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https://www.bloomberg.com/news/articles/2023-06-23/russia-war-economy-awash-with-bags-of-cash-kept-out-of-banks#xj4y7vzkg https://www.businessinsider.com/families-of-dead-wagner-mercenaries-paid-60000-creating-cash-chaos-2023-6 quote:The payments for so many deaths would equal 100 billion rubles ($1.2 billion) of cash flowing into Russia's financial system. That seems like a lot of additional cash flowing into the informal economy in Russia. Presumably mercenaries, particularly felon convicts pulled out of prison, aren't servicing a lot of debt, so that cash is used in other ways
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Jun 30, 2023 00:33
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https://jalopnik.com/new-car-buyers-now-pay-over-1000-per-month-1850606581quote:Nearly One-Fifth Of New Car Buyers In The U.S. Now Pay Over $1,000 Per Month If they stretch the maximum loan repayment period out to 120 months then you can afford to finance even more dealer markup 
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Jul 5, 2023 21:33
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Hadlock posted:https://jalopnik.com/new-car-buyers-now-pay-over-1000-per-month-1850606581 These debts are small amounts and lucrative, but risky, maybe if we group and package them into bundles we could get them off our books by selling to investors looking for a return.
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Jul 6, 2023 06:40
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The collapse of auto ABS has been predicted for like half a decade now. I suppose eventually the bears will be right on it.
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Jul 6, 2023 14:24
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The auto finance industry won't collapse as long as autos are still treated as depreciating assets, which they still are by major financial institutions. They technically were appreciating assets some time during the pandemic but from what I know, nobody was using those numbers in their forecasting or planning.
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Jul 6, 2023 15:39
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auto is way too comparable in default rate for mortgages for it to be comforting that one is basically fun little extras on a banks balance sheet and the other is basically the foundation of every significant banks balance sheet
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Jul 6, 2023 16:27
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The thing is though that repossessing cars is net profitable, so much so that loan shark outfits like Santander basically build their business around usurious rates for the lowest-credit buyers on the assumption they'll be repossessing and reselling a huge percentage of those cars within the first year. This contrasts with mortgages, where banks usually lose money (or they have to get their own insurance) if they have to foreclose on a mortgage. Foreclosure is very costly and the big foreclosure crisis was a crisis in part because losses per foreclosure accelerated as prices plunged due to more and more foreclosures. The collateralization of loans was also problematic in that the actual risk of those loans was underreported. So-called "liar loans", sub-sub-prime loans, etc. I do not know off the top of my head to what degree auto loans are collateralized, but my guess is that it's much less. A little googling shows that subprime lenders were in trouble in 2017: https://www.yahoo.com/news/meet-companies-most-exposed-subprime-112001134.html quote:Groshans mentions the following companies as particularly at risk from the decline: My takeaway is that these companies all carry very large subprime auto loan portfolios directly on their books, and their risk in 2017 was due to declining used car prices (that reduces or eliminates profit from repossession). In today's climate of very high used car prices, I have to think that even if defaults go up, these banks will make money on the resale side.
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Jul 6, 2023 18:22
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Agronox posted:The collapse of auto ABS has been predicted for like half a decade now. I suppose eventually the bears will be right on it. I have not historically been much of a bear but in one of the AI threads someone posted a $150,000 corvette z06 new in factory shipping wrap that went for $100,000 over sticker on Bring a Trailer (BaT). To me that feels a bit like tulip mania and the (beginning of?) the edge of a collapse. I know boomers are awash in paid off real estate wealth but come on I can maybe see a $50-60k bump on a porsche or exotic but the corvette (even the z06) has always filled the niche of "blue collar sports car, but the best blue collar sports car". The guy who bought it already had a porsche gt3 and other similar car 
Hadlock fucked around with this message at 20:47 on Jul 6, 2023 |
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Jul 6, 2023 20:45
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Hadlock posted:I have not historically been much of a bear but in one of the AI threads someone posted a $150,000 corvette z06 new in factory shipping wrap that went for $100,000 over sticker on Bring a Trailer (BaT). To me that feels a bit like tulip mania and the (beginning of?) the edge of a collapse. I know boomers are awash in paid off real estate wealth but come on Sure but like... there's a roughly zero percent chance that an auto loan written against that 'vette (if there was one, it seems pretty unlikely!) would end up securitized somewhere. To be clear: new and used car prices coming down? Definitely, it's happening right now. Auto asset backed securities blowing up? I have my doubts.
