Today’s Fin runs a letter from Standard & Poors responding to my column from last week, reprinted here. Unfortunately the letter is paywalled (if anyone would like to email me the text, I’ll make fair use of it), so you’ll just have to take my word that it contains some interesting semantics. For example, the writer takes umbrage at the suggestion that S&P “threatens” governments with the loss of AAA credit ratings, but does not deny that the agency explains to government that certain policies will lead to the preservation of the rating while others will not. (“Nice little state you’ve got here …”)
I’m most interested though, in a claim that, since 1978, the default rate on AAA-rated structured finance offerings has been only 0.5 per cent. Obviously, a statistic like this can mean just about anything, but the claim is surprising to me. AFAIK, the biggest single category of structured finance offerings rated AAA by the agencies were collateralised debt obligations (CDOs) and the vast bulk of these were issued in the last few years. According to Alan Kohler in today’s Business Spectator (I think the ultimate source for this is Gillian Tett in the FT).
Between 2005 and 2007, about $US450 billion of CDOs of asset backed securities were issued. Of those, $US305 billion are in a formal state of default, with those underwritten by Merrill Lynch accounting for the largest proportion, followed by UBS and Citigroup.
The real problem is what has happened after the default. JPMorgan estimates that $US102 billion of the CDOs have been liquidated; the average recovery rate for the super senior tranches – rated AAA – has been 32 per cent. For the ‘mezzanine’ tranches – created from mortgage-backed bonds – the recovery rate is just 5 per cent.
Up to a 95 per cent real loss rate on AAA debt CDOs …
(Note that, although the text is ambiguous, the top mezzanine tranches were typically AAA-rated – the super-senior stuff was supposed to be better than plain old AAA).
The default rate here is over 60 per cent, which is a bit higher than 0.5 per cent, and it’s safe to bet there are more defaults to come. Even assuming that older issues pull the average down, can there really have been anywhere near $60 trillion ($300 billion/0.005) of them issued, as you would need to get the S&P average default rate? Or is this the kind of average that conceals more than it reveals?
Update A kind reader has supplied me with the text, and I’ve selected the relevant bits for reference (OTF). If anyone is still interested, and keen to do an Intertubes meme mashup, we could do a crowdsourced fisking.
In “Risky business needs rethink” (Opinion, February 26) John Quiggin evaluates Standard & Poor’s February 20 downgrade of the state of Queensland to AA+ and in the process misstates the role of a credit rating agency and how credit ratings should be used.
Standard & Poor’s does not “threaten” states or other rated issuers with downgrades or make demands to “implement whatever economically irrational policies”. Nor do we act as an “advisor to bondholders” or “ensure that bondholders get paid in full and on time”.
Our sole role is to provide the market with an independent opinion on the creditworthiness of issuers and their debt. A Standard & Poor’s rating does not speak to the market value of a security, or the volatility of its price. Ratings are not recommendations to buy, sell or hold a particular security. Nor do they replace the need for investors to do their own risk analysis or to seek professional advice.
…
Like many others in the market, we did not anticipate the speed or extent of deterioration in the US housing market. However, our track record remains strong. Since 1978, only 0.5 per cent of AAA structured finance ratings have ever defaulted, which is broadly similar to corporate ratings performance.….
For many decades, Standard & Poor’s has in effect served the global capital markets with high quality, independent, and transparent credit ratings. We have listened to what the market is saying, and reflected long and hard on the recent, unprecedented market events. We are working with market participants and policymakers worldwide to do our part to restore confidence in global financial markets.
John Quiggin 
Perhaps we could finish JQ’s sentence in parentheses for him. My stab at it is;
Nice little state you’ve got here, let me tell you how to run it.”
But I guess that ending is obvious.
The effrontery of these rating agencies is staggering. It would not surprise me in the least that they are lying through their teeth about the default rate. They lie about everything else.
It just amazes me that anyone would think they have a shred of credibility left. Why don’t our governments tell them to get lost? Surely any international bank worth its salt could do the due diligence itself on lending to a solvent state in a stable solvent nation like Australia?
