Monday, October 19, 2009

More On The Ratings Agencies

There are a couple of things this weekend that dovetail nicely my post from some time ago regarding Moody's fine handiwork. The major point there was that I tracked the public equity performance of Moody's March 10th "Bottom Rung" list, and if you had followed their advice and shorted the equities listed, you would have been better off sniffing asbestos dust out of a plastic bag, financially speaking. Not unlike buying newly-issued triple-A rated tranches insured by triple-A rated bond insurers circa 2006.

So, the things that caught my eye this weekend:

(1) Calculated Risk has a thing from McClatchy about how Moody's- at one time considered #1- "sold" ratings. I personally think they are getting off too easy: where are the indictments for negligence, misrepresentation, breach of duty and the like?? Mind you, the reason for Buffet's (now declining) investment in MCO was its officially bestowed moat: it was an oligopolist in the "nationally recognized statistical ratings organization" racket that zombified pension managers' brains so they swallowed hook, line and sinker anything "rated above...".

(2) The second, and far more interesting piece is from something written exactly 6 years before the now-infamous "Bottom Rung" list by Mr. Howard Marks. In one of his "memos"- dated March 11th, 2003, on page 5, he discusses his love (really) for the ratings agencies. I am quoting somewhat liberally but one should really spend some time reading his stuff.

"I confess: I love the rating agencies! Oaktree would be lost without them. My whole career and many of Oaktree’s activities are based on opportunities created by credit ratings...What are inefficient markets? They’re markets where mistakes are made...My favorite example: literally for decades, Moody’s has defined B-rated bonds by saying they “generally lack characteristics of the desirable investment.” How can they say that based on the risk alone, without any reference to price or promised return? Once they imply “there’s no price at which this bond could be a good buy,” people will shun it, making it cheap. That can create an opportunity for a bargain hunter...And the ratings agencies are wrong a lot. Not in every case, but at the margin where it counts. The agencies are convinced they do a good job because the bonds they rate low default more often than the bonds they rate high. But the majority of speculative grade bonds never default, and every once in a while an investment grade bond does. Both of these phenomena have significant financial consequences..."

Supremely clairvoyant. And while Mr. Marks has been picking up profitably the B- and C-rated and D-rated pieces, guess which hedge fund manager launched himself into the stratosphere by going mirror-image and shorting the A-rated pieces?


No comments: