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Really... "Rating" Agencies  
User currently offlineDerico From Argentina, joined Dec 1999, 4318 posts, RR: 11
Posted (3 years 2 months 4 days 22 hours ago) and read 1816 times:

They are downgrading debt left and right for European countries, the USA, Japan... they've done this for years against emerging markets in Asia. Eastern Europe and South America.

Why are they still allowed to anyway?? This is not a rant against ''free markets'', it's a rant against completely corrupt and crooked agencies. Time and time again it's been proven they facilitated the financing of CRISES (by excessive or outright illegal collusion in cooking numbers), and then subsequently make them worse by turning around when exposed for their involvement and pretending to be ''watchdogs''.

This is like someone supplying liquor to a drunk relative and then having him arrested for public intoxication.

Why are these institutions still legitimate, or have not been replaced by competitors.


My internet was not shut down, the internet has shut me down
29 replies: All unread, showing first 25:
 
User currently offlineKlaus From Germany, joined Jul 2001, 21521 posts, RR: 53
Reply 1, posted (3 years 2 months 4 days 20 hours ago) and read 1753 times:

In theory rating agencies serve a useful function. They have just lost any credibility by boosting the junk to AAA which effectively caused the crash of the financial system.

User currently offlineRara From Germany, joined Jan 2007, 2168 posts, RR: 2
Reply 2, posted (3 years 2 months 4 days 20 hours ago) and read 1737 times:

They estimate the probability that the borrower will default. If they have evidence that defaulting has become more likely, they are obliged to downgrade the borrower. Given the bad financial state that many European countries and banks are in, lower ratings are simply realistic. The situation itself will not be improved by rating countries higher than they actually are.


Samson was a biblical tough guy, but his dad Samsonite was even more of a hard case.
User currently offlineKlaus From Germany, joined Jul 2001, 21521 posts, RR: 53
Reply 3, posted (3 years 2 months 4 days 20 hours ago) and read 1734 times:

Quoting Rara (Reply 2):
They estimate the probability that the borrower will default. If they have evidence that defaulting has become more likely, they are obliged to downgrade the borrower.

The trouble is that they completely disregarded that theoretical obligation during previous years and that they have been instrumental in the creation of the crisis that way.

The entire construction of their business model is corrupted and invalidates their entire purpose.


User currently offlineDerico From Argentina, joined Dec 1999, 4318 posts, RR: 11
Reply 4, posted (3 years 2 months 4 days 15 hours ago) and read 1663 times:

The problem is that it seems many of them profited from giving very generous upgrades to countries, companies and real estate endeavors that had no business even being prime lending material.

I have an idea: no credit rating should be increased until any company or country has succesfully gone through an expansion/recession cycle under their current one. That way higher ratings are not irrationaly awarded when it seems everything is on a roll.

Also, ultimately I am a firm believer of breaking up banks. Yes it sounds interventionist, but no bank should grow large enough to threaten entire continents and people's savings if they go under. If it means a boring banking system, good. Argentina has a very boring banking system because of the hard lessons of 10 years ago, but not one single bank has failed in the last four years.



My internet was not shut down, the internet has shut me down
User currently offlinePyrex From Portugal, joined Aug 2005, 4063 posts, RR: 30
Reply 5, posted (3 years 2 months 4 days 14 hours ago) and read 1620 times:

Quoting Derico (Thread starter):
This is not a rant against ''free markets'',

No, it is a rant against free speech.

Quoting Derico (Thread starter):
Time and time again it's been proven they facilitated the financing of CRISES

Proven by whom?

Quoting Rara (Reply 2):
The situation itself will not be improved by rating countries higher than they actually are.

Shh.. don't tell that to the European Commission that is trying to create a European "independent" rating agency (and please disregard the fact that Fitch is already European). Let me guess what the ratings will be from that thing - AAA across the board, Greece included.

Quoting Derico (Reply 4):
The problem is that it seems many of them profited from giving very generous upgrades to countries, companies and real estate endeavors that had no business even being prime lending material.

Well, if you have such great insights into the creditworthiness of those enterprises, you could have a) shorted the debt of those companies or b) created your own rating agency. So, where are your billions? Or maybe you are just talking with the benefit of hindsight?

http://www.youtube.com/watch?v=9rmUZQrvF5o

Quoting Derico (Reply 4):
Argentina has a very boring banking system because of the hard lessons of 10 years ago, but not one single bank has failed in the last four years.

No Argentinean banks went bust because nobody in their right mind puts their money in an Argentine bank. If the funds don't evaporate through interest rates way below real inflation, they ran the risk of being outright nationalized as is Argentine tradition. Anybody in Argentina with one dollar and two brain-cells puts their money in Uruguay.



Read this very carefully, I shall write this only once!
User currently offlineeinsteinboricua From Puerto Rico, joined Apr 2010, 3377 posts, RR: 8
Reply 6, posted (3 years 2 months 4 days 13 hours ago) and read 1606 times:

Quoting Pyrex (Reply 5):
Shh.. don't tell that to the European Commission that is trying to create a European "independent" rating agency (and please disregard the fact that Fitch is already European). Let me guess what the ratings will be from that thing - AAA across the board, Greece included.