Sorry folks but those rating agencies (along with finacial advisers) make me foam at the mouth. What a bunch of fakes they are.
John, this is pretty silly of you.
S&P’s letter does not claim that the default rate on ABS CDO’s is 0.5%, it claims that the default rate on the whole, entire universe of structured finance instruments is 0.5%. This is not limited to ABS CDO’s (in fact CDO’s are a very small fraction) but comprises thousands of other securities, mortgage-backed bonds, auto loan backed bonds, bank CLO’s, credit card debt etc. To take an example, Australian prime mortgage-backed bonds are close to $200bn in outstandings and have had a default rate of exactly 0.0%. Default rates in asset classes not linked to US sub-prime debt or SIVs are equally very low.
So, of course, the overall default rate of AAA securities is also very low, 0.5% or so.
What it highlights is that the rating agencies cocked up completely in two specific instances: US sub-prime mortgage-backed debt and ABS CDO’s. At the same time, they have a pretty good (read excellent) track record in all other asset classes.
As such, they continue to provide a useful service (i.e. reducing infomational assymetries) in those areas where they have preserved credibility: corporate and sovereign debt as well as some areas of structured finance debt. Hence, the governments’ focus on them. Hence, the media coverage Moody’s got yesterday with regard to bank ratings etc.
As fof Ikonklast’s comment, calm down fellow, no one is lying, default studies are available on rating agency websites, other independent parties have come up with the same conclusions.
So they tried to make a silk purse out of a sow’s ear and someone finally said, “look, the emperor error has no clothes”.
Fancy passing off used dunny paper as a fifty dollar note…
John, the other point you make is with regard to ABS CDO being the predominant asset class. Moody’s has a while back published some data on the distribution of rating per asset class: as at 2007, at the beggining of the crisis, they had something like 85,000 structured finance ratings outstading. Of these, US mortgage paper was ~35%, US home equity loans (also mortgage paper I suppose) another 20%-odd. CDO’s were 13%. Hardly the dominant asset class you refer to.
This (S&Ps claim) is just spin. All they have to do to claim that statistic is to cook up some definition of structured finance that excludes CDos and or CDS deals. It would be more intersting to ask what is the percentage of the total AAA ratings that have been issued by them have defaulted.
They realise that the gig is up, but they are desperately trying to escape the regualtion that will need to be imposed on them, or better yet replace them. They are fighting for their survival. If they were willing to take fees to issue AAA to all sorts of stuff in the recent past, it does not seem likely they will have any ethical constraint on mounting spurious defences.
Socrates, but that is exactly their point: the total percentage of structured finance AAA’s that have ever defaulted is 0.50%. I am assuming from what they are saying this is inclusive of CDO’s.
If we include corporate and sovereign debt, the rate is going to be even lower: AAA corporates are less volatile than structured finance securities.
I find it interesting that we are happy to por scorn on the rating agency but when presented with the statistics, we simply dismiss them as spin. Well, it’s not always spin.
Eli – is that default as $value or default as % of businesses rated
and I guess we’d want to see % default as a ratio across rating – so we could see it how AAA defaults stacked up against AA, BB etc defaults. Presumably there’d be some sort of smooth increase in default rate as the rating got worse
Eli, before you throw terms like “silly” about, you might want to check your arithmetic. Applying the FT failure rate of 60 per cent to your estimate of 13 per cent for CDOs gives a 7.8 per cent failure rate for this category alone. And it’s not as if CLO’s, for example, are problem-free, as S&P themselves observe.
As Nanks said, we need to look at the AAA component more closely, but your data certainly doesn’t support your point.
Obviously, there must be some definition under which the 0.5 per cent claim is true. Equally obviously, neither of us has any idea what that definition might be.
nanks,
There is a (fairly) smooth increase. CBA covers the numbers from their point of view in their latest disclosures (look at page 21). The tables there map the PD (probability of default, 1 year horizon) to both Moody’s and S&P’s numbers.
