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View Diary: BREAKING: Standard and Poor's GUILTY, “deceived” and “misled” Investors (91 comments)

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  •  I think that's only partly true (2+ / 0-)
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    johnny wurster, divineorder

    I agree that, as a practical matter, investors had to purchase securities that had a rating from one of the agencies. I think that's bogus, but I can see how it came about.

    However, in this case the problem wasn't too few bonds with good ratings but too many of them. The only people really hurt were investors in junk bonds who didn't have as many officially junk bonds to pick from. The investment-grade people had an embarassment of riches to pick from, and they could have picked the good ones out of the pool.

    In fact, investment firms used to pride themselves not only on average annual return but also safety; especially for fixed-income investments and the widows-and-orphans customers of them. So, there should be a market for investment firms that take a more conservative view than S&P, resulting in fewer defaults at the cost of lower income, and a market for cowboy firms that provide higher current income at the expense of more defaults. (Part of the problem there is with managers who are paid on the last 12-months returns with no claw-back penalty for subsequent defaults.)

    The short story, in my opinion, is that there is lots of blame to go around, but I don't know that you can officially blame S&P for overly optimistic ratings in general. If you can prove that internally they concluded a bond was junk but they took a "consulting fee" from the issuer to provide a higher rating I think you could easily bring conspiracy to defraud charges.

    •  The people in charge of asset (5+ / 0-)

      allocation (usually a committee) would determine that, say, 5% of a fund's assets should be in CDO paper, or 10% in subprime ABS. Then the portfolio managers would pick the "best" of the offerings. That's how it generally worked. The orders were (as always) to pick up as much yield as possible while hewing to guidelines on minimum ratings. So AAA CDO paper, with its higher yields, got plenty of investor interest. The funny thing in hindsight is that these investors would buy CDO or SIV paper, collateralized with re-securitized B-pieces or even with already-created, re-re-securitized CDO paper, just to pick up 15-25 basis points in yield. Some lost 100% of principal in an attempt pick up less than a quarter point of annual yield relative to risk-free paper!

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