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Monday, February 2, 2009

Calling b.s. on bond ratings

Watching spendthrifts like the City of Portland get in further and further over their heads with debt is depressing, but observing the bond rating agencies that these borrowers hire to evaluate their credit is maddening. Since they get their fees from the borrowers, these agencies have a strong incentive to paint as rosy a picture as possible. Now that the market has been burned, big time, by faulty ratings, it seems that investors aren't following these "expert" shills' opinions too closely these days. As the Times reports today:

The wild variations on the value of many bad bank assets can be seen by looking at one mortgage-backed bond recently analyzed by a division of Standard & Poor’s, the credit rating agency.

The financial institution that owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S.& P. estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.

Or to put it another way, the market has figured it out: Don't believe everything that S&P and its ilk tell you.

Comments (2)

"How should they be valued?"

For mortgages on property in Oregon I would insist that the mortgagee-seller comply with ORS 646.010 to 646.180 which prohibits price discrimination. In particular, here, if a creditor will sell a document that evidences debt to anyone else (including a government entity, particularly a non-creditor debt collector) for 50 cents on the dollar then they must make precisely the same offer, contemporaneously, to the mortgagor to meet or beat such offer. Failure to comply with this provision should also be a factor in determining if the sale makes good business judgment about the partial worthlessness of the debt and eligibility for taking any tax write off on the supposed loss. There are hundreds of billions worth of tax write-offs that are suspect.

The FDIC (and other federally related lending guarantors) were never on the hook to cover a single dime to any financial institution under the Winstar case, particularly when the collateral (nothing whatsoever to do with credit risk characteristics) was overvalued in violation of 18 USC 1014. A bankrupt bank is not a "depositor", and is not a beneficiary of any such insurance.

The class of assets that our Mad Magazine-style Congress is concerned about are debts owed by insolvent citizens. A bankruptcy court could take all the assets that the debtor has and give it to a creditor, then void the balance owed and thereby enable the creditor to take the write-off that they desire. The write-off should not be allowed without the simultaneous declaration that collection on the unpaid balance, the amount written-off, is thereafter void. The value of any written-off debt (or portion of debt written-off) is a big fat ZERO.

The lender/creditor has no one to blame but themselves. PROOF: If a bank had limited their lending on some piece of collateral to the value of that collateral then they would have no loss other than the prospective loss of hoped-for but not yet accrued interest, and some limited transaction costs to perform a sale of the collateral.

The whole TARP scheme is fundamentally flawed, and freakishly so. The seeds of ridiculous abstractions and misdirection were set the instant the bankers (and other lenders/investors) sought to transform the private company Fannie Mae into a giant conduit for illegal graft, for cover of illegally-overvalued collateral. The graftees all lined up their ducks long before such legislation popped up as an emergency in Congress.

Obama would not need to attack the glorious pay and junkets and jets of the TARP fund recipients if he simply told them to all go plead their case to a bankruptcy judge, "our concern is legally confined to covering depositors, who can immediately entrust their guaranteed deposits to some other institution or to no institution at all."

What is the value of a bank that is being dissolved in a bankruptcy proceeding?

Well, I don't think CoP is the only guilty party, the Oregon Legislature wants to go into debt in a big way also to stimulate us.

How is Multnomah COunty managing the crunch? I thought Mr Wheeler was trying to clamp down on spending? The mean girls and Lonnie really didn't leave him much to work with.

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