The seeming failure of the ratings agencies to rate correctly is more apparent than real. This is an area I know well. It only seems that way because you only hear of the “bads” – the thousands of issues (and there are thousands, it is the only way to validly build up these sorts of stats) where they have been rated correctly is something you never hear about.
.
PrQ,
I would encourage you to read the vast amount of statistical literature on these ratings before plunging into this area again. The guy from S&P in the paper today was absolutely correct in what he said. An AAA rating is no guarantee that the instrument will not default, it is just that – a risk rating, no more, no less. You should do your own due diligence, not get caught up in one asset class etc. You know, basic portfolio stuff.
Seeing AAA as some sort of guarantee of performance is just simply ignorance.
Additionally, they do not try to force the government or any other client to do (or not to do) any thing but, if asked, they are happy to provide advice (often for a fee, they are not charities) on likely effects. Remember, the governments ask for these ratings, they pay the agencies to give them a rating and it would not be good client service for the agencies not to tell the government that they are likely to change them.
If a government does not want to be rated then all they need to do is to request the relevant agency to stop rating them.
They may have problems raising debt after that, though. That said, that may well be a good thing.
“since 1978, the default rate on AAA-rated structured finance offerings has been only 0.5 per cent”
I dont undertstad this claim : surely they need to give a time horizon for default? i.e. [x%] of companies rated AAA at teh start of period defaulted within [y] years?
Otherwise, this statistic would be almost always 0%; because they would downgrade AAA to CCC one day before default.
Andrew, I can’t say that I appreciate patronising remarks like “I would encourage you to read the vast amount of statistical literature on these ratings before plunging into this area again.” especially when they are followed by an endorsement of statements that are clearly disingenous.
If S&P believes that its ratings are merely opinions and that people should do their own due diligence, it should endorse the main point of my article which is that AAA or investment grade ratings should not be required by regulation. Oddly enough, the S&P letter writer didn’t get to this point and neither do you.
And, despite your references to the statistical literature, you haven’t got any closer to answering the question: how is the claimed 0.5 per cent default rate consistent with the observed 60 per cent default rate for CDOs, which formed a significant part of the total issuance of structured finance and a large proportion of which were rated AAA at the time of issue?
The explanation offered by HN occurred to me, but I find it hard to believe that an agency which thinks it has a reputation to defend would offer such a brazenly dishonest statistical defence of its ratings.
To make the problem a bit harder, you might want to take into account the fact that mortgage backed securities, originated at AAA, are currently trading at 35 cents on the dollar.
Perhaps the financial market participants need to bone up on some statistical theory and bid the price back up to 99.5.
Yep, I bet they do in fact get the 0.5% figure by counting only those that went broke while they still had an AAA rating. In other words, those they weren’t quick enough to rerate. We may be able to test this by looking at how much rerating occurred amongst all those CDOs before they disappeared.
Is there a solution to the reliance on rating agencies?
The ratings agencies should be legislated out of existence. They are a pox on democracy and are devoid of credibility.
Someone above said AAA was “a risk rating, no more no less”. What on earth does that mean?
Let me tell you how it works. These ratings agencies are paid by the Frankensteins that construct these “structured” products to provide guidance on how they might build them in a way that generates a coveted AAA.
And what is a AAA rating to the product provider, but a marketing tool – a way of misrepresenting the risk of their product in a way that fooled a large part of the investment world and was used by a horribly compromised financial services industry all the way down the line to financial advisers to push ordinary people into investments sold as stable and defensive.
That these same products have now destroyed the global financial system and propelled the global economy into its deepest recession in decades is in no small part due to the detestable ratings agencies, the ultimate symbol of a discredited and unaccountable caste.
John, with respect you continue making fundamental computation errors.
