Comments on: Gorton’s triple-A error http://blogs.reuters.com/felix-salmon/2010/03/22/gortons-triple-a-error/ 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: GingerYellow http://blogs.reuters.com/felix-salmon/2010/03/22/gortons-triple-a-error/comment-page-1/#comment-12878 Wed, 24 Mar 2010 17:47:26 +0000 http://blogs.reuters.com/felix-salmon/?p=3031#comment-12878 Eh? I never said there were no trades. I just pointed out that to the first commenter there are ways to obtain spreads even if there are no trades – although obviously they aren’t as good indicators of “true” value as real trades. For that matter, even in the absence of dealer quotes, you could have indicative bid/offer levels.

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By: johnhhaskell http://blogs.reuters.com/felix-salmon/2010/03/22/gortons-triple-a-error/comment-page-1/#comment-12874 Wed, 24 Mar 2010 15:16:16 +0000 http://blogs.reuters.com/felix-salmon/?p=3031#comment-12874 congratulations najdorf, you figured it out.

As for GingerYellow, please note that the volume of GE debt outstanding is greater than the amount of Greek sovereign debt outstanding. No trades during the crisis? Yeah right.

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By: najdorf http://blogs.reuters.com/felix-salmon/2010/03/22/gortons-triple-a-error/comment-page-1/#comment-12843 Tue, 23 Mar 2010 19:51:28 +0000 http://blogs.reuters.com/felix-salmon/?p=3031#comment-12843 I don’t have good TRACE data, but if you look at the exchange-traded GE bonds (GEA, GEG), volume spiked at each of the crisis points in 2008-2009. I’m quite certain that there was significant volume in standard GE bonds, but someone else will have to check out the numbers.

The main problem with Gorton’s thesis that AAA-AA spreads indicate fire sales is that it makes no sense. If AA are trading higher than AAA, ratings are accurate, and you want to raise cash, why wouldn’t you sell the AA instead? AAA/AA spreads are meaningless when the ratings aren’t accurate. I assume the huge spike back to positive territory in 2009 comes from the GE downgrade. Thus what Gorton gives you is not a chart of credit market behavior, but a chart of rating agency behavior.

The other complicating factor in this analysis is that most of the actual AAA issuance in late 2008/early 2009 was government-backed, since private securitization was dead and GE certainly didn’t want to issue debt at 10%+. So these spreads don’t tell you anything about access to capital, since the TBTF companies were issuing huge amounts of government-backed debt, receiving huge government capital infusions, and continuing to securitize assets through Fannie and Freddie.

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By: GingerYellow http://blogs.reuters.com/felix-salmon/2010/03/22/gortons-triple-a-error/comment-page-1/#comment-12832 Mon, 22 Mar 2010 14:27:05 +0000 http://blogs.reuters.com/felix-salmon/?p=3031#comment-12832 “2. How can you calculate a spread if there are no trades?”

Dealer quotes

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By: johnhhaskell http://blogs.reuters.com/felix-salmon/2010/03/22/gortons-triple-a-error/comment-page-1/#comment-12830 Mon, 22 Mar 2010 12:21:33 +0000 http://blogs.reuters.com/felix-salmon/?p=3031#comment-12830 1. The chart purports to show spreads between AAA and AA bonds, not the spread between AAA and AA CDS’s.

2. How can you calculate a spread if there are no trades? There should be gaps in the line where trades were not occurring.

3. Yahoo finance says that at Mar 31 09 GE had $176 billion of s/t debt outstanding and $332 billion of LT debt o/s. It is your suggestion that NONE of it traded during the greatest financial crisis of the past 50 years. Well ho-kay then!

4. If I read it correctly, what you are trying to say is that if you take out the largest issuer of AAA paper, AAA spreads would be different. Good point! By the way, if you exclude the most indebted members of the Eurozone, the Eurozone is highly solvent.

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By: owe.jessen http://blogs.reuters.com/felix-salmon/2010/03/22/gortons-triple-a-error/comment-page-1/#comment-12829 Mon, 22 Mar 2010 12:11:56 +0000 http://blogs.reuters.com/felix-salmon/?p=3031#comment-12829 Multiple exclamation marks. A sure sign of a diseased mind. :D

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