I actually missed this thread the first time around. Too busy working trying to bob and weave through departments and avoid the firings.
I work for a credit rating agency. I was in structured finance. Saw the writing on the wall there about a year ago and went to financial institution ratings which seemed safe until...
Then another move this winter and a 50% paycut to make sure I can continue paying the mortgage and put food on the table for the wife/kids.
Yeah yeah, flame away. It's all our fault, we deserve to be fired and get paycuts. Blah blah blah. I've heard enough from un-educated media and politicians that I'm numb to this blame game by now.
I got one word for this whole mess - GREED. Common sense should tell you that if something is growing faster or yielding more than historical levels it is likely unsustainable. But everyone wants to turn a blind eye and hope the musical chairs doesn't stop on them while they're holding some junk investment packaged up with a bunch of other junk investments and called gold. You can't polish a turd.
Anyway, I can't complain because I am still better off than many people in the world and will come out of this with a better sense of what is really important in life. Ultimately this great country will give me the opportunity to bite and claw my way back up.
And for now, I can still afford my beer and drive an M5 (not in that order or course). So cheers and good luck to you all!
I have been in the restaurant industry for 25+ years...I have lived through the 19% interest rates of Mr. Jummy Carter.....and now this...with everything inbetween.
Some say this is a good thing...a little blood letting gets rid of the marginal people....unfortunately some good people will become collateral damage in this economic debacle.
Fortunately I saw the wrting on the wall in the Spring of 08 and started to trim any fat from my business...spoke with my 20+ employees and explained the situation. That in order for us to survive and thrive for the next two years we must tighten our belts.
By that I meant cut hours...and unpaid furloughs....employees now have to contirbute to benefits....no one will be laid off..but no one will get raises...we have to learn to do more with less....my Father used to tell me it builds character...lol.
I remind myself that I have my health...as does my family...we live in our home...and are better off than some people we know.
My wife sells RE for Sothebys International Realty....and last year was her worst year in 20 years...believe it or not so far in 2009 buyers are coming around again because home prices here have finally dropped to normal levels...the days of bidding wars are over for now....and the bottom feeders have left the area realizing that they are not going to steal anything....BUT...will be paying a correct price for a home in my area.
Keep the Faith Fellas!
Regards
S
Please explain how these CDOs got an AAA rating. Is the public wrong when these ratings lead to the wide trading of these devices??
Really curious.
The short answer is, in theory, if defaults come at historical levels you can package pools of assets and reduce the risk of default for certain asset classes, to the point of being as secure as a US Treasury.
The long answer is securitizations are pools of assets sold in tranches. I'm really over-simplifying it, but basically to get to a AAA you pull out the best pieces of the pool, add a level of over-collateralization that increases at higher tranches, and layer in the riskier assets underneath you. So you would have to have defaults burn through the mezz pieces (which would be expected), then burn through every other tranche completely before AAAs would suffer any loses.
IF history repeated itself with default rates, you would never burn through enough collateral to lose principal at the AAA level. CDOs can have anything in them. Bankers got real creative in recent years because they didn't like the pricing they were getting on traditional stuff. You can basically securitize anything. So historical defaults sort of go out the window if the assets being securitized aren't what you've seen historically.
Is the public wrong? Yes and no. You are correct AAA ratings led to a false sense of confidence that their money was as good as government bonds, which after all are AAA rated. So investors can take that position and in their mind have a right to be angry. But ratings are opinions based on the assumption that everything is as presented. In other words, no one is lying and there has been no fraud. The facts are there was lying and fraud behind the loans being securitized. Additionally, none of the investors even knew what they were investing in. They never read the prospectus. The bankers putting the deals together knew what was in that stuff and that's why they didn't hold any of it and sold it off. It's along the same lines of when everyone got mad at us over Enron. That we should have uncovered the fraud. Well no, they shouldn't have lied. And if they didn't lie, our ratings were right.
Were our ratings ultimately wrong? Were investors too doped up on big returns to bother reading the fine print? Was everyone being compensated to keep the machine going? I'll let you answer those questions for yourself. I hope I didn't bore you with my long reply.
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I have been in the restaurant industry for 25+ years...I have lived through the 19% interest rates of Mr. Jummy Carter.....and now this...
Wow Sergio, I never knew you were that old! Just kidding (although I wonder if you started in the restaurant business when you were 10 ). Glad to hear you and your family are hanging in there with a great perspective on things. I hope to see you again soon.
The short answer is, in theory, if defaults come at historical levels you can package pools of assets and reduce the risk of default for certain asset classes, to the point of being as secure as a US Treasury.