The CDO component of the overall structured finance market (~13% as per my other post) comprises not only ABS CDO’s (a smaller portion still) but also bank CLO’s, corporate debt CDO’s, non-mortgage ABS CDO’s and so on. It is not fair or correct to multiply the FT 60% default rate (even if we believe it) by the full 13% but by a much smaller fraction. At the risk of being branded patronising, would suggest it would be useful for participants in this debate to be careful about their own claims, otherwise this simply foaming at the mouth about rating agencies and missing the bigger issue (see below).
The second problem is that the 35 cents in the dollar market price has limited informational value as to the probability of default. The market price is based on a number of things: confidence, absence of bids for this paper, preception of future default (as opposed to current defaults, as I concede in my first post) and so on. The nuance here is that a large number of securities did get severely downgraded and did lose their market value but did not default to date and a number may not at all. S&P quite rightly point out that they do not assess market prices.
John, you also confuse the current stock of ratings (the 13% CDO we are debating) agains the historical number of securities rated AAA since 1978 in the S&P example. Clearly the currenct stock is displaying a higher default rate. This does not invalidate S&P claim that historically the default rate has been 0.50%.
Where does this leave us?
Rating agencies cocked it up badly in two asset classes. The makor reason for their failure appears to be lack of intellectual independence whether due to conflicts of interest or to failed processes. This needs to be recognised and fixed.
At the same time, they serve an extremely useful function in the global financial markets. There is no one – no one – else providing even a semblance of independent credit information. What we need right now is to work out how the public good (freely available independent credit opinions) supplied by the RA’s can be preserved whilst their process inmproved and independence buttressed. It is simply not constructive to run around shouting gotcha every time a mistake is made: we need a credible solution.
Again, none of the problems they have experienced, invalidates the concern over QLD’s rating: the rating agencies continue to be credible suppliers of analysis in the sovereign space.
I reckon there are at least two possible intents in the S&P response:
1. Demonstrate long term accuracy – “see, we’ve been around for 30 years and our failure rate is only 0.5%”.
2. Pad out the the most recent (really bad) figures with 25 years of good figures.
If this is the case, then it is quite disingenuous. It’s the “Up to a 95 per cent real loss rate on AAA debt CDOs …” that is the issue. Not the previous work, irrespective of whether it was accurate or not.
Finally, to address the issue of ‘there must be some sort of a definition that produces 0.50%’, S&P and the other two RA’s publish default and rating transitions studies all the time. This is presumably where teh 0.50% comes from: I suggest you go have a read before speculating on the way S&P ‘spin’ etc.
(I have by the way).
Eli, since you’ve got access to the information on which the estimate is based, how about setting us straight? What fraction of initially AAA-rated CDOs of all kinds have defaulted and how does this square with the 0.5 per cent estimate you’re defending?
Sure John, that is fair enough. Just went to the Moody’s website, latest study I can see is from mid last year and covers 1993-2007.
From I can see at first glance, the overall structured finance ‘material impairment’ rate is 0.30% at the 7-year horizon. The rate for global CDO’s is 0.92%. This inludes non-ABS CDO’s so the ABS CDO rate would be (much) higher. To point out the obvious, 2008 was shocking and the rate would be materially higher than what these data indicate. Still, this is close to the S&P numbers: the aggregate numbers includes all kinds of ratings that did not go bad etc.
I suspect the real ABS CDO default rate is something like 20-30% but non-ABS CDO are around 0.50-1%. Pure speculation though.
Mind you, rating trasition rates from AAA to junk would be horrendous, indicating future defaults and major market value losses, so they definitely have a problem in this sector. It is not a terminal problems though as ratings quality in the corporate space is quite good.
The report is here although may need a subscription: http://www.moodys.com/moodys/cust/research/MDCdocs/04/2007100000515939.pdf?doc_id=2007100000515939&frameOfRef=structured
“…but I find it hard to believe that an agency which thinks it has a reputation to defend would offer such a brazenly dishonest statistical defence of its ratings.”
