93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk
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Re: 93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk
#2Headline is inaccurate, it's 93% of subprime-backed mortgage securities.
Re: 93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk
#3If anyone is interested in a very clear example of the story behind the stat, I highly recommend this podcast/radio episode: http://www.thisamericanlife.org/radio-archives/episode/405/i...
Re: 93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk
#4It seems to me that rating agencies should be paid by the institutional investors that buy the bonds, not the banks trying to sell them. That might help the incentives line up better.
Am I crazy? Nobody suggests this, and I think I'm missing something crucial here.
Re: 93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk
#5When people say they will act one way and have financial incentives to act another, expect them to follow the financial incentives.
Appropriate regulation can help for a bit. But unfortunately the regulated party has incentives to provide incentives (such as contributions to political campaigns) to gain control of the regulations. This leads to regulatory capture that then renders the regulations ineffective.
In a perfect world we'd be forcing the banks right now to write down securities that took a hit, forcing them to declare losses, which would mean that they wouldn't be paying out absurd bonuses. This would absorb the money we gave them from the bailout. In a slightly less perfect world we'd be enacting useful regulations that would avoid this problem returning for a few decades (such as happened during the Great Depression).
In the real world we gave the banks a big bailout, have let them mark securities to models of their choice, and they paid themselves big bonuses on their "profits". Of course they are still sitting on lots of toxic securities (like bad CMBS and the junk bonds issued by private equity) that they have not marked down yet. When that blows up we have good odds that they'll ask for another bailout. And the behavior of both parties says that the leadership will try to get it for them. They nearly didn't manage to deliver it last time, and given the public outrage since, they may not be able to deliver it next time.
This could lead to interesting times. Interesting times.
Re: 93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk
#693% isn't bad luck. 93% is fraud.
Re: 93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk
#7It seems to me that rating agencies should be paid by the institutional investors that buy the bonds, not the banks trying to sell them. That might help the incentives line up better. Am I crazy? Nobody suggests this, and I think I'm missing something crucial here.
The problem is that the institutional investors buying the bonds are much smaller, and there is no way to keep the information from leaking. Therefore most of those investors won't be willing to pay for the bonds, and the ones that can pay will be paying less money.
That doesn't mean that this model is not viable. But it isn't viable at the kind of margins that the rating agencies would like to remain accustomed to.
Re: 93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk
#8what does this have to do with news.yc ?
it's not even about startups!
Re: 93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk
#9It seems to me that rating agencies should be paid by the institutional investors that buy the bonds, not the banks trying to sell them. That might help the incentives line up better. Am I crazy? Nobody suggests this, and I think I'm missing something crucial here.
The problem is that the institutional investors buying the bonds are much smaller, and there is no way to keep the information from leaking. Therefore most of those investors won't be willing to pay for the bonds, and the ones that can pay will be paying less money. That doesn't mean that this model is not viable. But it isn't viable at the kind of margins that the rating agencies would like to remain accustomed to.
Maybe investors could pool resources to start their own rating agency that would be answerable to them, and publish ratings for everyone to use? There has to be a better system.
Re: 93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk
#1093% isn't bad luck. 93% is fraud.
Not that I think everything was above-board, but to be fair, these are hugely correlated instruments: it's not reporting 93% of all AAA debt tanked, but 93% of all AAA-rated derivatives of subprime mortgages. Given the subprime-mortgage crash, it's not surprising that everything tied to subprime mortgages uniformly tanked too.
The way an AAA-rated derivative of a subprime mortgage could exist to begin with was via "tranching", where debt was sliced up into different buckets of repayment priority, which heightened the correlation. In a minor crash, the AAA securities would do okay, because they'd get the payments from the non-defaulting loans, and the lower-rated tranches would take the losses. But once you go over the threshhold where there isn't enough money to even repay the top tranches, then everything tanks all together. So really, near-0% and near-100% default rates were the likely outcomes.