The long answer is securitizations are pools of assets sold in tranches. I'm really over-simplifying it, but basically to get to a AAA you pull out the best pieces of the pool, add a level of over-collateralization that increases at higher tranches, and layer in the riskier assets underneath you. So you would have to have defaults burn through the mezz pieces (which would be expected), then burn through every other tranche completely before AAAs would suffer any loses.
IF history repeated itself with default rates, you would never burn through enough collateral to lose principal at the AAA level. CDOs can have anything in them. Bankers got real creative in recent years because they didn't like the pricing they were getting on traditional stuff. You can basically securitize anything. So historical defaults sort of go out the window if the assets being securitized aren't what you've seen historically.
Is the public wrong? Yes and no. You are correct AAA ratings led to a false sense of confidence that their money was as good as government bonds, which after all are AAA rated. So investors can take that position and in their mind have a right to be angry. But ratings are opinions based on the assumption that everything is as presented. In other words, no one is lying and there has been no fraud. The facts are there was lying and fraud behind the loans being securitized. Additionally, none of the investors even knew what they were investing in. They never read the prospectus. The bankers putting the deals together knew what was in that stuff and that's why they didn't hold any of it and sold it off. It's along the same lines of when everyone got mad at us over Enron. That we should have uncovered the fraud. Well no, they shouldn't have lied. And if they didn't lie, our ratings were right.
Were our ratings ultimately wrong? Were investors too doped up on big returns to bother reading the fine print? Was everyone being compensated to keep the machine going? I'll let you answer those questions for yourself. I hope I didn't bore you with my long reply.
Thanks, a much more detailed explanation than I have heard from anyone else. A couple more questions....
- What were the ratings that were given to the worst tranches? Were they above junk?
- Don't these agencies factor in that all these tranches were tied the housing market...
Caveat emptor for investors but your ratings gave the institutionals free run to "get in the game". I imagine there is much regulation coming to the rating industry.
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Last edited by T Bone; 26th February 2009 at 04:17.
Thanks, a much more detailed explanation than I have heard from anyone else. A couple more questions....
- What were the ratings that were given to the worst tranches? Were they above junk?
- Don't these agencies factor in that all these tranches were tied the housing market...
Caveat emptor for investors but your ratings gave the institutionals free run to "get in the game". I imagine there is much regulation coming to the rating industry.
I'm not that good at splitting up quotes...so I'll answer these in order best I can.
1) Worst rated tranches are junk. There are actually pieces of deals that aren't even rated. Not including C-level ratings that are generally on corporate debt, structured ratings go B, BB, BBB, A, AA, AAA with pluses and minuses. Anything below BBB- is considered a junk bond (below invesment grade, non-investment grade and high-yield are polite terms). People investing in these 'b' pieces or 'mezz' pieces are taking a lot of risk for a lot of return. They supposedly know what they are doing and in general are not the ones complaining about losing money...they know it is part of the game and made a ton of coin before getting hit with defaults.
2) Most, but not all is tied to the housing market. I guess you can say all roads lead to rome. Meaning if a credit card loan or auto loan is packaged into a CDO, well maybe someone went out and bought a car they shouldn't have or ran up a credit card they were planning on paying off with their tenth refinancing of a home equity line.
You asked the right question. Should we have assumed that this whole thing was a house of cards built on the foundation of a speculative housing market? Should common sense have told us that when our cab drivers were giving us advice about how to flip condos that they were handing out money too easily and there was presumably lying and fraud taking place? No offense to cab drivers of course, but you get my point. Problem is our ratings "criteria" did not take into account the 'possibility' (and I use that word loosely) that there was something shady going on. It just wasn't flexible enough.
Which brings me to your third point...You are very correct my friend. Just listen to the tone of the rating agency suits when they testify now vs. a couple of years ago. Their message has gone from rating agencies don't need any regulation, to some regulation is good and we'd like to help steer you in the right direction, to "thank you sir may I have another". (hope you've seen "Animal House" or you won't get that)
It will be a different world for ratings if the agencies survive all the lawsuits from investors and everyone else they've pissed off
"The hedge fund traders learned from a news account that Sadek was dating a soap opera actress, Nadia Bjorlin, and using profits from his mortgage company to fund a movie about car racing, in which she starred.
"When they started catapulting Porsche Carrera GTs and he says, 'What the hell, what are a couple of cars being thrown around?' I'm thinking, 'That's the guy you want to bet against'," Bass says."
"Bass says he raised about US$110 million and used the leveraging effect of derivatives to sell short about US$1.2 billion of sub-prime securities.
Two-thirds of it was based on BBB rated mortgage instruments, some involving Sadek's loans. One was Nomura Home Equity Loan 2006-HE2 M8, an instrument based 37 per cent on loans issued by Quick Loan Funding."
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You can't polish a turd.
). Glad to hear you and your family are hanging in there with a great perspective on things. I hope to see you again soon. 
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