Perhaps the senior people in this organisation are defending their reputation in their area of expertise:
http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/ratings_ses/2,1,10,0,0,0,0,0,0,0,0,0,0,0,0,0.html
http://www2.standardandpoors.com/portal/site/sp/en/us/page.managementbios/mngmnt_bios/4,3,3,0,4,0,0,0,0,0,0,0,0,0,0,0.html
Sorry for the heated tone earlier by the way, a little on the stressed out side right now…
Sorry I have pasted the wrong links. I try again :
“…but I find it hard to believe that an agency which thinks it has a reputation to defend would offer such a brazenly dishonest statistical defence of its ratings.”
Perhaps the senior people in this organisation are defending their reputation in their area of expertise:
http://www2.standardandpoors.com/portal/site/sp/en/us/page.managementbios/mngmnt_bios/4,3,3,0,3,0,0,0,0,0,0,0,0,0,0,0.html
http://www2.standardandpoors.com/portal/site/sp/en/us/page.managementbios/mngmnt_bios/4,3,3,0,3,0,0,0,0,0,0,0,0,0,0,0.html
Replacement of 2nd link:
http://www2.standardandpoors.com/portal/site/sp/en/us/page.managementbios/mngmnt_bios/4,3,3,0,4,0,0,0,0,0,0,0,0,0,0,0.html
What are we arguing about? The proof is in the result. Several hundred billion of AAA has disappeared.
Since these CDOs were “slice and dice” it probably means they can slice and dice the stats anyway they like too.
The finance industry is a parasitic superstructure. They don’t labour and they don’t manufacture. They produce nothing.
Eli, apology accepted. And I’m prepared to believe that the 0.5 per cent number would be about right as of 2007, as your data suggests. As I mentioned in my original article, the default of an originally AAA-rated RMBS CDO in late 2007 was treated as shocking news back then.
But there have been hundreds of billions of dollars of defaults since then, and not just in ABS CDOs. RMBS and synthetics have been terrible as well (and the market obviously thinks things are going to get much worse).
http://www.reuters.com/article/marketsNews/idUSN2641849320090226
http://news.alibaba.com/article/detail/analysis/100024654-1-synthetic-cdo-default-losses-likely.html
So, I still don’t believe the 0.5 per cent number can be right as of now, let alone when the huge numbers of AAA investments now trading as junk have defaulted.
Ikonoclast@27
“The finance industry is a parasitic superstructure. They don’t labour and they don’t manufacture. They produce nothing.”
That’s ridiculous statement Ikonoclast, I take it you stick all your savings under a mattress and you don’t borrow.
Look around you, I would be surprised if there was anything within sight that wasn’t financed at some stage on route to its current location.
As for your comment @1 that government’s should tell the ratings agencies to get lost, it is the credit policies of purchasers that matter when it comes to ratings, not what the issuers think.
S&P are righty beginning to restructure how it rates the respective state governments credit ratings. However, while they are correct in saying that the state gov’t has enacted poor public policy, the State Government will never, ever default on their obligations – the Federal Government would intervene before that would ever happen.
All this does is send a signal not about the true credit rating of the state governments but rather the seriousness of their financial management.
sdfc, don’t forget the thread is considering a corruption from within of a system based on a marketeer concept of self regulation from a sector whose contrary ideology has come to valorise self will, slyness, self glorification, expediency and narcissism.
For this, we were persuaded to release an earlier concept of neutral referee, altho we wonder incidentally at the extent to which parties and governments eager for the oxygen of election support from the lucrative private sector, were prepared to overlook the risks.
The point is, at the moment, the newspapers are full of articles trying to apportion blame to academics, workers, governments, most of all governments achieving office in the wake of the crash; also those formations of a less neoliberal bent accused of “over regulation”, that would have had more secure regulatory frame works in place rather than leaving the spinach patch to the rabbits or the matches in the hands of, at an emotional level, small children, via “trust me” laissez faire and small (impotent) government.
We have just witnessed the case of Pac Brands, who is then expected to suffer on behalf of rogues explaining away their control of material and human resources as some sort of god given “right” provided for their personal amusement.
