Monday, December 22, 2008

AAA Garbage

"In the past month, there has been a big selloff in a corner of the mortgage-bond market that investors once thought impregnable: triple A. ... The most troubling change has been a wave of selling in triple-A prime mortgages. ... Leland Abrams, a trader at a Florida broker dealer, says his firm has bought prime triple-A mortgage bonds for about 30 cents on the dollar. Similar bonds traded for about 70 cents a few months ago", Scott Patterson at the WSJ, 9 December 2008.

"In a sign of how quickly the global crisis has reversed Russia's economic fortunes, Standard & Poor's cut the country's debt rating on Monday for the first time in a decade, warning of the 'rapid depletion' of Russia's massive reserves. ... The government has steadily added to its bailout package, which now totals more than $200 billion. ... S&P highlighted Russia's spending of its reserves as a key reason for its downgrade to BBB from BBB+, adding that a further downgrade is possible. ... Its current debt remains at modest levels", Gregory White at the WSJ, 9 December 2008.

AAA may mean nothing today.

In reading this article, I thought, "If Russia is only a BBB credit, why should Uncle Sam be higher"? I await S&P's downgrading Unc's debt.

10 comments:

Anonymous said...

Mercy IA...

All of fixed income land will implode when that happens...

Spread what?

Anonymous said...

The Pension Benefit Guaranty Corporation (PBGC) today announced the selection of investment firms BlackRock, Goldman Sachs and J.P. Morgan as strategic partners to manage $2.5 billion in assets and provide support to PBGC's in-house investment staff.

http://www.individual.com/story.php?story=93890554

Here's a buyer for those.

Subprime Loan Analysis said...

By and large, those prime mortgages weren't AAA quality to begin with. Their quality stemmed from the financial guaranty policies written by AAA providers.

As stand-alone credits, they're barely investment grade, if that.

The financial guarantors who wrote the insurance policies and CDS trades never envisioned a calamity such as the one we're experiencing now. Their stress tests never contemplated this level of stress.

AAA definitely means something, but no one really understands what that is, exactly...

Anonymous said...

I agree with previous poster who suggested credits were never AAA to begin with. But some measure of fault belongs to the big 3 rating agencies who not only garnered business based on their ratings (i.e. paid by the issuers) but also had significant investment/trading positions in the instruments they were rating. Classic conflict of interest.

Anonymous said...

Hi ... you are totally incorrect about the credit of the borrowers and reliance on insurers in the comment 'subprime loan analysis" . prime mortgages, which did not conform to agency standards were also securitized. However... almost NONE of these rely on insurance policies by financial guaranty companies for their rating... ratings are based on credit enhancement (ie the amount of bonds subordinate to the respective rated tranche). Prime mortgages typically have FICO scores north of 750 and many have full documentation. These are very complicated securities and there are lots of data available for each underlying loan in a mortgage pool. Typically... even in the midst of this disaster we are in, prime, non agency mortgages, only have about 2-5% delinquent loans, compared to subprime which are now about 35-55% currently delinquent on average in their respective pooled trusts.

All that said ... yes I agree the rating agencies completely had their models wrong, which were not designed to handle a systemic shock (ie housing prices nationally decling). but ... it is doing a disservice making comments about securities and structures when someone doenst know how they work. almost all subprime, alt-a, option arm, and prime mortgages do NOT have a "wrapper" creating the rating. Creidt tranching allowed for AAA tranches because of subordination and priority of payment...therfore it is possible even in bad times to carve out a thin AAA slice of bonds backed by a pool of subprime, prime, alt-a mortgages or any asset back for that matter. do your homework!!

Subprime Loan Analysis said...

Anonymous 12/29/08...

Your assessment that almost none of these assets relied on financial guaranty is counterintuitive. Monolines have been experiencing downgrades left and right because of their exposures to mortgage assets. That's not event to mention AIG's exposure.

Those exposures were acquired via financial guaranty and/or CDS transactions. While the rating agencies pushed the bar on conflict of interest, they didn't shell out high grade ratings solely because there was something in it for them. The AAA ratings stemmed, in part, from the wraps provided by the insurers.

I can pull a CDS trade screen down from Reuters and post it onto your blog to show you some of the CDS trades that offered protection on some of these MBS/CDO deals.

Remember, before these assets became CDOs/CMOs, many were organically asset backed securities. It is those trades that primarily received the protection wraps.

Having worked in a strategic partnership with a large insurer who has received ratings downgrades in the marketplace, I feel pretty safe in my conjecture.

Anonymous said...

I TRADE THESE SECURITIES... YOU HAVE NO IDEA WHAT YOU'RE TALKING ABOUT... VERY VERY VERY FEW VANILLA RMBS, ALT-A, OR SUBPRIME DEALS RELY ON MONOLINE WRAPS.

Subprime Loan Analysis said...

Anonymous:

Take a look at this link and square it up with your assertion...

Fitch: Financial Guarantors 2007 Mark-to-Market Losses Reviewed

If that doesn't accentuate the point, then I can get you Fitch's annual report on financial guarantors, which actually spells out the dollar exposures that monolines have taken in the business.

Anonymous said...

I am a non-agency RMBS trader.... it is extremely rare that one of these deals will be wrapped. Often, some HELOC (home equity line of credit) revolving credit deals have monoline wrappers. THese markets are over 1 trillion EACH... subrpime, alt-a, and prime non agency. that link you sent is meaningless. Please do not argue with someone in the business.

Subprime Loan Analysis said...

Anonymous:

With all due respect, you have come off as someone who is scantly knowledgeable about your business -- at best. That's not surprising, given current market conditions. Such is rather ironic or embarrassingly tragic, depending on the time of day.

If your best attempt to refute my point -- rather Fitch's point -- is to repudiate Fitch, go hide behind your trading desk and spew misinformed fare while simultaneously babbling "trader's privilege", then that's your prerogative.

Just be advised that such representations reflect poorly upon yourself and the industry that permitted you to help execute its business.

To say that financial guarantors had relatively limited skin in the game -- which was a chaotic "spread grab" at its high point -- just doesn't square with reality. I've already pointed you to a definitive link, yet you still prefer to bury your head in the sand.

Your experience as a trader clearly didn't come part and parcel with wisdom. Sort of like "practice makes routine", as opposed to "practice makes perfect" -- obviously you perfected a very questionable routine.

Anyway, I'll leave you to ruminate over that which appears obvious to able practitioners and reasoned observers.