Comments on: Why asset managers should ignore credit ratings http://blogs.reuters.com/felix-salmon/2009/05/05/why-asset-managers-should-ignore-credit-ratings/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: thruth http://blogs.reuters.com/felix-salmon/2009/05/05/why-asset-managers-should-ignore-credit-ratings/comment-page-1/#comment-1360 Thu, 07 May 2009 14:35:19 +0000 http://blogs.reuters.com/felix-salmon/2009/05/05/why-asset-managers-should-ignore-credit-ratings/#comment-1360 The bigger issue is that ratings of any form (market or funadmental) are used to perpetuate the shell game of taking short term deposits to fund investment in illiquid assets (i.e. the maturity/liquidity mismatch game).

+good point Nate

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By: Nate http://blogs.reuters.com/felix-salmon/2009/05/05/why-asset-managers-should-ignore-credit-ratings/comment-page-1/#comment-1343 Wed, 06 May 2009 20:15:48 +0000 http://blogs.reuters.com/felix-salmon/2009/05/05/why-asset-managers-should-ignore-credit-ratings/#comment-1343 Actually, using spreads as a proxy for credit risk would have been an improvement in the case of structured finance AAA’s as well, since those always traded wider than single-credit AAA’s. So if instead of having a regulatory regime which gave a preferential risk-weight treatment to AAA-rated securities, it had given a preferential risk-weight to, say, anything trading Libor-minus, that would have been a very different story. Certainly the structured finance AAA market could not have grown nearly like it did. There are some pro-cyclicality issues here (much like the Mark-To-Market rules debate), but still if you think the market is better at judging this risk than credit rating agencies, or you just don’t like the idea of government-mandated, issuer-funded, heavily-conflicted arbiters of risk, this is probably a net plus.

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By: Mark http://blogs.reuters.com/felix-salmon/2009/05/05/why-asset-managers-should-ignore-credit-ratings/comment-page-1/#comment-1334 Wed, 06 May 2009 16:58:50 +0000 http://blogs.reuters.com/felix-salmon/2009/05/05/why-asset-managers-should-ignore-credit-ratings/#comment-1334 Problem was not the ratings, it was the regulators who required AAA ratings and then allowed the AAA to be put on anything.

If the regulators now require a spread less than X I’m sure we can all come up with reasons why that is wrong.

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By: dWj http://blogs.reuters.com/felix-salmon/2009/05/05/why-asset-managers-should-ignore-credit-ratings/comment-page-1/#comment-1321 Wed, 06 May 2009 14:36:16 +0000 http://blogs.reuters.com/felix-salmon/2009/05/05/why-asset-managers-should-ignore-credit-ratings/#comment-1321 > fund managers who outsource that business to a ratings agency are simply not doing their job

On some level, neither are fund managers who outsource to the market as a whole. I don’t think it’s terrible to take account of ratings and spreads if they have information; ideally the fund managers would add extra information, but it’s okay for them to take account of other people’s analyses, too.

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By: Ilya http://blogs.reuters.com/felix-salmon/2009/05/05/why-asset-managers-should-ignore-credit-ratings/comment-page-1/#comment-1292 Wed, 06 May 2009 00:36:57 +0000 http://blogs.reuters.com/felix-salmon/2009/05/05/why-asset-managers-should-ignore-credit-ratings/#comment-1292 Felix, the GSAM proposal is breathtakingly cretinous. The problem is not moving away from ratings (I’ll come back to this), the problem is they are proposing using credit spreads (i.e. market prices) as indicators of riskiness. In other words, the lesson GSAM seem to have learned from the crisis is that markets are more informationally efficient than fundamental analysis. EMH is back! Pure genius.

Do these people know where sub-prime RMBS was trading in, say, 2006? Including on a relative-to-peers basis? I’m told credit spreads on structured paper turned to be a good predictor of true riskiness…

The guy in article says they would segment the market based on market prices and securities that are “the widest 20 percent are the most risky”. This is so stupid, it’s breathtaking.

Now, with regard to ratings. First of all, ratings are not a ‘lagging indicator’ as you say. There are studies out there comparing ratings with market-implied measures: ratings are a more accurate predictor of default over any horizon longer than a year. In other words, the market is only better at picking up near-default (i.e. the bleedingly obvious) with the agencies reluctant to consign companies to the dustbin of history before they really need to. Secondly, corporate and sovereign rating and structured ratings outside of the problematic mortgage & CDO space continue to perform well. However, no doubt things can be improved. The point is that fundamental analysis is still the only one to figure things out: GSAM seem to have discovered they can look up spread on a Bloomberg screen which is all well and good (and amazingly lazy intellectually) but hardly makes them financial Columbuses.

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By: Gabriel http://blogs.reuters.com/felix-salmon/2009/05/05/why-asset-managers-should-ignore-credit-ratings/comment-page-1/#comment-1290 Tue, 05 May 2009 23:09:40 +0000 http://blogs.reuters.com/felix-salmon/2009/05/05/why-asset-managers-should-ignore-credit-ratings/#comment-1290 The problem too many investors have is that they simply don’t have the resources to do all the needed credit analysis themselves. That’s why they rely on third parties.

It’s true credit ratings tend to lag, but it’s also true they are much, much less volatile. And that’s a big plus for many fund managers. If you believe market spreads are a better indicator of credit risk tha you also have to believe that credits jump from spec to investment grade and back again in just a few months.

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By: Jesse http://blogs.reuters.com/felix-salmon/2009/05/05/why-asset-managers-should-ignore-credit-ratings/comment-page-1/#comment-1289 Tue, 05 May 2009 23:08:30 +0000 http://blogs.reuters.com/felix-salmon/2009/05/05/why-asset-managers-should-ignore-credit-ratings/#comment-1289 The biggest change will occur when regulations are no longer based on holding AAA, though I’m not sure I see an alternative yet. You could argue rather convincingly that part of the reason for the current mess is the high demand for AAA rated securities. If we could find a better way to do that, we may not have seen as many AAA rate junk CDOs.

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