To discover the rancid relationships between the ENRONS of this world and supposedly objectivist auditing and ratings orgs, has not been amusing for some time. Any more than the doctored so-called intelligence that COW used as a pretext for its ill-conceived invasion of Iraq.
Less Al Capone and more productive work from the Big End, eh?
And when corporates are discovered to have engineered those conditions responsible for corporate disasters ( prior to the disasters themselves, on those terms ) that ruin thousands of workers, supporters and creditors, it is not amusing or legitimate for others to be blamed or forced to suffer as rensposibility is fobbed off on bystanders by Gadarene corporates and their apologists trying to duck their obligations.
Their narcissist libertarian ideologies do not meaningfully and incontrovertibly legitimate their existence over, from, separate and above the rest of humanity. Actually it seems to be, the rest of us are expected to carry them all the time.
I was told by a wise man once, that with freedom comes responsibility, for adults.
Off thread. Or is it?
Just reading Ross Gittens’ latest,”Dirty deeds done by chiefs”, obviously a play on an old accadacca song. Just want to say I wouldn’t want to discourage anyone from reading it.
Also won’t mention Courier Mail article by psychologist observing population of psychopaths as percentage of grouping exponentially higher in corporate sector than else where.
sdfc # 29 says
“That’s ridiculous statement Ikonoclast, I take it you stick all your savings under a mattress and you don’t borrow.”
Well, its funny you should mention that sdfc. I have been rather hell bent on getting the home mortgage paid off (phew, just in time) and under the mattress is actually pretty comfortable as well for now. Put anything spare in shares or funds just now? No way, except for the bare and now much resented minimum I was forced to. Id rather buy a tiny pile of bricks – at least it has a function, without “excess” worry and “excessive” middlemen. Id trust a real estate agent more right now over a financial intermediary and thats is saying something.
Paul#32, did you notice that little typo in Gittins “dirty deeds done by chiefs”. I was trying to work out why the chiefs all thought they were born in March/April and the rest of us werent. Its Aryans, not Arians.
PrQ,
Apologies for the patronising tone, but there really is a lot of peer-reviewed literature on the default rates. Granted, it does not cover the period 2008 to 2009, but this is more because (as you would be aware) the process of writing these papers and then getting reviewed and published takes much longer than that.
Both Moody’s and S&P have a large amount of self-criticism on the ratings they assigned on their websites which you only need to register to get access to.
.
Alice/Ikonoklast,
I covered the purpose of banking a while ago. If you are really interested in what banks do (rather than just making a hackneyed debating point) I would suggest you give it a read.
Of course you have your own ability to make your own choices on what you do with your money. That is called freedom (dare I say capitalism?) and is the very essence of the system you seem to be criticising so much.
Making silly decisions is your right, guys. Others have made silly decisions in the past.
.
paul walter.
I would say that another sector in our economy is more likely to “…valorise self will, slyness, self glorification, expediency and narcissism.” Problem is that this sector gets to decide it’s own pay and then can literally put us in prison for not funding them. It’s called the government.
PrQ wrote:
Yes the ultimate source is the FT: Insight: Time to expose those CDOs
I posted the quote about AAA-rated CDO recovery rates in the “Standard: Poor” thread last week.
Andrew,
No one is making a margin call on me, the banks arent chasing me for more equity on bad sharemarket investments, and I havent lost a cent of my savings, except what the super fund lost me (bare minimum).
Im not making silly decisions at all.
Bully for this Professor Quiggin fellow! Quite right to lambast these scoundrels for their lack of absolute standards and values. Begone with their miserable excuses that their ratings are all relative and need to be taken in context. Many of us have been warning for a long time where all this relativism and contextual approach to education would lead and here’s a stunning example of what we’ve been talking about. Hopefully we can all look forward in future to more of these professor fellows coming out and standing up for absolute standards and values.
