How can securities be rated AAA one day, and junk the next?

Think of it as a new class: AAA Junk.

"Moody's." Is that some sort of cognitive emotional disorder? Maybe they got a medical prescription for hopium.

When you pay someone to review your work, and reviews are their only source of income - what do you think will happen?

Totally stupid system.

Customer: "Hey! I thought you said these toxic AAA debt instruments were the safest I could buy."
Moodys: "They are. Thus the AAA rating."

When commercial property loans go into default, how much can lenders reasonably expect to recoup from asset dispositions or the sale of mortgage notes? A new study from Real Capital Analytics (RCA) reveals that recovery rates on defaulted commercial mortgages vary by property type, location and loan-to-value ratios.

The New York-based researcher analyzed 145 defaulted commercial mortgages that have been liquidated this year. Of the $3.2 billion outstanding balance on those mortgages, lenders recovered $1.9 billion, equating to a recovery rate of nearly 60% before costs and fees.

A loan is considered liquidated, or resolved, when the property or note is sold to a third party. The recovery rate is calculated by dividing the gross proceeds from the disposition by the distressed amount (the outstanding balance of the first mortgage at the time of default). The average size of the first mortgage loans in RCA’s sample was $13 million. All data was based on properties and portfolios $5 million and above.

Average Recovery Rate on Defaulted Commercial Mortgages Is Nearly 60%, RCA Study Shows

Terry wrote

but the restrictions on TARP recipients on hiring H1B holders that can be avoided by outsourcing the work

But then most of the big TARP recipients already have subsidiaries in India. When Lehman got squashed, cream of MBAs graduating from Indian management schools were quite upset their $200K job offers were withdrawn.

And what exactly does the "AAA" stand for?

(let 'er rip...)

How can securities be rated AAA one day, and junk the next?

Moody's definition of Structured Finance Long-Term Ratings:
Aaa : Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.

It never says that AAA has a given probability of default or that these structured finance ratings would be stable over time.

Moody's (or SP) has long published default reports focused on corporate ratings: default frequencies, rating transition frequencies, etc. Since these reports covered the rating history going back to 1920s, one could reasonably judge the expected default behavior for a given rating.

The ratings history of structured finance is much much shorter. One had to be lazy or naive or willfully ignorant to assume blindly that AAA in structured finance means the same thing as AAA in corporates.

PS. I am not affiliated with any rating agencies, but I do think that it is all too easy and convenient to shift most of the blame to them.

Some (many?) investments can only be made in AAA rated paper (pension funds, etc.), so the rating is the difference between pass/fail or sale/no-sale.

No investment policy ever says you have to buy all AAA rated paper. It limits your universe of securities, but you still have to do some job picking them.

As I said, laziness and willful ignorance.

"But then most of the big TARP recipients already have subsidiaries in India."

Absolutely correct on the big boys, but 720 businesses received TARP funds and all businesses that received TARP funds or participated in TALF are restricted from hiring visa holders - the offshoring is reaching smaller institutuions

RockyR - I tell my clients 60% of offshoring deals eventually unwind, especially for custom developed applications, for the very reasons you cite. Notwithstanding, there is a huge push on to offshore.

Terry wrote:

RockyR - I tell my clients 60% of offshoring deals eventually unwind, especially for custom developed applications, for the very reasons you cite. Notwithstanding, there is a huge push on to offshore.

my hypothesis is that this is happening because buyers are ignorant. not ignorant in the mouth-breathing, drooling sense, but ignorant in the "they don't understand the product that they are buying" sense.

"buyers are ignorant"

RockyR - My feelings are that they are desperate - everyting is crashing in around them and cost cutting is the only tool they have.

The role of the overseers of the pension funds has conveniently been forgotten- they are the ones who should be sued for dereliction of duty. They set the rules that their managers could only buy securities that had a minimum rating from the agencies. They kicked out managers who underperformed their peers and the net result was that every manager even if they knew these assets were unworthy of the rating ascribed by the agencies had no choice but to buy them. Were these overseers so dumb that they didn't realize that the market doesn't provide yield premiums on triple AAA securities if they truly are AAA.