Come on, be realistic. Greece will most likely be AA+, and if it is AAA, then it's because all of its EU peers will either be AAA+ or AAAA (even Latvia with its almost junk bonds).   



"You haven't seen a tree until you've seen its shadow from the sky."
User currently offlineRara From Germany, joined Jan 2007, 2168 posts, RR: 2
Reply 7, posted (3 years 2 months 4 days 6 hours ago) and read 1569 times:

Quoting Klaus (Reply 3):

The trouble is that they completely disregarded that theoretical obligation during previous years and that they have been instrumental in the creation of the crisis that way.

Correct - but they can't make up for that by not downgrading financially unstable countries today..

I don't see the alternative, to be honest. Creating a new European rating agency, as politicians want it, would be nonsensical if the new agency wasn't entirely politically independent. If there's only the slightest hint that politicians interfere with the ratings, they will become meaningless for the markets. However, if it is indeed independent, chances are its ratings won't differ a whole lot from the three current agencies, so where's the sense?

Functionally speaking, rating agencies are a form of outsourcing. If a friend approaches you for a loan, you will consider their situation, weigh their problems against their assets, and then decide whether to give them your money or not. Banks and investors do the same, but outsource much of the process to the rating agencies. A side effect is limiting their own responsibility. Now I guess you could outlaw this practice and force everyone to estimate credibility themselves, but what would that really achieve? The whole process would become a lot less efficient, it would become harder for companies and countries to acquire loans, and investors would still make mistakes in assessing credibility. So in short, I wouldn't know what to do the rating agencies if I had to decide...



Samson was a biblical tough guy, but his dad Samsonite was even more of a hard case.
User currently offlineKlaus From Germany, joined Jul 2001, 21521 posts, RR: 53
Reply 8, posted (3 years 2 months 4 days 4 hours ago) and read 1553 times:

Quoting Rara (Reply 7):
Correct - but they can't make up for that by not downgrading financially unstable countries today..

No, indeed not.

Quoting Rara (Reply 7):
I don't see the alternative, to be honest. Creating a new European rating agency, as politicians want it, would be nonsensical if the new agency wasn't entirely politically independent.

And that had indeed been the plan before it was scrapped (or put on hold) recently.

Quoting Rara (Reply 7):
Functionally speaking, rating agencies are a form of outsourcing.

Yes, we agree about that. If done properly, it is a useful service. It's just not done properly so far.


User currently offlineDerico From Argentina, joined Dec 1999, 4318 posts, RR: 11
Reply 9, posted (3 years 2 months 3 days 23 hours ago) and read 1507 times:

Pyrex,

You have no idea what you are talking about.



My internet was not shut down, the internet has shut me down
User currently offlineEDICHC From , joined Dec 1969, posts, RR:
Reply 10, posted (3 years 2 months 3 days 15 hours ago) and read 1471 times:

Stupid question here....who rates these agencies?

User currently offlinePPVRA From Brazil, joined Nov 2004, 8976 posts, RR: 39
Reply 11, posted (3 years 2 months 3 days 14 hours ago) and read 1453 times:

Quoting Derico (Thread starter):
Time and time again it's been proven they facilitated the financing of CRISES (by excessive or outright illegal collusion in cooking numbers), and then subsequently make them worse by turning around when exposed for their involvement and pretending to be ''watchdogs''.

Let's put it this way. . . they were not the only watchdogs who completely missed the crisis in its forming stages. And some watchdogs (like central banks) were too actively making the situation worse by pushing more and more debt (and still are!!!).

Rating agencies do a good job in most situations. Problem is, banks and nations are not as simple as Caterpillar or Delta Air Lines. Insurance companies can look AAA one day and literally like sh!t overnight even with the most prudent work being done - all it takes is something big and unexpected.

Quoting EDICHC (Reply 10):
Stupid question here....who rates these agencies?

The people who rely on them.


ps: don't take this post as me trying to excuse their failure. There is no question they failed miserably.



"If goods do not cross borders, soldiers will" - Frederic Bastiat
User currently offlineDerico From Argentina, joined Dec 1999, 4318 posts, RR: 11
Reply 12, posted (3 years 2 months 3 days 13 hours ago) and read 1428 times:

Allow me to be slightly less laconic and answer Pyrex in a bit more detail, even though originally I was not going to do this given that he evinces a tenacious intransigence on the matter, so I may be talking to a wall.

Quoting Pyrex (Reply 5):
No, it is a rant against free speech.

And based on what exactly? That is quite a leap of assumption regarding my post, seemingly already made even before bothering to read until the end of the opening post. Notice how nowhere did I state they should be closed down, banned, or curtailed by politicians. I was just wondering why the free market is apparently not functioning as it should, by ostracizing them for their poor choices and allowing new entities or competitors that did a better job at assessing risk (I did write that specifically in the closing sentence, easily seen with a cursory read to the entire OP).

So no, it is not a harangue against free speech since I wrote that I would appreciate rating agencies that actually perform, and are TRULLY private and separate from public government.

Quoting Pyrex (Reply 5):
Proven by whom?


Ah, but you see, simply because the pertinent regulatory authorities and more saliently, private investors themselves, have been at best diffident in confronting the issue (possibly because of fears they destabilize further the economy), does not mean they were not possibly—and yes, likely in my opinion—criminally involved.

