Simon Johnson…You Get What You Pay For
Simon Johnson comments on Standard and Poor’s irrational ratings:
Standard & Poor’s downgrade of United States government debt last month has been much debated, but not enough attention has been devoted to the fact, reported last week by Bloomberg News, that it continues to rate securities based on subprime mortgages as AAA.
In short, S.&P. is suggesting that these mortgages are more creditworthy than the United States government — a striking proposition. Leave aside for a moment that S.&P. made a big mistake in its analysis of the federal budget (as explained by James Kwak in our blog). Just focus on all the things that can go wrong with subprime mortgages: housing prices can fall, people can lose jobs, the economy may fall into recession and so on.
As Johnson says in his piece, the business model doesn’t work. It doesn’t even work for S&P in the long run because eventually people realize their approach yields perverse outcomes. Then what?
No country rated A or higher by S&P has ever defaulted within the following 15 years. The same cannot be said about other investments.
ANY bond can be AAA if structured properly.
(Consider a bond with 200% solid collatoral backing it).
” is suggesting that these mortgages are more creditworthy than the United States government — a striking proposition. Leave aside for a moment that S.&P.”
When push come to shove the central bankers protect their owner banks.
The US also stands (TARP) behind the banksters’ AAA tranches and will make them whole, while it bankrupts itself (being dependent upon foreign creditors and tethered to special interests and the war machine mill stones unable to raise taxes or tariffs) and the lower 98% of the economic spectrum.
Like the Euro, the banks will stand after the governments are bled white.
Alternately.
We will have to wait and see how the suits against the sellers of the MBS go.
When the sovereign nations realize and accept that S&P ratings are “pay to play” and amend their yearly budgets accordingly and generously, they will achieve equity in ratings between disparate entities. They will be equally nonsensical to today but more predictable.
So what does the market say? Are AAA securities backed by subprime mortgages paying 2%? Why anyone takes S&P seriously is beyond me.
Exactly this. The question is: how big a slice is the AAA tranche? Even if you feel that it is likely that the pool of mortgages will suffer 50% aggregate losses, (not crazy unreasonable for some of this poo) you should regard it as apretty good bet that you can create a top 20% tranche that will get an AAA rating.
Compare this to the treasury rating which is NOT AT ALL about the capacity of the US government to service its debts but is all about whether there is the political will to do so.
Exactly this. The question is: how big a slice is the AAA tranche? Even if you feel that it is likely that the pool of mortgages will suffer 50% aggregate losses, (not crazy unreasonable for some of this poo) you should regard it as apretty good bet that you can create a top 20% tranche that will get an AAA rating.
Compare this to the treasury rating which is NOT AT ALL about the capacity of the US government to service its debts but is all about whether there is the political will to do so.
Exactly this. The question is: how big a slice is the AAA tranche? Even if you feel that it is likely that the pool of mortgages will suffer 50% aggregate losses, (not crazy unreasonable for some of this poo) you should regard it as apretty good bet that you can create a top 20% tranche that will get an AAA rating.
Compare this to the treasury rating which is NOT AT ALL about the capacity of the US government to service its debts but is all about whether there is the political will to do so.