Mel - I have a little more jaded view of reporters - not defending Moody's (and my post above about being mad about the ratings cut was snark) but the few dozen times I had to deal with reporters they were clueless and had an agenda.

RockyR wrote:

my hypothesis is that this is happening because buyers are ignorant. not ignorant in the mouth-breathing, drooling sense, but ignorant in the "they don't understand the product that they are buying" sense.

Of course they don't, if they walked around any large, good software company in the US they would have noticed that all of the superstars from China/India work here, not back in their native countries. Who knows how long this will hold true, but the people holding the regular software developer jobs in China/India are not going to be high quality until that balance is restored. A middle tier software dev in America going back to India/China will be coming in at a director/VP level, not a coder. Similarly, for the ones who are really good, most leave for America and those that don't are the CEOs of those off shoring firms.

"re: Moody's: there need to be public beatings."

Stalin had people shot for real or supposed inefficiency. It didn't save the Soviet system from going down.

If there is a cure, it is one of culture, not punishment.

Without trust there is no free market.

Pavel - I assume you meant trust in legal enforceability of contracts, stability of laws as well as equal and unavoidable applicability of laws to all subjects.

crazyv wrote:

Were these overseers so dumb that they didn't realize that the market doesn't provide yield premiums on triple AAA securities if they truly are AAA.

Yes, they were and are too dumb.

They also work overtime at remaining dumb.

You can explain to them a dozen times, a dozen different ways that there is only one way to increase yields in fixed income and that is by taking on more risk (duration risk, default risk, liquidity risk, etc.). They will pretend to hear you and then proudly announce that their new, improved investment goals are to boost yields and minimize risk.

When my daughter was studying engineering at THE Ohio State University, most of her professors and graduate TAs were Indian.

MrM wrote:

Pavel - I assume you meant trust in legal enforceability of contracts, stability of laws as well as equal and unavoidable applicability of laws to all subjects.

I hope that Pavel means that with most transactions "the parties involved agree to the deal and live up to their commitments" with needing to resort to the available legal remedies.

When two traders say that a trade is "Done", it should be completed without having to get all lawyered up to make certain that it is done.

Any sensible buyer knows that ratings are an opinion and securitization ratings carried an additional qualifier.

The financial system is loaded with incompetence and corruption. Unfortunately, so is government. The buyers of this junk paper should go first. We live in a caveat emptor society. Should we feel sorry for some well compensated idiot that purchased high tech swampland? That person deserves a demotion to drive-up window attendant.

The comments on America has plenty of quality IT people seem to forget that cost is part of quality. How many people claim American cars are junk and to expensive?

When two traders say that a trade is "Done", it should be completed without having to get all lawyered up to make certain that it is done.

One proposal to rein in the CDS market and move it to exchanges is to announce that all OTC CDS contracts will be unenforceable by US courts.

Do you think that might affect the behavior traders saying a CDS trade is "Done"?

No, they will just rewrite the standard contract so it will be enforceable in some country that does recognize the Doneness.

The US courts will then have to decide if they will continue to recognize the enforceability of foreign court judgments. If they decide "No", the foreign courts will then have to decide if they will continue to recognize US court decisions.

What ever happened to basic values such as honesty and integrity?

What ever happened to basic values such as honesty and integrity?

As E.O. Wilson once quipped about communism: "Wonderful theory, wrong species"

Later all

Video | The Outsourcing Report - Sweatshop Warrior | Link TV

my hypothesis is that this is happening because buyers are ignorant. not ignorant in the mouth-breathing, drooling sense, but ignorant in the "they don't understand the product that they are buying" sense.

Having made a living managing and architecting software in offshore and onshore environments, I disagree. I managed several 100 man years+ projects offshore that worked wonderfully well at a fraction of the price. Many of these projects would not have been feasible if they had to be done onshore.

If you are aware of the pitfalls, it works just fine. Reality is sometimes tough to face!

Allen C wrote:

We need to hold the buyers accountable.

Frustrating thing is "How?"

Old Agency Problem: The Buyers are not the ultimate "owners" so they do not get stuck will the costs. If one were tofire them all, they still would have made their fees for playing with Other People's Money (OPM).