PrQ,
Time horizon for default is normally one year (IIRC – it is the one that banks use) so if a rating of AAA is assigned on 31 March 20X7 and then revised on 30 April 20X7 and the instrument is not in technical default on 30 April 20X8 then this is counted as a “good” outcome for the AAA rating when conducting back-testing.
Point to note here is that the assessment is (again, IIRC) on a per issue basis and value plays no part in it, so if there are 999 issues of $1 and one issue of $1bn and only one of those goes into default then it is irrelevant to the assessment whether it is one of the $1 issues or the $1bn issue.
My position on using these assessments for regulatory purposes I have put up here (and elsewhere) many times before, notably several times on this thread. How can you possibly blame the agencies for their priviliged position? If you must point a finger it is the lazy regulators that you should be pointing it at.
35# Which brings to mind an old proverb; the hare and the tortoise.
The problem is that the financial markets and financial fund managers and firms and individuals who work within them, have a vested interest in keeping us interested in the services they provide. They desperately need to keep running and playing hare with our money.
Andrew, the reality is some of these financial firms wont be around soon and we dont know yet which financial firms are going to fold, but fold they will. So until the folding is done and the deadwood is cleaned out, many investors wont be giving you their money.
Alice,
If you choose to forego interest it is your complete and utter right. I would not attempt to force you to do otherwise. It is (dare I point out) government regulation, however, that a portion of your money must be put into a super fund – which over the last year has lost (on average) 18%.
Still a fan of yet more regulation?
Andrew, taken together I think that your points support my conclusion that the 0.5 per cent number is an average that conceals more than it reveals.
In particular, the idea (implied by the use of the statistic S&P letter) that it counts as a rating success for a long-term security to be rated as AAA on issue, downgraded to junk within a year and defaulted a year after that with zero or minimal recovery, is obviously wrong. In what possible universe is it OK to award a AAA rating to toxic sludge like ABS CDOs while downgrading a state government that has never defaulted and is extremely unlikely ever to do so.
And as regards pointing the finger, with losses of trillions of dollars and millions of jobs, there’s plenty of blame to around here. The great majority of financial market institutions (banks, hedge funds, ratings agencies, mortgage insurers and many others as well as regulators) have failed miserably, despite reaping huge rewards for their allegedly superior skills.
Andrew,
I have not chosen to forego interest but there are better returns in rent lately or havent you noticed? Interest rates are on the decline. I expect rents will too later but right now, Im self interested and its about preservation and opportunity and being careful, and banks just arent attractive and neither are shares.
Regulation where regulation is required. If I do choose to go back in to shares at some point Ill be looking at the firms policies on squandering money at the top.
Has anyone thought about(or discovered any research?) examining for any correlation between executive remuneration policies, risk appetite of firm, and risk of firm failure within certain time periods (10 years, 15 years, 5 years)?
#35
Its a relief, Alice. At least I know I won’t get kicked out by the Catholic church, now.
Andrew Reynolds#35.
Wasn’t the government that plotted for twelve months to chuck out 1800 workers at pacbrands, ordering themselves a massive pay rise in the meantime, conveniently prior to committal of the foul deed.
Sol Trujillo?
No comment.
That’s narcissism: not even a politican could dream of topping that…
Alice, sorry meant #34 not #35. Must be the wolf pelagianism- organic stuff, you know!
John, yes, that is somewhat of an issue with regard to how comparable ratings are across different asset classes: a comparison between a AAA mortgage-backed security (for argument’s sake a non-defaulting Australian one) and corporate or soverreign debt is not trivial.
At the same time, the rating agencies are trying to assess QLD’s creditworthiness as best they can: the fact that they made a mistake in awarding a AAA in CDO space should not constrain them in assessing QLD’s finance and commenting on the state’s worsening position. Otherwise, you would never be able to downgrade anyone at all.
As I said, the big problem with noncomparable scales is caused by regulations mandating that certain investments be AAA or investment grade, and providing safe harbour to people who rely on the agencies to meet their fiduciary obligations. If it weren’t for this outsourcing of regulatory functions, I’d be pretty relaxed about the whole thing.