Its really amazing the stock market is holding up. This is a horrible story.
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Florida suspends withdrawals from state investment fund
- Thread starter S2007S
- Start date
When someone sells you AAA paper with A yields and you think you are outsmarting the world ... well, guess what ...
l
l
Quote from TheStudent:
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.
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.
Quote from Sponger:
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
AMBAC is getting killed, I mean AAA means we paid in full for this rating...
AAA means triple shit...
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.
Quote from TravelTrader:
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.
Maybe of interest :
Appraisal for
"The leading platform for Structured
Investment Vehicle (SIV) management and
administration"
http://www.ppllc.com/OurProducts/StructuredFinanceSolutions/SFP_Sheets/SIV_PDF.pdf
Daily Compliance Test
Market Risk Sensitivity Tests
⢠Parallel Yield Curve Shift
⢠Point-by-Point Yield Curve Shift
⢠Foreign Exchange Rate Shift
Diversification Tests
⢠ABS Composition
⢠Geographical Composition
⢠Minimum Rating Composition
⢠Weighted Average Life and Maturity
Liquidity Risk Tests
⢠Net Cumulative Outflow (NCO)
⢠Liquidity Coverage Tests
Portfolio Management
⢠Rapid, accurate modeling of all
assets, liabilities and hedging
derivatives on a single platform
⢠Support for synthetic and cash assets
⢠Rapid deal capture capabilities for
dynamic asset management
⢠Advanced portfolio management and
asset monitoring capabilities for
seamless reporting and operations
⢠Intuitive hedge management
functionality
Cashflow and Exposure Analysis
⢠Robust surveillance of asset performance
and diversification
⢠Advanced risk and sensitivity analysis
across all instruments
⢠Comprehensive liquidity and funding
management
⢠Addresses the numerous subtleties
required for compliance
⢠Integration of proprietary capital
models
Operations and Administration
⢠Full reporting suite of standardized
rating agency compliance tests
⢠Intuitive management of all
administrative data and fees
⢠Implementation of operating manual,
surrounding controls, audits and
reports that monitor compliance
⢠Standard chart of accounts enables
rapid system implementation
Appraisal for
"The leading platform for Structured
Investment Vehicle (SIV) management and
administration"
http://www.ppllc.com/OurProducts/StructuredFinanceSolutions/SFP_Sheets/SIV_PDF.pdf
Daily Compliance Test
Market Risk Sensitivity Tests
⢠Parallel Yield Curve Shift
⢠Point-by-Point Yield Curve Shift
⢠Foreign Exchange Rate Shift
Diversification Tests
⢠ABS Composition
⢠Geographical Composition
⢠Minimum Rating Composition
⢠Weighted Average Life and Maturity
Liquidity Risk Tests
⢠Net Cumulative Outflow (NCO)
⢠Liquidity Coverage Tests
Portfolio Management
⢠Rapid, accurate modeling of all
assets, liabilities and hedging
derivatives on a single platform
⢠Support for synthetic and cash assets
⢠Rapid deal capture capabilities for
dynamic asset management
⢠Advanced portfolio management and
asset monitoring capabilities for
seamless reporting and operations
⢠Intuitive hedge management
functionality
Cashflow and Exposure Analysis
⢠Robust surveillance of asset performance
and diversification
⢠Advanced risk and sensitivity analysis
across all instruments
⢠Comprehensive liquidity and funding
management
⢠Addresses the numerous subtleties
required for compliance
⢠Integration of proprietary capital
models
Operations and Administration
⢠Full reporting suite of standardized
rating agency compliance tests
⢠Intuitive management of all
administrative data and fees
⢠Implementation of operating manual,
surrounding controls, audits and
reports that monitor compliance
⢠Standard chart of accounts enables
rapid system implementation
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?
How can we as traders prepare for this?