If fire them all, they still have made their fees for playing with Other People's Money

While firing them will not solve all the problems, it will be the right step in the necessary direction (deterrent is a big motivation behind punishment for crime).

Terry wrote:

everyting is crashing in around them and cost cutting is the only tool they have

Depends on what they measure. In this case it's clearly short-term cost. But other metrics also exist. Throughout the current secular cycle during which growth will not happen due to increasing leverage, they will quickly have to learn to heed these other metrics in order to achieve "real" growth.

NorkaWest,

Unfortunately, a critical mass of populace demanding action has yet to form. Keep recruiting...

Business has had to go to short sighted profit thinking, since the stock market went to pump and dump casino operations. Long term thinking was punished not rewarded.

Outsourcing also circumvents US equal employment laws. Indian subsidiaries routinely advertise jobs with max age stipulations. Most IT jobs come with age restrictions between 25 and 35 .

Hiring H1B or B1 visas for on site employment in shore also have that problem of 'what meets the public eye'. I know BOA has a huge amount of its work out sourced to India. If they had too many H1B's on site, it would not be politically correct. On line , its all under the radar.

yagij wrote:

There is something about this commentary that sticks out at me, but I cannot put my finger on it.

It might be that software engineering skills are becoming very competitive worldwide. Rebalancing is not just a matter of monetary flows but will also result in comparable compensation for skills.

My job can not be outsourced. That means I need to lower my life style.

JimPortlandOR (profile) wrote on Sun, 10/18/2009 - 1:11 pm

Yelling 'bad' at the lizards in your yard can make you feel like you did something, but the lizard knows nothing....

Doubly-useful metaphor as the most primitive functions of the brain, which we share in common with reptiles, are very much part of the root of this sort of behavior. And unlikely to change

NorkaWest
However, bribery is still rampant. Who knew that Chevron would pay only a $30mn fine for buying 78mn barrels of Iraqi crude below price through the oil for food for kickbacks, meanwhile Condoleeza Rice was only Secretary of State at the time.
Germany and Britiain still lead the way in bribing governments by a country mile. France just uses its military to maintain amenable governance in client states.
There has to be a better example for the spread of domestic laws than that. How about freedom of information acts that started in Sweden hundreds of years ago, then had a renaissance in Australia and Canada, and ever since have been varying degrees of effective in countries all around the world.

More realistically, it should be more practical to ban any domestic financial firms from dealing with any counterparty that deals in CDS or other naked positions outside of regulatory 'norms' however defined. That way you accept that you can't prevent CDS, but you can do your best to keep them contained

"Precisely. The real crisis is not the failure of market mechanisms - it's the (apparent) collapse of integrity"

Interesting RIF - was reading a post at ZH that was similar in thought - Brokedown Palace: The Undermining of Property Rights in America | zero hedge

See that Google's ad server is working well - mention a credit report and I instantly have an ad for coface commercial credit reports.

"However, people become intolerable to each other when they have no or sympathy for the misfortunes or resentment of each other:"

The U.S. marketing machine works on envy.

splat
I'm thinking along the lines of BAE or Trafigura
Even Thatcher's son's attempt at a coup in Equitorial Guinea

Re Smith, for 'moral sentiments' I prefer the precision of:

Humility, Liberality, Chastity, Meekness, Temperance, Brotherly Love, Joy, Peace, Patience, Benignity, Goodness, Longanimity, Mildness, Faith, Modesty, Continence, Understanding, Fortitude, Knowledge, Piety, Prudence, Justice, the Fear of the Lord.

, "What few realized was how much of modern industrial society up to the mid-20th century had relied upon a symbiosis between old community & family values and the new society and therefore how dramatic the effects of their spectacularly rapid disintegration were likely to be."

Hobsbawm has it right in this case.

