Think a certain credit rating means something? Think again!
Amid the financial crisis which enveloped the global financial system in 2008-2009, Standard & Poors (S & P) and Moody's played a central role. So much paper with sub-prime mortgages defaulted that were originally given Triple A ratings, that any scintilla of crediblity these agencies had has vanished.
The meaning of an AAA rating is that the likelihood of default is virtually nil. Yet, in the 2008-2009 period, thousands of Collateralized Debt Obligations (CDOs) not only defaulted, but suffered principal losses of up to 90% of face.
The problem with the entire business of rating credit has been that issuers "pay" to have their bonds rated to make them marketable to institutional investors, who often base their asset allocations on how highly rated an issuer is. Since S & P and Moody's are paid by the issuers, they're beholden to their customers and not the investors that will ultimately rely on the ratings themselves.
Another side-effect is that the rating agencies are incredibly slow to issue downgrades. A recent example is Spain, which was just downgraded by Fitch to AA+ from AAA. Spain's bonds already trade at levels more akin to comparable issuers rated either A or BBB with yield spreads in excess of 150 basis points. When issuers ARE about to be downgraded, they often fight the downgrade, delaying it further.
Credit ratings have ZERO informational content. Studies performed by my own firm, Helix Investment Partners, indicated that the yield spreads needed to compensate investors for the probability of default were highly correlated with 3 market driven variables: a company's market capitalization (share prices times shares outstanding), its market-adjusted DEBT/EQUITY ratio (debt divided by market capitalization) and the volatility of the issuer's common stock.
Once these variables were considered appropriately, a company's credit rating was absolutely meaningless statistically, In all likelihood, the 3 aforementioned variable captured imputed information much more accurately since money is on the line. A credit rating imperfectly captures these market indicators and is, therefore, nothing but a poor cousin.
Last week, in a Senate hearing, former Moody’s and S&P employees admitted that the agencies tried to please investment banks that were paying big fees to get high ratings. The three largest ratings companies, Moody's, S&P and Fitch (a unit of France's Fimalac SA), generated combined revenues of $3.6 billion on bond ratings last year.
Nowhere has the failure of the rating agencies been more prounced than in the mortgage securities market. Of all the issues assigned Triple A ratings in both 2006 and 2007, a full 90% have been downgraded to junk or defaulted!
On the corporate side, there are now only 4 issuers carrying Triple A ratings: Automatic Data Processing (ADP), Johnson & Johnson (JNJ), ExxonMobil (XOM) and Microsoft (MSFT). Even Berkshire Hathaway, whose bond yields are LOWER than Uncle Sam's, does not qualify for this very small club.
Yet, Triple A ratings on collateralized mortage paper was given out freely.
There is no need to even have this industry. The bond market, including the Credit Default Swap (CDS) market, is much more accurate in pricing in true credit risk at NO cost to the issuer. CDSs reflect the cost of "insuring" debt against default and have an excellent record of reflecting the latest information. By comparison, credit ratings are adjusted very infrequently and only "rubber-stamp" what the market already knows and has already priced in.
If the financial system is truly to be restructured to eliminate the unbridled greed and conflicts of interest which imperil investors, one component of reform should be to eliminate any requirements that bonds be rated and paid for by the issuers. A better system would be to have the rating agencies provide information to the investor community and get paid if their information proves valuable. It isn't. No sophisticated investor would pay to know what S & P, Moody's or Fitch thinks. Therefore, the problem will eliminate itself.
Marko's Take
Want to know you to fix the ponzi-scheme/FRAUD known as Social Security? Tune in to our new video, entitled "Social In-Security: The Solution", which will be posted shortly on You Tube. To get more background on this heinous, unconstitutional and immoral program, click here http://www.youtube.com/markostaketv#p/u/0/twFn9XyP2rI.
Showing posts with label Collateralized Debt Obligations. Show all posts
Showing posts with label Collateralized Debt Obligations. Show all posts
Monday, May 31, 2010
Tuesday, May 4, 2010
Government Sachs In The Cross-Hairs: What The Scandal Is All About
Goldman Sachs (GS), aka "Government Sachs" has been exposed for being what readers of Marko's Take, as well as anyone with a brain, already knew: the most corrupt and greedy institution on planet Earth! (But Marko... how do you REALLY feel?)
With so many allegations and opinions flying about, it's easy to get confused as to exactly what prompted the SEC complaint and how it relates to the Obama Administration's formerly cozy relationship with Government Sachs.
Goldman was accused of fraud by the Securities and Exchange Commission (SEC) in a lawsuit filed April 16. The SEC claims Goldman duped investors in a Collateralized Debt Obligation (CDO) called Abacus 2007-AC1, by failing to disclose that it was created with the help of hedge-fund firm Paulson & Co., which made a profit of about $1 billion when the investment collapsed in value. John Paulson became an overnight celebrity within the investment community by virtue of his huge score shorting the real estate market.
The CDO is a bet against the value of mortgages and the housing market overall. The securities themselves were allegedly created specifically to give hedge fund manager John Paulson a means to profit from the real estate meltdown. Goldman, for its part, put its own clients into these CDO's, which defaulted in droves.
Paulson and Goldman got rich as America and the world got poor.
Warren Buffett, the richest man in America, and the most hypocritical man in America, sees ABSOLUTELY NOTHING WRONG! Why should he? His investment in Goldman, made at terms not available to anyone BUT him, is in the money. What him worry? (But Marko... how do you REALLY feel?).
