Re: [A-List] The coming savage downturn

[kaliyuga@xxxxxxxxxxxxx]

>
> The peculiarity of this trade is that profit is never arbitraged away in
> the benign phase of the credit cycle because positions are not
> constantly marked to market. Their illiquidity requires them to be
> marked to a model approved by credit rating agencies. As we saw after
> Enron and the subprime mortgage fiasco, rating agencies, who are paid by
> those who they rate, do not adjust ratings to reflect deteriorating
> economics. They close stable doors after profligate horses have bolted.
>
Actually, I believe this is incorrect. Issuers are required to provide
monthly reports and bonds are reviewed by the rating agencies and can be -
and are - downgraded for unanticipated poor performance.  It is true that
the rating agencies are paid by those they rate, but the issuer has no
alternative and usually requires the rating of 2 of the 3 agencies.  An
issuer therefore has little leverage when the rating agency determines the
levels of the structure.

Investors who buy the low risk traunches (and sometimes these are held by
the investor who either can't sell because of the risk or maintains
because of the high rate of return) MAY be in for disappointment, but I
seriously doubt that there will be a "savage downturn" in the AAA market.

Maggie