Conjure's word for today is:

ACCOUNTABILITY

I'm thinking along the lines of BAE or Trafigura

Don't forget the awesome use of courts to stifle Private-eye magazine from reporting that Robert Maxwell was one of the biggest financial fraudsters in British history It makes me wonder how the Lisbon treaty will effect free speech in the UK and the gagging of newsources.
~splat

There are 2 incomparable economies that affect our daily lives
Social
Financial
You can't put a price on a thanksigiving dinner with family/friends, and you can't write a paycheck in first-kisses
There may be more vectors, but I haven't thought of them yet.
What's happened basically during the credit bubble is the substitution of financial benefits in exchange for reductions in social benefits. In large part because the financial part of the economy was apparently growing so fast, and promised the opportunities to make up for a reduced social wealth (eg less time with kids, but you get to take them on your yacht around the Carribean). Turns out a large part of the financial economy was just a phantom, a credit bubble, virtual wealth. So now we revert.

JP,
Somebody should tell Timmy G that L Summers has said he doesn't believe in a reduction of the American standard of living or growth thereof

pavel.chichikov (homepage, profile) wrote on Sun, 10/18/2009 - 1:30 pm

Humility, Liberality, Chastity, Meekness, Temperance, Brotherly Love, Joy, Peace, Patience, Benignity, Goodness, Longanimity, Mildness, Faith, Modesty, Continence, Understanding, Fortitude, Knowledge, Piety, Prudence, Justice, the Fear of the Lord.

Almost the entirety of the mechanisms of culture and commerce are based upon exploitation of the seven deadlies... Cultivating virtues such as those you suggest would be postiively un-American!!!

ResistanceIsFeudal
In the context of the 7 deadly sins,
How would you explain someone who obsessively cleans their house under that?
Or people who backpack around the world just because they haven't seen it yet?
Or telephones.

*Once again - *market mechanisms are subordinate to culture.**

Nope, pavel wrote that, not me.

"How would you explain someone who obsessively cleans their house under that?"

Anyone? It's like asking what Justice has to do with opening a bag of peanuts. Well, give us a few more details.

"Or people who backpack around the world just because they haven't seen it yet?"

Nothing wrong with energy and curiosity.

"Or telephones."

Like hands and brains, it depends on the use.

back in the day (early 80's) the biggest concern with derivative contracts was whether they would be considered gaming contracts and therefore legally unenforceable. To get around that we required that the counterparty make a whole bunch of reps and warranties that they were entering into this contract for bonafide hedging requirements.

In the early 90's there was a famous case in the UK where the courts held that contracts entered into by the Borough of Hammersmith were unenforceable because they had no authority to enter into those type of transactions. The of course the lobbyiest got involved and bankruptcy rules were changed for derivatives. It seems to me that all we have to do is go back to the old regime. Require that derivatives not transacted on an exchange have a legitimate hedging requirement to be enforceable. No need for complicated regulatory solutions- the market will take of it. Of course nobody likes market based solutions it is much simpler to out wit regulators failing which to bribe them.

My last contract, well-paid y2k stuff, was with GE Capital. I worked with many Indians on that project, and was not impressed, but my sample was small. Nevertheless, after y2k, the big boss decided to outsource the entire division (car finance) to India. When it didn't work, he and the other bosses decided that the company should just close the entire division. I'm sure he got a favorable review and bonus for putting a few thousand people out of work.

Perhaps I am just a disgruntled worker bee, but my bosses, and THEIR bosses had no clue about what it took to do my job. Not just that they couldn't do it themselves, but they had no idea what it took to do the job well. Managers and Execs rise for reasons that have nothing to do with the actual work involved, in most cases. Management was not something I ever wanted to get involved in. I would have hated spending my time that way, and given the 'corporate culture' I wouldn't have fit in anyway. Until the time comes when programming productivity can accurately be measured (about the time pigs begin to sprout wings) management will make bad decisions and never be called to account for it.

/end of rant

pavel.chichikov
Have fun trying to tip your wife after dinner and amorousness, without ending up on the couch or worse if you think yourself clever in this way

a long time ago a wise man told me "never pay incentive compensation to the person who manages your money". Bonuses are a lazy managers tool. Pay the person the right amount and scrap the bonus.

they are too busy asking for birth certificates !!!!

RIF,
The exploitation of the 7 for commerce makes sense.
People will always love a good ponzi scheme