My Afternoon At The AEI Ratings Agency Conference - Must Read
Well ladies and gentlemen, one of the advantages of living in DC compensating the many headaches is getting to take in boutique mini-conferences and Congressional hearings. Today's was the American Enterprise Institutes on Ratings Agencies:
aei.org
AEI usually has a video download available within a day of the event. PowerPoint presentations are available at the right of the page. Panelist remarks ran about two hours.
The role of ratings agencies may sound tangential to the housing bust, but it is at the epicenter, believe me. This info is crucial to your investing (shorting) in this space. I will list a few general impressions and then tick off some remarks on a speaker by speaker basis. This was so good that I fully intend to invest another two hours when the video becomes available.
Personal Notes:
1) $2 trillion in bad (housing) loans were made which will result in $400 billion in total losses. Those loans were and are bad. SIVs aren't going to help a lick.
2) The bias of the rating agencies is enormous towards those being rated. (In our current system, those being rated pay for the ratings.)
3) The ratings agencies have been making roughly 50%, and were (still are) great shorts.
4) The catastrophic CDO writedown phase will run from 2010 - 2012. It won't be as big in magnitude but its affect on the markets will be worse because counter parties will fail unexpectedly and unpredictably.
5) There was some discussion of the bag holder in the agencies vice insurers vice appraisers, but not much. There will no doubt be a separate conference on that subject coming up.
6) Basically Wall Street blew out a bunch of crap because there was too much money floating around. They got a fee off of it and didn't want the toxicity in their portfolios so they put lipstick on it through the CDO process and sold it abroad.
7) Gut assessment - this will be as big or bigger than Enron in terms of grabbing the national attention. It will no doubt have a much much larger financial impact. I hereby revise my game clock back to the fifth inning from my previous seventh inning appraisal.
Kyle Bass:
1) problem and credit is only getting worse,
2) securitization is simply a bad idea,
3) "AAA" ratings are no longer the gold standard. There is no apples and apples any more,
4) The mezzanine tranches are toast
5) Bassmat an investment banker at a wedding a few weeks ago. The IB said: 'They had repackaged a bunch of CDOs recently to make them sufficiently opaque and obscure so that they could be sold to Europeans and Asians.' Bass thought that it was at best gross incompetence and most likely out and out fraud.
6) The ratings agencies are making so much coin from those who are paying for the ratings that they can't afford to alienate their sponsors.
7) "The only reason to bring a CDO is because the rating is wrong."
8) "Alt-A is subprime in drag." (The guy has a sense of humor.)
9) WRT the mezzanine tranches, the ratings agencies HAVE NO POSSIBILITY of defending their previous debt ratings. (Did I mention that the ratings agencies - McGraw Hill etc - might still be great shorts?) The Ohio AG is already on the warpath and many institutional investors are lining up their legal teams.
Joseph Mason (Mason is as sharp and knowledgeable as they come.)
1) The key problem is information. We are not having a liquidity crisis - thre is plenty of $$$$ to invest. Nobody will move becuase nobody knows what anything is worth. It is an information crisis.
2) FED rate cuts will have NO impact. W/O the info, nobody will risk losing 20% just because they can borrow for 25 basis points less. There is an information crisis. (He kept hitting that point.)
3) Info problem has gotten worse since February.
4) We stand at the first anniversary of crisis and no solution is in sight. The FED is not helping.
5) Good rating agency clients are clearly getting rated more highly,
6) BOND INSURERS STEER THE MOST BUSINESS TO THE RATINGS AGENCIES AND GET MEASURABLY BETTER RATINGS. (Personal comment: It has been a rough ride on MBI, but my grip has not been loosened, and I might just double down. My gut is SCREAMING that those boys will be the best shorts of all of this. The volatility in UNBELIEVABLE. Sell those options!!!! You can get $0.45 fo4r the Nov $40 MBI calls expiring tomorrow. That would be about 1% for holding 8 hours.)
7) Wall Street has taken the view - correctly over time - that there is an unlimited upside with a limited downside. With mortgages the opposite is now true - there is a very limited upside and an unlimited downside.
Alex Pollack
1) "Where Are All of the Customer's Yachts?" (Famous investing book from the '40s - apparently addresses conflicts of interest from that era.)
2) The AG of Ohio and ratings agencies were invited but didn't show.
3) Germany and the European Central Bank president are extremely POed at our ratings agencies. (Persoanl comment: International crisis brewing??? Don't tell me that they will sell our treasuries.)
4) Complex risk models and their recursive nature will cause the risk models to fail.
5) Models are based upon Home Price Appreciation (HPA) but none of them have Home Price Depreciation (HPD) built in. We are clearly seeing HPD.
6) Thinks investors (e.g. CALPERS) should finance the rating function.
Glenn Reynolds:
1) There is another wave of crisis coming in 2010-2012 based upon the CDOs. (Personal note: I didn't understand this too well. I infer that a bunch of CDOs might be maturing in that period and will hence need refinancing - at realistic market values vice mark-to-model. Stephanie Pomboy has referred to the corporate securitization crisis in the pipeline and headed our way. This might have been the same topic.) |