If I rape a child and no charges are ever made or pressed, does that make me innocent (really innocent)?

Quoting Pyrex (Reply 5):
Shh.. don't tell that to the European Commission that is trying to create a European "independent" rating agency (and please disregard the fact that Fitch is already European). Let me guess what the ratings will be from that thing - AAA across the board, Greece included.


I certainly am not suggesting any such agency, open to cajoling by politicians preoccupied about their next election campaign.

Quoting Pyrex (Reply 5):
Well, if you have such great insights into the creditworthiness of those enterprises, you could have a) shorted the debt of those companies or b) created your own rating agency. So, where are your billions? Or maybe you are just talking with the benefit of hindsight?


So one has to have made billions in order to enjoy credibility on this matter or to have power of persuasion? Interesting. Unfortunately, I'm not a millionaire to have been in such a position; however, I did see some of this coming.

I have been on this forum for a long time; most people know nothing about me. That is deliberate of course:. I simply don't give very much information about my personal life on the Internet whatsoever. Never have here, with some small exceptions that were never too revealing. So why would I do it here. Well, I'll make another exception since you seem to require it.

I did make "money", I think... I won't know for some years. Principally, however, I warned some acquaintances in 2005 NOT to invest in American or Spanish real estate. I told them to invest in Argentine real estate; they thought I was nuts. Some followed my advice, some did not. Those who did are quite amenable towards further advice in the future. No, I'm no oracle, no I'm not a doctorate in economics, I'm not even a dilettante on the issue. I just follow some basic common sense which shouted at me that real state is not flipped in two months at 20% premiums and such a scenario remains sempiternal.

Quoting Pyrex (Reply 5):
No Argentinean banks went bust because nobody in their right mind puts their money in an Argentine bank. If the funds don't evaporate through interest rates way below real inflation, they ran the risk of being outright nationalized as is Argentine tradition. Anybody in Argentina with one dollar and two brain-cells puts their money in Uruguay.


Apples with watermelons. The private banks in Argentina have nothing to do with the government when it comes to their lending practices, one of the areas which surprisingly the Ks have left undisturbed. Thus, they are conservative, they learned their lessons. That is what I meant as an example of how free markets "educate" and scold. They were not over-leveraged (they easily could have been laxed with credit in the years prior to 2008), but they were not. People did put money in the banks and heavily up until 2008 when inflation made it less of a smart choice, and purchasing durables like cars since then has made more sense.

The big banks in Europe, the USA, etc were bailed out. They will not learn their lessons, or on the other hand will become perennial zombie institutions like those in Japan. You probably agree with me there, but that's were the rating agencies utterly failed and the free market is not working by casting them to the side for their failures of judgement. I mean, they failed at what they are supposed to do well.

[Edited 2011-10-19 18:27:12]


My internet was not shut down, the internet has shut me down
User currently offlineAR385 From Mexico, joined Nov 2003, 6602 posts, RR: 35
Reply 13, posted (3 years 2 months 3 days 12 hours ago) and read 1420 times:
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Quoting Derico (Thread starter):
Why are they still allowed to anyway??
Quoting Derico (Thread starter):
it's a rant against completely corrupt and crooked agencies.

It´s not wether they are allowed to or not. They are companies that simply provide a service. They simply do analysis and write their conclusions. Conclusions that mostly have been right throughout the years. The problem is that the "market" listens to them. And that´s the issue. If the "market" was a bit more intelligent and not mostly comprised by MBAs who played golf though most of their two year progrmas, the ratings of the agencies would be questioned more thoroughly, but this is not done, hence what happens when they issue ratings.

Quoting Rara (Reply 2):
They estimate the probability that the borrower will default. If they have evidence that defaulting has become more likely, they are obliged to downgrade the borrower. Given the bad financial state that many European countries and banks are in, lower ratings are simply realistic. The situation itself will not be improved by rating countries higher than they actually are.

Exactly. What rating do you think Portugal, Spain or Greece deserve? Please, do tell, and provide some analysis.

Quoting Klaus (Reply 3):
The entire construction of their business model is corrupted and invalidates their entire purpose.

I can´t agree with that statement. They provide information. Wether you agree with that information or not is up to you and where you want to put your money. On the other hand, if you have some basic knowledge of economics and finance you can do your own analysis and determine your own portfolio. I´m not saying they are always right or "omniscient", but saying that their model is corrupt is going too far.

Quoting Derico (Reply 4):
The problem is that it seems many of them profited from giving very generous upgrades to countries, companies and real estate endeavors that had no business even being prime lending material.

1. Please provide examples.
2. A lot of their ratings depend on the information provided to them. That is why YOU have to do your homework. No experienced analyst uses their ratings as Absolute Truth. I´ve been there when defending my basis points above risk level when different from the ones of the agencies.

Quoting Derico (Reply 4):
I have an idea: no credit rating should be increased until any company or country has succesfully gone through an expansion/recession cycle under their current one. That way higher ratings are not irrationaly awarded when it seems everything is on a roll.

That statement makes absolutely no sense whatsoever.

