When someone sells you AAA paper with A yields and you think you are outsmarting the world ... well, guess what ... l
You make a good point, but guys with licenses are supposed to be responsible. now, they could say in Florida, knowing it was bad paper, ok, ok, figuring if something goes wrong, they'll hang Lehman, which is going to happen. The Onus will fall on the broker. Now, they'll be damages, so, we'll do ok. The 20th, 21st State, so on, may have a problem.:eek:
I must politely disagree, it will not fall on the broker that sold the paper. AAA ABS CP met the internal investment policy requirements of the states that bought it. And the rating agencies assigned the AAA ratings. Fixed income portfolio managers of size have internal credit analysts evaluating the deal structures of any and all holdings, and do not rely on the ratings agencies. Perhaps the state treasury departments do not have this depth in their investment staffs. If you are an IB underwriter, and you are slicing and dicing cashflows from various asset classes, how do you ratchet up your rating on a bond offering from where it SHOULD be....to AAA where you want it...you get yourself an insurance wrapper. But what good is that when those very companies are in trouble too for over-insuring the toxic tranches - just look at MBIA and AMBAC....taking severe hits. Ratings on bonds are predictive guidance, not a guarantee....issuers can default at anytime, including governments. Some of you may remember Orange County California's Treasurer back in the 90's. He got smacked in his fixed income portfolio by holding all kinds of....how shall we say...."exotic" tranches of CMO deals....all rated appropriately. What he DIDN'T seem to understand was that he had made a giant directional bet on interest rates. And when rates made a sustained directional move, he was holding the wrong tranches, and suffered huge losses. He blamed everyone except himself. He wasn't the only one that tried to do that. If I remember correctly, he was held responsible for his actions, and so were all of the other portfolio managers that should have known what they were buying.
AMBAC is getting killed, I mean AAA means we paid in full for this rating... AAA means triple shit...
Like I said, ratings on bonds are predictive guidance, not a guarantee....issuers can default at anytime.
The ratings are supposed to show the risk, no? Maybe there are no specific laws against this, I'm not sure??? But the rating agencies lied about the risk. The brokers at the very, very least knew exactly what was going on, they are not stupid. But more likey they pressured the rating agencies to lie if they wanted the brokers' business. Like I said, this was not just a few people at one company, it was rampant.
the rating agency did not lie about the risk. they probably didn't understand the risk themselves. it is doubtful that state employees had the sophistication to understand the risk.
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Other states' investment funds likely hold the same kind of investments. This problem might spread all over the USA. How can we as traders prepare for this?