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Politics : The Obama - Clinton Disaster -- Ignore unavailable to you. Want to Upgrade?

To: SGJ who wrote (8658)	3/9/2009 7:31:27 AM
From: DuckTapeSunroof	Respond to of 103300

Thanks, texbanker! You make a good point about the proposal for a new bond rating system for multi-asset packaged securities like RMBS. I don't think that Mauldin was trying to claim that simply moving to a 'new name' for the securities ratings, (such as the 'I-factor' that he proposed), would be particularly useful in and of itself. Rather I think he was making two points (or contentions): 1) The current system that we use for asset-backed notes has been borrowed from corporate bond ratings. (Where it has functioned fairly well - at least in the eyes of participants in that market - for many decades now.) 2) But corporate bonds are a 'one-to-one' sort of instrument. Collateralized Mortgage Obligations, (& Assed-backed notes in general), are a horse of a different color. They are created from large pools of (generally) geographically-dispersed individual obligations. They are 'Multi-to-one' by design. Whereas keeping track of the financial health of the individual company responsible for a corporate bond issue (and keeping abreast of the macro economic environment in general) might be perfectly sufficient for understanding risks with an individual corporate note --- as recent events, call them 'Black Swans' or 'long-tailed events' if you will... have clearly demonstrated that that level of investor knowledge - perfectly adequate for evaluating risk with individual corporate notes - is not sufficient for understanding the true risk levels which attach to a given RMBS security which may be a specific individualized slice created out of a pool of thousands of individual notes, possibly from tens or more various locales. The complications appertaining to understanding accurately how that asset-backed may react don't seem to be very well addressed by just an AA-, or CCC rating. It does not seem to really provide the investor with very much USEFUL INFORMATION. However... an 'I-factor' rating aimed specifically at the rating agency's estimate of the CHANCES for PRINCIPAL LOSS --- where an I-factor of 12% indicated that the ratings agency fully expected that 12% of capital would be lost on the security... and one of 0% indicated a prediction of NO LOSS, would seem (to me anyway...) to offer the investor something very much more USABLE in the way of information about that complex 'multi-to-one' security. The ratings agencies themselves might not be all that crazy for an idea like this: For ONE THING, they would have nowhere to hide. If they seriously blew a rating, (drastically mis-estimating the risk to capital), then their ass would be hanging out in the breeze --- and very publicly, too! I am certain that the performance of all the ratings agencies would be tracked very closely --- and their business would be directly affected by errors. Nowhere to hide. Last point: 3) I agree with Mauldin that something as simple as this could bring a lot of buyers back into the asset-backed markets. And that renewed liquidity could go a very long way toward giving us fully-functioning markets again, with more ACCURATE price discovery.