Quoting Derico (Reply 4):
Also, ultimately I am a firm believer of breaking up banks. Yes it sounds interventionist, but no bank should grow large enough to threaten entire continents and people's savings if they go under. If it means a boring banking system, good. Argentina has a very boring banking system because of the hard lessons of 10 years ago, but not one single bank has failed in the last four years.

Governments owning banks are a bad idea for many reasons that would deserve their own thread. And yes, none has gone bankrupt in tha past four years, but many have chosen to merge or have been acquired by foreing banks.

Quoting Pyrex (Reply 5):
No, it is a rant against free speech.

     

Quoting Pyrex (Reply 5):
Proven by whom?

     

Quoting Pyrex (Reply 5):
Shh.. don't tell that to the European Commission that is trying to create a European "independent" rating agency (and please disregard the fact that Fitch is already European). Let me guess what the ratings will be from that thing - AAA across the board, Greece included.

Agreed. Politicians, banks and rating agencies are a devil´s mix.

Quoting Pyrex (Reply 5):
No Argentinean banks went bust because nobody in their right mind puts their money in an Argentine bank. If the funds don't evaporate through interest rates way below real inflation, they ran the risk of being outright nationalized as is Argentine tradition. Anybody in Argentina with one dollar and two brain-cells puts their money in Uruguay.

Or in the US. Namely, Miami. The more short-sighted keep them in the house "under the matress" as is colloquially said.

Quoting Rara (Reply 7):
Functionally speaking, rating agencies are a form of outsourcing.

And as in any outsourced product, you, as the outsourcer, needs to make sure the product delivered to you is up to your specs.

[Edited 2011-10-19 18:39:11]

User currently offlineDerico From Argentina, joined Dec 1999, 4318 posts, RR: 11
Reply 14, posted (3 years 2 months 3 days 12 hours ago) and read 1409 times:

Quoting AR385 (Reply 13):
1. Please provide examples.
2. A lot of their ratings depend on the information provided to them. That is why YOU have to do your homework. No experienced analyst uses their ratings as Absolute Truth. I´ve been there when defending my basis points above risk level when different from the ones of the agencies.

Oh come on, you really saying that I as a lonely individual have to do my homework to find the ''correct'' information, and these huge institutions with the all the expertise and information in the world at their fingertips lack the resources to do the same to create trusted qualitative analysis? May I politely call BS there.

Quoting AR385 (Reply 13):
If the "market" was a bit more intelligent and not mostly comprised by MBAs who played golf though most of their two year progrmas, the ratings of the agencies would be questioned more thoroughly, but this is not done, hence what happens when they issue ratings.

That's my point, why is this? Why does a "free market" still afford them relevance? Give your faith to other private agencies. I believe in free markets, but this is perplexing I admit. Unless we were to suggest the agencies acted like a cartel and there was in fact no choice.

Quoting AR385 (Reply 13):
That statement makes absolutely no sense whatsoever.

Why not? Why should a country like Argentina have been upgraded so much in the 90s based on a cycle? It should have had their credit rating restricted at whatever level it was until the government showed they could manage through a downturn without profligate borrowing. Then you raise their credit rating if they prove they can "handle their credit rating" in good and bad times, not just when the "cows are fat".

Quoting AR385 (Reply 13):
Governmenets owning banks are a bad idea for many reasons that would deserve their own thread. And yes, none has gone vbankrupt in tha past four years, but many have chosen to merge or have been acquired by fooreing banks.

Where did I say banks should be run by government? If they choose to merge with foreign banks fine, that's the free market. Other smaller banks take their niche.



[Edited 2011-10-19 18:52:30]


My internet was not shut down, the internet has shut me down
User currently offlineKlaus From Germany, joined Jul 2001, 21521 posts, RR: 53
Reply 15, posted (3 years 2 months 3 days 12 hours ago) and read 1401 times:

Quoting PPVRA (Reply 11):
Quoting EDICHC (Reply 10):
Stupid question here....who rates these agencies?

The people who rely on them.

That is more or less how it should be, but that's not how they actually work.

In reality, they are getting paid by those who create the products the agencies are then asked to rate.

See the problem there?

That is the whole reason why the financial system ballooned and then crashed – the rating agencies were unsurprisingly incapable of extricating themselves from the obvious moral hazard which is inherent in their entire business model.

If they had a sustainable construction instead, there would still be plenty of problems with having them in the kind of position they undeservedly have, and the public debt problems would still exist to some (likely much smaller) degree, but the gigantic failure we have seen was in very large part only possible through the complicity of the rating agencies.

All the other problems still needed to get solved – but the utter recklessness and corruption in some of the investment banks and in the rating agencies was (and to some degree still is!) a huge problem.

Even if they operated via a investor-driven business model, the substantial inherent problems of "not wanting to rock the boat" would remain – I'm not sure if commercially operating rating agencies can ever really work with anything approaching the kind of responsibility their position would absolutely require.


User currently offlinePyrex From Portugal, joined Aug 2005, 4063 posts, RR: 30
Reply 16, posted (3 years 2 months 3 days 9 hours ago) and read 1376 times:

Quoting AR385 (Reply 13):
The problem is that the "market" listens to them. And that´s the issue. If the "market" was a bit more intelligent and not mostly comprised by MBAs who played golf though most of their two year progrmas, the ratings of the agencies would be questioned more thoroughly, but this is not done, hence what happens when they issue ratings.

