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Post by jeffolie on Sept 8, 2007 15:24:49 GMT -6
As if the buy-out issue was not bad enough, banks face a bigger danger elsewhere, linked to the subprime-mortgage crisis. This threat involves a series of specialist investment vehicles known as conduits and structured investment vehicles (SIVs). Conduits were mainly set up by banks as “off-balance-sheet” vehicles for themselves and their customers that allowed them to invest in slightly riskier assets. SIVs tend to be independent. Both borrowed partially (but not exclusively) in a form of short-term debt known as asset-backed commercial paper. The investors who bought this paper are now deciding it is not worth the risk. That gives the conduits and SIVs a problem. Moody's, a rating agency, says many have found funding “either impossible or achievable only at exorbitant levels”. On September 5th the agency downgraded (or placed on review) some $14 billion-worth of bonds as a result. It is an ugly prospect since Tim Bond of Barclays Capital estimates that $1.4 trillion-worth of conduits are out there. Either the banks will have to lend money directly to them, or they will end up owning a ragbag of securities—including some dreaded mortgage-linked bonds. www.economist.com/finance/displaystory.cfm?story_id=9769296
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Post by jeffolie on Sept 9, 2007 11:36:47 GMT -6
Pumping liquidity into the financial system, as the European Central Bank and US Federal Reserve have attempted, has not encouraged commercial paper investors to abandon their picket lines. They are unlikely to start buying until they can be confident about the quality of the assets the banks are asking them to finance. This requires a return to the lost art of credit analysis. Years ago, when banks made loans and held them until they were paid back, credit analysis was the essential skill at the heart of every financial institution. But as loans were turned into securities that could be traded, investors began to rely heavily on credit ratings as a guide to the value of a security. The ratings agencies have rightly been criticised for missing the underlying risks faced by more complex structures. But they cannot be blamed for the wholesale repricing of credit. Simple credit ratings are just too crude to be used as a basis for pricing decisions. Just because a security has an AAA rating does not mean its price will not fall. The long-term solution to the current crisis lies in greater transparency in the credit markets and a more specialised and sophisticated body of investors. None of this can be achieved quickly. news.yahoo.com/s/ft/20070909/bs_ft/fto090920071102322334;_ylt=AtLhBEq1i3OhmxO5BR_JbAKs0NUE
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Post by robertnyc on Sept 20, 2007 21:14:32 GMT -6
I agree with Jeffolie but I think some more blame should be placed on the credit rating agencies whose seal of approval by way of an investment grade rating is required in order for the commercial paper to be sold into the market.
Years ago the 3 main credit rating agencies saw how structured products needed their ratings in order to get sold. What did the ratings agencies do? They cranked up the prices they charged banks and issuers to get that investment grade rating. These credit rating agencies makes millions of dollars in fees from the bankers in exchange for their investment grade rating.
Can you say conflict of interest??
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