Comments on: The horrifying AAA debt-issuance chart

By: Danny_Black

Danny_Black — Wed, 20 Jul 2011 04:30:21 +0000

KenG_CA, something is either AAA or not. Again AAA does not equal risk free nor does it mean there is no fluctuation in price before maturity. What percentage of AAA bonds have actually defaulted?

By: FelixSalmon

FelixSalmon — Tue, 19 Jul 2011 02:33:13 +0000

@Kiffmeister — is there a database of outstandings by current credit rating?

By: SSarson

SSarson — Sun, 17 Jul 2011 04:31:01 +0000

Could the buyside come from the increased need for pension funds to have long term assets?

With ageing populations and increasing pension liabilities these funds might have been running out of suitable assets to buy. As they cannot make loans, then the banks securitised their loans so that pension funds could buy them. Then they had to be rated AAA because of pension fund rules.

Bit of a chicken and egg thing, or I might be talking pure drivel.

By: MGCC

MGCC — Sat, 16 Jul 2011 22:34:10 +0000

Dunno about the chart data. 1990 issuance of almost zero AAA debt, including sovereign? The US budget deficit in 1990 was almost $280B, which would show up on a graph denominated in Trillions.

And in 2008 the US Budget deficit was about $1.3T, of the total shown here of just under $2.0T. The rest of the world’s sovereign issuers was just 1/3 of the global total?

US budget year runs Oct – Sept, and the figures above are for calendar years, so that might throw things off a little. But the data doesn’t look right. Which doesn’t mean the data is wrong, but it might mean the data doesn’t mean what you think it means.

By: wpw

wpw — Sat, 16 Jul 2011 17:51:19 +0000

I don’t buy this “overcaution” line either. More like an inability to conceptualize risk when something has never happened, at least within recent memory. I just finished reading Tony Judt’s Postwar, written before 2005, and he discusses at great length so many of the problems of Greece, Italy, Spain, Belgium and others that the markets are finally worrying about today. The debt problems are not something that just magically appeared in the past year or two, like a black swan. The risks have been with us for years but markets chose to ignore them. That is less overcaution than willful ignorance.

By: KenG_CA

KenG_CA — Sat, 16 Jul 2011 16:25:49 +0000

Danny, the greedy, negligent parasites were the ones peddling the junk as AAA, or buying it with other people’s money, because they were going to get big bonuses for their imaginary profits. The people now trying to claim they were too stupid to invest were just too stupid to invest. Two different groups, scammers and suckers.

By: Danny_Black

Danny_Black — Sat, 16 Jul 2011 15:09:09 +0000

KenG_CA, by “greedy, negligent parasites” you mean investors right? The same people now trying to claim they were too stupid to invest?

By: KenG_CA

KenG_CA — Sat, 16 Jul 2011 15:04:33 +0000

I’m glad I’m not the only one calling Felix out on his pinning the 2008 crisis on “overcaution: – Yves Smith responded to that point with an entire post:

http://www.nakedcapitalism.com/2011/07/f elix-salmon-misreads-aaa-bond-demand-to- say-overcaution-caused-crisis.html

Come on. Felix, this isn’t like you to make excuses and re-direct criticism for greedy, negligent parasites. Time for an update.

By: Danny_Black

Danny_Black — Sat, 16 Jul 2011 09:56:41 +0000

Triple A are not “safer” than other investments. There is one thing and one thing only that triple A says and that is that the issuer of the obligation is very very likely to meet the terms of the obligation, ie make the right coupon payments on time and return the promised principal on time. It says absolutely nothing else about other risks. You hold Zimbabwe bonds and Mugabi prints worthless money to pay them then that is still AAA as long as he making his coupons. The idea that AAA is ultra-safe is a hold-over from the fixed rate bond issuance of the gold standard era, where the major risk was credit risk.

By: Danny_Black

Danny_Black — Sat, 16 Jul 2011 09:45:58 +0000

Foppe, corporations could borrow much much more cheaply in the market than from banks. It is just locking in of ultra-low rates. The real question is why buysides are buying this debt….

Kosta0101, what makes you think China is “saving”? They are buying the debt to manage their currencies.

Kiffmeister, Bloomberg…

By: Kiffmeister

Kiffmeister — Sat, 16 Jul 2011 04:06:24 +0000

The reason for focusing on issuance is that there is no reliable source for outstandings of every relevant asset class by original credit rating. If anyone knows of such a database, please tell!

By: FDum

FDum — Fri, 15 Jul 2011 23:13:32 +0000

What’s particularly interesting is that global growth hasn’t kept pace with the leveraging up, which one would expect is a desired outcome. That’s what’s most concerning.

By: FelixSalmon

FelixSalmon — Fri, 15 Jul 2011 20:52:43 +0000

@dWj, I’m looking for debt which was AAA when it was issued.

By: robb1

robb1 — Fri, 15 Jul 2011 19:36:47 +0000

For more than one decade we considered “financial services” as the driving force of US economy, i.e. inflating the global balance sheet without creating anything new.

Now we realize that manufacturing is gone abroad and we r holding an heavy amount of debts coming due.

By: loudnotes

loudnotes — Fri, 15 Jul 2011 19:06:50 +0000

Wow, this commentary is misleading on so many levels. Yes, debt can be dangerous, but when we look at aggregates it’s not that meaningful. This is debt the ENTIRE WORLD owes to itself…that means the net of all of these claims is zero. My asset is your liability!

What we really are showing here is the financialization of world output. That may be a problem for a number of reasons (overexpansion of the financial sector, possible reduction in underwriting standards, etc.) but the volume of issuance alone does not suggest increased risk.

The two main drivers of the increase were sovereign debt and ABS. On the first point, it’s pure accounting. Consider Japan’s huge public debt, most of which is held by local governments and hence owed to itself. During this period, world nominal GDP increased from 20T in 1990 to 30T in 2000 to 60T in 2009. For the sovereign piece, we’re merely denominating the government spending portion of that in terms of rated bonds (potentially a good thing) rather than current tax revenues. Issuing 10% of GDP per year in debt doesn’t worry me.

As for the rest, we all know what happened with ABS. It wasn’t a good thing that mortgages previously held at banks (and hence not showing up on the chart) started getting securitized to the point that underwriting went downhill. But packaging those loans into rated bonds didn’t increase the amount of debt in the world.