Actually, the only people who listen to what rating agencies have to say are not "the MBAs who played golf", but the bureaucrats that work at the banking and insurance regulators to decide whether that particular bond or loan is an acceptable asset or not and set capital ratios. If your portfolio manager looks at a ratings report to do anything else but to see if it fits his investment mandate or not you are paying him too much.

Quoting Derico (Reply 12):
I was just wondering why the free market is apparently not functioning as it should, by ostracizing them for their poor choices and allowing new entities or competitors that did a better job at assessing risk

Some industries with apparently low barriers to entry never end up having much competition - see accounting and the Big 4. It is not like there is a conspiracy from the free market against the likes of DBRS, Egan Jones, etc. But as I mentioned, the only reason anybody ever looks at one of those ratings is to see if it fits their mandate - rating quality is really irrelevant for that, all you need is a semblance of credibility, and it is easier to do that with a big brand name.

Quoting Derico (Reply 12):
Ah, but you see, simply because the pertinent regulatory authorities and more saliently, private investors themselves, have been at best diffident in confronting the issue

The regulatory authorities have fomented to avoid having to pay banking and insurance supervisors that actually understand credit.

Quoting Derico (Reply 12):
So one has to have made billions in order to enjoy credibility on this matter or to have power of persuasion? Interesting.

Does not have to have made billions, but the fact is that most people (and not talking necessarily you) who criticize the rating agencies, the banks, etc. talk with the benefit of hindsight, and in 2006/2007 totally missed the ball just as bad as anybody else (bubbles are like religious miracles, they usually have that power of causing mass delusion). And even when you do identify a bubble, knowing when it will pop is a difficult and dangerous thing to predict - you risk becoming illiquid before you are proven right. In your example, while not investing in Spanish real estate is definitely sound advice (the one about Argentinean real estate is another issue - yes, good inflation hedge, but only as long property rights are preserved....) the fact is, if your friends / family members had bought in 2005 and sold in 2007 they could have made a decent chunk of change.

Quoting AR385 (Reply 13):
Or in the US. Namely, Miami.

Yes, how could I forget Miami? Although probably not as interesting as Uruguay - apparently UBS rents whole houses in Punta del Este during January and February so the rich Argentineans can visit their money while they are on vacation.



Read this very carefully, I shall write this only once!
User currently offlineDoona From Sweden, joined Feb 2005, 3772 posts, RR: 13
Reply 17, posted (3 years 2 months 3 days 7 hours ago) and read 1365 times:

Quoting Derico (Reply 14):
and these huge institutions with the all the expertise and information in the world at their fingertips lack the resources to do the same to create trusted qualitative analysis?

Are you saying that simply having enormous amounts of information at hand automatically means people make the right call? I'd like to call bullshit on that, sir.



Sure, we're concerned for our lives. Just not as concerned as saving 9 bucks on a roundtrip to Ft. Myers.
User currently offlineAR385 From Mexico, joined Nov 2003, 6602 posts, RR: 35
Reply 18, posted (3 years 2 months 3 days 5 hours ago) and read 1350 times:
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Quoting Derico (Reply 14):
Oh come on, you really saying that I as a lonely individual have to do my homework to find the ''correct'' information, and these huge institutions with the all the expertise and information in the world at their fingertips lack the resources to do the same to create trusted qualitative analysis? May I politely call BS there.

No. You´d be surprised how much you as an individual can do to understand where to put your money if you are really interested. Nowadays you have access to the same information the analysts at the rating agencies have and the same tools, if you look for them. There are a few basic finance courses you can take in Argentina that would help too. I suppose you have something equivalent to community college?

Besides, a lot of what is actually written in the reports if people actually bother to read them is either BS or actually justifies the agency´s decision. It depends on the industries, basically, and the quality of the analysts involved, and you´d be surprised, (again) how much leeway an anlayst has. You can even do "in situ" analysis yourself if you so wish, and even that is no guarantee you´ll fare worse or better than the agencies. I know the couple who does the "Highways in Mexico" reports for Fitch and the word "idiots" doesn´t begin to describe them.

Quoting Pyrex (Reply 16):
Some industries with apparently low barriers to entry never end up having much competition - see accounting and the Big 4. It is not like there is a conspiracy from the free market against the likes of DBRS, Egan Jones, etc. But as I mentioned, the only reason anybody ever looks at one of those ratings is to see if it fits their mandate - rating quality is really irrelevant for that, all you need is a semblance of credibility, and it is easier to do that with a big brand name.

I agree. But in the context of your post I would add to my above response to Derico that just as you need to take responsibility for your health, you need to take responsibility for your portfolio, if it has any significance that you have someone else managing it for you. You have to at least understand what is going on in the world to be able to understand what your portfolio manager is telling you and be able to disagree (if you have at least a reasonable reason). And again: You don´t need to be a PhD. to do that. If I meet someone whose sole source of credibility for a portfolio is brand names, I´m out of there.

Quoting Derico (Reply 14):
That's my point, why is this? Why does a "free market" still afford them relevance? Give your faith to other private agencies. I believe in free markets, but this is perplexing I admit. Unless we were to suggest the agencies acted like a cartel and there was in fact no choice.

