratings lose. So what has been happening today in the post-S&P bond market?
So for this first day of post downgrade trading, S&P has made borrowing cheaper for the US taxpayer.
Hey S&P can I get a downgrade over here?
At what level of computer triggered trading is the market not considered a market? Currently I have read 70% of all trades are computers running.
S&P has some money being made somewhere. You know someone(s) have made a big bet to win with a down grade.
Even Diggby wrote about how she’s been saying S&P has been pushing for this since eary spring. Now Moody’s is getting in on the ride?
Warren B was buying last time on the way down. Suppose he is this time?
All while Microsoft is on the hill saying they can’t find enough talent in the current pool of unemployed to fill the needs of 4600 jobs and needs visa’s.
The flower shop has now had days where there are no credit card charges posted. Never happened before.
Excess liquidity… not the S&P downgrade. But of course the media morons were not hired for their ability to make such distinctions.
Bubbles are not possible without excess liquidity. Investment capital is constrained by incomes… duh.
ray
Sh*t, I knew that by late January of 2007, and I wasn’t being paid to know it.
More importantly, you weren’t being paid not to understand what was going on. These drones don’t get where they are by being cautious and going against the grain; in that environment you can only be wrong once (and sometimes even if you’re embarrassingly right) and you’re out the door. They live very comfortable lives being gladhanding cheerleaders and echoing the status quo.
Robert,
You are misinterpreting the rally in Treasuries. It’s not a vote of confidence, it’s a flight to safety. AA+ is still better than most everything else, and Treasuries are very liquid.
So if computers are generating most of the trading and stocks are sliding downhill fast, who is it that’s on the buy end of these trades. Are we to believe that the buyers are ignorant of the market’s future value? Are these buyers just there to help institutional sellers unload unwanted shares; the prices of which have been pared in the past several weeks? The market for stocks is a trading phenomenon. For every action there is a reaction. A trade is a sell and buy phenomenon. So if its so important to institutional sellers (those are our stock funds which hold all of our 401K and IRA retirement assets) that they divest of equities, why is it that there are buyers for these “over valued” shares? Curiouser and curiouser.
All those computers that were selling short are now buying.
“If you don’t have the data, argue the analysis”
Dan B. – I hope you’re correct. Not seeing it in the futures, though.
amatuer,
There is NO justification for a bond price to rise when the risk, as measured by the bond rating, increases. Higher risk demands higher return.
There is STROMG justification that when uncertainty increases, like today, it causes an increase in the discount rate that makes lower risk, lower yield investments, like Treasuries, relatively more attractive than higher risk investments. Hence, my statement. Empirically, it is ALWAYS TRUE that during crises, Treasuries rise. So take your pick, theory or data.
Well yes, but… This means that in aggregate investors are MORE confident in treasuries than stocks and corporate bonds. And plenty of investors did buy CDOs based on their AAA rating. They’re called marks.
Oh, I don’t doubt that there are human minds behind the computers seeing that the economy here and world wide really has not been so great since it was officially called not so great. However, I think signs of that type of selling happens slower with periods of manic selling and buying of the computer/day traders.
To bad we haven’t implemented the Automated Payment Transaction tax. http://www.apttax.com/faq.php
We’ld be singing “We’re in the money” regardless of the direction of the manic market. In fact, it might even make these computer’s stop and think for a moment.
But that then raises the question of who was it that was covering all of those short contracts? If it were the institutional buyers who are now the institutional sellers that would imply that the institutional traders were busy digging their own (and our) collective financial graves. Is this the way that hedge funds assist in the transfer of wealth from everyone’s retirement portfolios to the wealthy hedge fund investors, who I’m gooing to guess don’t need to buy into mutual funds since they are too busy cashing in on this scam.
“But that then raises the question of who was it that was covering all of those short contracts?”
The bookie. Ah, hedge fund manager.
And Yes on our last question. Remember, this is all the “shadow banking” that is unregulated using the “worker economy” (as coined) as the backing for the shadow (gambler) economy.
Though the econ world politely calls it rent. Ha!