Goldman's defense filing included copies of six lawsuits, as well as a "demand letter" from the Louisiana Municipal Police Employees Retirement System, that the company's board launch an internal probe of "officers and directors responsible for the Abacus 2007-AC1 incident."
In addition, Goldman clients are up in arms, believing not only that they had been misled, but that GS used its trading operation to benefit itself at their expense. Goldman, trade against its clients for its own profit? You're kidding, right? NOT! (But Marko... how do you REALLY feel?).
Prosecutors have demanded trading records as part of a probe that has ensnared several hedge-fund managers, including Galleon Group founder Raj Rajaratnam.
The U.S. Attorney's office in Manhattan has alleged Mr. Rajaratnam was at the center of a massive insider-trading ring that generated millions of dollars in improper trades. Mr. Rajaratnam has denied wrongdoing.
The SEC move came as President Barack Obama is making a final push for financial reform in the Senate next week. “Wall Street titans still recklessly speculate with borrowed money,” he told supporters. “We cannot delay action any longer.”
And this explains the sudden ploy by President Obama to throw his cronies at "Government Sachs" under the bus. It's 2010, and the elections are coming up. How better to show the American people that you have their interests at heart? He's gotten what he can out of Goldman. They're no longer useful. No honor among thieves!
Suddenly, the market impression of GS has taken an extreme turn for the worse. Not only has its stock plunged, but now market fears that the cumulative effects of the SEC and the private lawsuits will imperil Goldman's excellent credit-worthiness.
The cost of insuring Goldman Sachs’ debt against default has risen to about the level of Morgan Stanley and Citigroup, two less profitable rivals, as Goldman’s regulatory woes take a toll on investors’ confidence and its standing on Wall Street.
Credit Default Swaps (CDSs) leapt to 160 basis points yesterday, a real market sign that this is no slap on the wrist, but a real threat to the most corrupt institution in the world. Couldn't happen to a better bunch of guys! And that's how I REALLY feel!
Marko's Take
Our newest video entitled "Social In-Security: The Problem" will be uploaded in the next 24 hours. You can access all our videos by clicking here: http://www.youtube.com/markostaketv.
With so many allegations and opinions flying about, it's easy to get confused as to exactly what prompted the SEC complaint and how it relates to the Obama Administration's formerly cozy relationship with Government Sachs.
Goldman was accused of fraud by the Securities and Exchange Commission (SEC) in a lawsuit filed April 16. The SEC claims Goldman duped investors in a Collateralized Debt Obligation (CDO) called Abacus 2007-AC1, by failing to disclose that it was created with the help of hedge-fund firm Paulson & Co., which made a profit of about $1 billion when the investment collapsed in value. John Paulson became an overnight celebrity within the investment community by virtue of his huge score shorting the real estate market.
The CDO is a bet against the value of mortgages and the housing market overall. The securities themselves were allegedly created specifically to give hedge fund manager John Paulson a means to profit from the real estate meltdown. Goldman, for its part, put its own clients into these CDO's, which defaulted in droves.
Paulson and Goldman got rich as America and the world got poor.
Warren Buffett, the richest man in America, and the most hypocritical man in America, sees ABSOLUTELY NOTHING WRONG! Why should he? His investment in Goldman, made at terms not available to anyone BUT him, is in the money. What him worry? (But Marko... how do you REALLY feel?).
Goldman's defense filing included copies of six lawsuits, as well as a "demand letter" from the Louisiana Municipal Police Employees Retirement System, that the company's board launch an internal probe of "officers and directors responsible for the Abacus 2007-AC1 incident."
In addition, Goldman clients are up in arms, believing not only that they had been misled, but that GS used its trading operation to benefit itself at their expense. Goldman, trade against its clients for its own profit? You're kidding, right? NOT! (But Marko... how do you REALLY feel?).
Prosecutors have demanded trading records as part of a probe that has ensnared several hedge-fund managers, including Galleon Group founder Raj Rajaratnam.
The U.S. Attorney's office in Manhattan has alleged Mr. Rajaratnam was at the center of a massive insider-trading ring that generated millions of dollars in improper trades. Mr. Rajaratnam has denied wrongdoing.
The SEC move came as President Barack Obama is making a final push for financial reform in the Senate next week. “Wall Street titans still recklessly speculate with borrowed money,” he told supporters. “We cannot delay action any longer.”
And this explains the sudden ploy by President Obama to throw his cronies at "Government Sachs" under the bus. It's 2010, and the elections are coming up. How better to show the American people that you have their interests at heart? He's gotten what he can out of Goldman. They're no longer useful. No honor among thieves!
Suddenly, the market impression of GS has taken an extreme turn for the worse. Not only has its stock plunged, but now market fears that the cumulative effects of the SEC and the private lawsuits will imperil Goldman's excellent credit-worthiness.
The cost of insuring Goldman Sachs’ debt against default has risen to about the level of Morgan Stanley and Citigroup, two less profitable rivals, as Goldman’s regulatory woes take a toll on investors’ confidence and its standing on Wall Street.
Credit Default Swaps (CDSs) leapt to 160 basis points yesterday, a real market sign that this is no slap on the wrist, but a real threat to the most corrupt institution in the world. Couldn't happen to a better bunch of guys! And that's how I REALLY feel!
Marko's Take
Our newest video entitled "Social In-Security: The Problem" will be uploaded in the next 24 hours. You can access all our videos by clicking here: http://www.youtube.com/markostaketv.
Subscribe to:
Posts (Atom)