Because people, as hard as it is to recognize, have "the sheep mentality".

Quoting Derico (Reply 14):
Why not? Why should a country like Argentina have been upgraded so much in the 90s based on a cycle? It should have had their credit rating restricted at whatever level it was until the government showed they could manage through a downturn without profligate borrowing. Then you raise their credit rating if they prove they can "handle their credit rating" in good and bad times, not just when the "cows are fat".

Because you can´t base you country analysis on what a country has done in the past. The past is the past and no downgrade or rating has the same current reason to be what it is today as a downgrade or rating from the past. And let´s not get into the rating Argentina had in the 90´s because that is just a whole other can of worms I don´t even want to approach.

Quoting Derico (Reply 14):
Where did I say banks should be run by government? If they choose to merge with foreign banks fine, that's the free market. Other smaller banks take their niche.


You said: "Also, ultimately I am a firm believer of breaking up banks. Yes it sounds interventionist, but no bank should grow large enough to threaten entire continents and people's savings if they go under. If it means a boring banking system, good. Argentina has a very boring banking system because of the hard lessons of 10 years ago, but not one single bank has failed in the last four years."

If you are a firm believer of breaking up banks, then you have to be a firm believer in government owned banking, which is the only way to break up a bank without causing a countrywide bank run that WILL bankrupt all banks. It´s not a matter of size, it´s a matter of people´s expectations. The economy works on expectations and you better wish they don´t turn into self-fulfilling prophecies.

Quoting Pyrex (Reply 16):
Actually, the only people who listen to what rating agencies have to say are not "the MBAs who played golf", but the bureaucrats that work at the banking and insurance regulators to decide whether that particular bond or loan is an acceptable asset or not and set capital ratios. If your portfolio manager looks at a ratings report to do anything else but to see if it fits his investment mandate or not you are paying him too much.


You are right. But with all due respect you are being a bit too idealistic. And yes, many portfolio managers are not that smart and/or have their own agendas. And we fall back to my main argument. If you have enough money to invest, you need to know what you are doing and you need to know which info. is garbage and which info. is fundamentally right.

Quoting Pyrex (Reply 16):
Does not have to have made billions, but the fact is that most people (and not talking necessarily you) who criticize the rating agencies, the banks, etc. talk with the benefit of hindsight, and in 2006/2007 totally missed the ball just as bad as anybody else (bubbles are like religious miracles, they usually have that power of causing mass delusion). And even when you do identify a bubble, knowing when it will pop is a difficult and dangerous thing to predict - you risk becoming illiquid before you are proven right. In your example, while not investing in Spanish real estate is definitely sound advice (the one about Argentinean real estate is another issue - yes, good inflation hedge, but only as long property rights are preserved....) the fact is, if your friends / family members had bought in 2005 and sold in 2007 they could have made a decent chunk of change.


I beg to disagree. Many good people have predicted all the bubbles. At least the ones I remember from the past two decades. The issue is wether people have listened to them or not. Sadly, in most cases people do not.

[Edited 2011-10-20 01:48:11]

User currently offlineAsturias From Spain, joined Apr 2006, 2156 posts, RR: 16
Reply 19, posted (3 years 2 months 3 days 1 hour ago) and read 1313 times:

Quoting Pyrex (Reply 5):
Well, if you have such great insights into the creditworthiness of those enterprises, you could have a) shorted the debt of those companies or b) created your own rating agency. So, where are your billions? Or maybe you are just talking with the benefit of hindsight?

There's one or two glaring omissions in your logic, which kind of surprises me as you should know better. One is that countries can't default like companies. In fact there's no comparison, so if you consider a country to be some type of company, your logic is already failing.

Countries can't, by definition, default. They can choose not to honor their obligations, but they can't default. The USA was downgraded, but not because of risk of default, but because there were political noises in the direction of not honoring the obligations they had already made.

The other thing is that rating agencies are meaningless when it comes to the actual "market" or "target" audience it is ostensibly serving. What entity or individual, willing and able to borrow money to a state - amounts starting in the 10 figure numbers - relies on a banal three-letter alphabetic "rating" to help with their decision?

That's a rhetorical question, because the answer is: none.

Thus the rating agencies do provide a service, but it's not the one they claim, i.e. to assess the actual credibility and risk of lending states, but rather to create a "reasonable" excuse for their customers to provide states with loans with exorbitant rates. The added rate of the loan is pure profit, and yet the loans are of such magnitudes that if any state would actually refuse to repay said loan, no insurance will cover that - let alone the extra percentage the lender is getting because of the poor rating.

For instance, government bonds in Portugal for 3 months is Ba2, while the actual risk of Portugal not repaying in the next 3 months is 0%. However, that means lenders can demand much higher rates from Portugal and walk away with nice and tidy profit, paid by the Portuguese taxpayer.

For no other reason than a credit agency said it was "more likely" that Portugal will refuse to honor its bonds in 3 months. Which is of course - as any sane person knows - bullpucky.

