tag:blogger.com,1999:blog-7905515.post4401154437471648421..comments2024-03-14T11:09:32.759-05:00Comments on Falkenblog: Double Counting RiskEric Falkensteinhttp://www.blogger.com/profile/07243687157322033496noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-7905515.post-69397172945358597472009-07-21T10:56:09.784-05:002009-07-21T10:56:09.784-05:00Admittedly the WSJ article doesn't get to the ...Admittedly the WSJ article doesn't get to the heart of the matter, but the title of your post is misleading. <br /><br />They key point in the allegation is not that Schwab is being sued for selling AAA paper but that the auction-rate securities (ARS) were "[promoted] to customers as cash-like investments" (WSJ) when they in fact were not.<br /><br />An ARS is a long-nominal-maturity floating rate instrument whose interest rate is supposed to be reset in regular (say weekly) auctions. *If* the auctions all take place successfully an ARS does behave much like cash. Notice the difference between this and a fixed-rate AAA MBS--nobody would describe a long-maturity fixed-rate AAA MBS as "cash-like".<br /><br />The key claim in the suit is that the customers were not made aware that there was any risk that the auction might fail, nor of what would happen if the auctions failed. Obviously the failure of the auctions turns a "cash-like" instrument into a long-maturity bond.Anonymoushttps://www.blogger.com/profile/17886745724621355432noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-32047273121938525792009-07-21T07:00:34.084-05:002009-07-21T07:00:34.084-05:00".or, let's find some data, a methodology...".or, let's find some data, a methodology and let's get paid"<br /><br />I imagine that's the attitude that has Cuomo concerned. Add to the mix the brokers' knowledge of the raters' attitude and it's pretty damning.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-19815625893605917222009-07-20T21:38:32.663-05:002009-07-20T21:38:32.663-05:00You make a good point that the ratings agencies ha...You make a good point that the ratings agencies have responded to "incentives"/ratings fees for a long time.<br /><br />You must have a good sense from your own experience of how accomodating some ratings agencies were with their letter ratings of corporates and some agencies. My only experience with the ratings agencies came from tranching up CDOs. The folks I dealt with in London were quite bright and committed to getting deals done. I think in many cases "they" recognized there was no data with which to frame expectations....either one had to say, as a rater, no data no deal...or, let's find some data, a methodology and let's get paid.... Upton Sinclair supposedly once wrote/said "it is difficult to get a man to understand something when his job depends on not understanding it"...Cuomo faces a situation where the potential return to his political capital is quite high from not understanding the nuances that you refer to....Anonymousnoreply@blogger.com