Quoting Rara (Reply 7):
I don't see the alternative, to be honest. Creating a new European rating agency, as politicians want it, would be nonsensical if the new agency wasn't entirely politically independent. If there's only the slightest hint that politicians interfere with the ratings, they will become meaningless for the markets. However, if it is indeed independent, chances are its ratings won't differ a whole lot from the three current agencies, so where's the sense?

If it is possible to create a truly independent rating agency, then that's probably worth the effort to counter the truly co-dependent rating agencies currently running the market.

The current agencies, S&P in particular, have been shown to cow-tow to its customers - being pressured to rate the sub-prime mortgage "financial products" AAA, when they were worth nothing.

Their relatively new-found ability to extort money from states will have to be curtailed.

asturias



Tonight we fly
User currently offlinePyrex From Portugal, joined Aug 2005, 4063 posts, RR: 30
Reply 20, posted (3 years 2 months 3 days 1 hour ago) and read 1310 times:

Quoting AR385 (Reply 18):
Many good people have predicted all the bubbles.

True, but usually the ones that have tended to be of the "sky is falling" persuasion - if you always go around saying that the economy is in the crapper and we are all doomed one day you will be right, it just does not necessarily make you someone I put much trust in.



Read this very carefully, I shall write this only once!
User currently offlineDerico From Argentina, joined Dec 1999, 4318 posts, RR: 11
Reply 21, posted (3 years 2 months 2 days 12 hours ago) and read 1265 times:

Quoting Doona (Reply 17):
Are you saying that simply having enormous amounts of information at hand automatically means people make the right call? I'd like to call bullshit on that, sir.

No, but then they have no excuse for any continued credence on the subject, right? But that is not what is happening.

Quoting AR385 (Reply 18):
Because you can´t base you country analysis on what a country has done in the past. The past is the past and no downgrade or rating has the same current reason to be what it is today as a downgrade or rating from the past. And let´s not get into the rating Argentina had in the 90´s because that is just a whole other can of worms I don´t even want to approach.

I would say past behavior is an excellent measure of future behavior. It should be the first thing they consider.

Quoting AR385 (Reply 18):
And again: You don´t need to be a PhD. to do that. If I meet someone whose sole source of credibility for a portfolio is brand names, I´m out of there.

The problem is a lot of people don't have the time to do the ''homework'' that is required.

See this is a problem that very few people have ever noticed, but I have. People talk about how in the "old days" people were so self-relient: they built their houses, they practiced home medicine, they prepared the food from living things, they sometimes self-schooled, they washed and dried by hand, they did their own finances, etc. Makes it look like our grandfathers were superheros and all of us like lazy and indolent dummies (well, they were, despite what what I say next).

One small problem: back then specialization did not exist. Almost all skills were at or barely above amateur level.

I can't do my own finances today, with stocks, bonds, real estate, gold, analysis, developed and emerging markets, short-selling, covers, etc, etc. I can't build a house when it require anti-sismic technology, reinforced concrete and steel pillars, dampening foundations, etc, etc. I can't do my own home medicine when today one requires MRIs, antibiotics and knowledge of pharmaceuticals, a myriad of medical plans and programs. You can' teach your children beyond early high school (back then, most people never even got to that level). And we certainly don't have time to cook food and wash clothes anymore.

Everything is specialized today.

So when some people quaintly want everyone to be able to manage personal finance, healthcare, construction, cooking, schooling. It's simply not possible. Some of us may choose to focus on one of these, including researching investment, but it means we depend on others who are specialized in the other areas. Some other people choose to be more into their health, thus have no time for finances. Those are the people that depend on such finished products.

Quoting AR385 (Reply 18):
If you are a firm believer of breaking up banks, then you have to be a firm believer in government owned banking, which is the only way to break up a bank without causing a countrywide bank run that WILL bankrupt all banks. It´s not a matter of size, it´s a matter of people´s expectations. The economy works on expectations and you better wish they don´t turn into self-fulfilling prophecies.

So then it's better to have that run on the banks when they can bring the whole economy down? That's my point, between having a little crash and a big crash, I'll take the little crash thank you. You can break up a bank and the two new entities remain private, it's not that difficult as long as the banks are not involved in the crazy splicing of their products that happened before 2008. In developed nations with fully trusted banking systems, there will be no runs and besides the deposits are guaranteed anyway.



My internet was not shut down, the internet has shut me down
User currently offlineAR385 From Mexico, joined Nov 2003, 6602 posts, RR: 35
Reply 22, posted (3 years 2 months 2 days 10 hours ago) and read 1243 times:
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Quoting Derico (Reply 21):
I would say past behavior is an excellent measure of future behavior. It should be the first thing they consider.

No, not in finance, neither in economics, because as I said before, what happened in the past was probably fixed so the reasons for the current downgrade or the current rating are new and unique in themselves. Plus, what the agencies are concerned with is the ability for their customers or whomever uses their services not to loose money based on what is going on in THE PRESENT, not wether if the s..t hits the fan, the industry, company or country has proven in the past they can recover. Cost of opportunity comes into play here and other factors.

Quoting Derico (Reply 21):
The problem is a lot of people don't have the time to do the ''homework'' that is required.

Quoting Derico (Reply 21):
I can't do my own finances today, with stocks, bonds, real estate, gold, analysis, developed and emerging markets, short-selling, covers, etc, etc. I can't build a house when it require anti-sismic technology, reinforced concrete and steel pillars, dampening foundations, etc, etc. I can't do my own home medicine when today one requires MRIs, antibiotics and knowledge of pharmaceuticals, a myriad of medical plans and programs. You can' teach your children beyond early high school (back then, most people never even got to that level). And we certainly don't have time to cook food and wash clothes anymore.

These may help, for starters:






That, combined with you reading a reputable newspapaer everyday and taking a course or two, will get you a long way towards being able to understand what´s going on with your money and to question your protfolio manager if you have one. And if you have time to post here, you have time to take care of your money.

The rest of your post about anti-seismic technology, pharmaceuticals and the rest I´ll choose to ignore as you are comparing apples and oranges. Makes no sense.

Quoting Derico (Reply 21):
So then it's better to have that run on the banks when they can bring the whole economy down? That's my point, between having a little crash and a big crash, I'll take the little crash thank you. You can break up a bank and the two new entities remain private, it's not that difficult as long as the banks are not involved in the crazy splicing of their products that happened before 2008. In developed nations with fully trusted banking systems, there will be no runs and besides the deposits are guaranteed anyway.


I´ve probably not been clear enough.You can´t have a "small bank" go bankrupt. Once that happens, there´s no "little crash". You risk and will get a general bank run as people know that if a small bank goes, the bigger ones are not far behind.

Exactly which developed nations with fully trusted banking systems are you talking about? Iceland? Spain? Greece? The US in the 30´s?

And no, not all deposits are guaranteed. As far as I know, the FDIC in the US will guarantee your money up to $100,000 USD Peanuts, compared to real big finance. I don´t know about other countries, but I´m pretty sure they don´t guarantee your entire account.

Development Banking is another story and yes, I do believe that type of banking is necessary. But that´s an entire different type of banking.

[Edited 2011-10-20 21:05:38]

[Edited 2011-10-20 21:12:06]

User currently offlinePyrex From Portugal, joined Aug 2005, 4063 posts, RR: 30
Reply 23, posted (3 years 2 months 2 days 8 hours ago) and read 1223 times:

Quoting Asturias (Reply 19):
One is that countries can't default like companies.

Not disagreeing with that, but I did not bring up sovereign default into this discussion... was not referencing it at all.

Quoting Asturias (Reply 19):
Countries can't, by definition, default. They can choose not to honor their obligations, but they can't default.

Not technically true. They can and do default, it is just that recovery becomes more of a tricky issue (that usually happens when the guy writing the laws governing your contract is one of the interested parties, and even if it is governed by the law of another country no government will back a citizen of its own country against a defaulting country because, well, honor among thieves and all that). That is why, in general, investing in government bonds of any country is a bad idea - LGD (loss given default) is too difficult to predict, and if you suspect even the slightest hint of a lack of willingness to pay you should stay away, as that risk is impossible to mitigate.

While in the case of default you obviously cannot repossess the entire country (although someone should probably foreclose on Greece), to the extent the country has any assets abroad you cannot seize them. That is precisely the reason why, to this day, Argentina is still shut off from international capital markets (any USD bond issuance would likely be cleared by the DTCC, and a U.S. judge would have the power to seize immediately any funds raised to pay unsettled creditors from the last default).

Quoting Asturias (Reply 19):
For instance, government bonds in Portugal for 3 months is Ba2, while the actual risk of Portugal not repaying in the next 3 months is 0%. However, that means lenders can demand much higher rates from Portugal and walk away with nice and tidy profit, paid by the Portuguese taxpayer.

One - the risk is not 0%, markets tend to be very efficient pricing that. Two - the rating agencies usually actually follows several months behind the market; if they have downgraded someone, it is likely the CDS market already caught on a while back. The rating agencies are NOT causing the current crisis in Southern Europe, they are merely "reporting" on it.

Quoting AR385 (Reply 22):
As far as I know, the FDIC in the US will guarantee your money up to $100,000 USD Peanuts, compared to real big finance

Got increased to $250,000 during the financial crisis (so people would not cause a run on the bank for amounts greater than that) but yes, used to be $100,000, and there is a chance it might revert back to that amount. Also, believe it only covers individual depositors, not corporations.



Read this very carefully, I shall write this only once!
User currently offlineBaroque From Australia, joined Apr 2006, 15380 posts, RR: 59
Reply 24, posted (3 years 2 months 2 days 8 hours ago) and read 1219 times:

Looks as if some EU organization is going to try to sideline the ratings agencies in certain circs at least within Europe. Interesting. Not surprising, but interesting. Just on our local DW but not sure this is the correct link

http://www.dw-world.de/popups/popup_..._type_livevideo_struct_633,00.html
It was on our SBS, but the link does not seem to produce anything useful. It is likely to become more obvious.


25 Doona : Of course they do. Not everything coming out of a credit rating agency has been incorrect, far from it. As has been mentioned, if companies and count
26 Post contains images Asturias : That's true, and this information is no secret to those who would invest in government bonds. However when the USA demonstrated recently a political
27 geekydude : Problem is: Is there an alternative with a better tracking record?
28 PPVRA : No business is going to spend money on a rating agency that nobody believes.
29 Post contains images Derico : Ok. If you say so...
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