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Jul 6, 2023 21:45
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Leperflesh posted:The thing is though that repossessing cars is net profitable, so much so that loan shark outfits like Santander basically build their business around usurious rates for the lowest-credit buyers on the assumption they'll be repossessing and reselling a huge percentage of those cars within the first year. A trillion dollars sounds like a lot but it's only like 3 grand per person. If you look at historical rates we're trending roughly in line with inflation. In inflation adjusted dollars the auto debt load is lower than the late 2000's. Here's the chart in raw dollars: https://www.statista.com/statistics/453380/outstanding-automotive-loan-balances-usa/
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Jul 6, 2023 22:29
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Jobs report's out. Talmon Joseph Smith on NYTimes posted:The U.S. economy added 209,000 jobs, extending a streak of gains. Here are some more graphs from the New York Times, for those who can't get behind the paywall... Labor force participation continues to rise...  Earnings are starting to outpace inflation...  Retail does seem to be taking a hit, though...  So yeah, it seems once again: LanceHunter posted:Doomers in absolute shambles.
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Jul 7, 2023 15:33
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I just watched The Big Short again and I have some questions... I hope it's OK to post them here.  1. Burry invests over a billion and at the end of the movie writes to the fund owner that his profits are $489M. Isn't that small, relative to the investment and risk? 2. We see one of his guys from the Scion fond stacking shelves, implying he was fired. Why, if the Scion fund made money? 3. The family of the tattooed guy ends in a car, in dire straits. If the housing market collapsed, doesn't that mean that the houses are now much cheaper, and the rents too? That should be an advantage to a family who rents. 4. To us laypeople they explained CDOs like a series of ever-enlarging bets. So it was not just a handful of weirdos betting that the system will collapse, the system itself was constructed from bets, they were intrinsic to those products. Who won those bets? 5. There was a mention of the Brownfield guys trying to sue rating agencies and getting laughed at. With so many people affected and so many financial institutions (rating agencies, banks, SEC) guilty, were there any class action lawsuits? Doctor Malaver fucked around with this message at 17:24 on Jul 9, 2023 |
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Jul 9, 2023 09:04
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street doc posted:
The system works
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Jul 9, 2023 13:13
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Agronox posted:Sure but like... there's a roughly zero percent chance that an auto loan written against that 'vette (if there was one, it seems pretty unlikely!) would end up securitized somewhere. well... cracks showing for worst lenders? via Bloomberg: https://archive.ph/r7iF3 quote:Subprime Auto Bondholders Face Possible First Hit in Decades
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Jul 9, 2023 16:41
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Doctor Malaver posted:I just watched The Big Short again and I have some questions... I hope it's OK to post them here. It's a fictionalized version based on some real events with a lot of dramatic license taken to try to exemplify the consequences of something like, and the lack of consequences for certain actors. I will dig in to #4 because it's the point of the movie. CDOs are essentially a way of taking a bunch of assets, in this case loans, and grouping them together. The nature of this asset is essentially a series of cash flows, going into the future, collateralized by a home. They are bets in the sense that when you invest in one you expect the value of the series of cash flows you receive in return to be worth more than what you paid. Synthetic CDOs include other, more complex assets such as swaps and options. Pre-2008 they also came to include credit default swaps, which were essentially unlicensed and unregulated insurance against the failure of CDOs amongst other things. The typical investor in CDOs were institutional investors, pension funds and things like that, which had cash now from payments from the company, but were responsible for making payments in the future. Managers of such funds attempt to grow the fund faster than the outgoing cashlows that will be required in the future. The accounting for this is really nuts btw, some of the hardest stuff i've done, since you have assets and liabilities based on projections and everything is getting regularly updated by estimates and actuarial tables. In any case, the real underlying problem was that banks were making loans that they would not have been willing to make themselves if they had to hold the mortgage. Instead they originated the loan and then rapidly sold it to a financial institution (such as Lehman Brothers) who would package it together with other mortgages (or other financial products). Both the banks and the financial institutions and the ratings agencies failed to do their jobs and properly account for the risk. The securitization process allowed the actual risk of the underlying product, i.e. a mortgage to be hidden from the ultimate holder of the investment. The appetite for these CDOs helped drive banks to offer riskier and riskier mortgages, which again, were mortgages they would not have been willing to underwrite if they were going to hold them on their books. One underlying assumption was that the homes would always appreciate in value. Always. No matter what. The models, even complex ones like monte carlo simulations, simply did not test what happened if the appreciation of homes went below 0%, i.e. negative growth in value. There are other, more complex causes, the growth in the global pool of idle money in the 90s due to computers driving productivity gains which were not passed down to workers and growth in China and other asian economies, Alan Greenspans failures as fed chairmen, instructions to Fannie Mae and Freddie Mac. The real problem isn't so much bets, its that the actual nature of the bet was withheld from the person buying the bet, in a way that to me makes it obvious people should've been bankrupted and jailed, and in general instead they got slaps on the wrist at best. pseudanonymous fucked around with this message at 17:08 on Jul 9, 2023 |
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Jul 9, 2023 17:05
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Doctor Malaver posted:I just watched The Big Short again and I have some questions... I hope it's OK to post them here. 1. That was just the profit to the one investor. Google says the fund also returned around 500% total. 2. I don't remember tattoo guy, but burry closed his fund after everything so there wasn't a job for them. Combined with the general downturn in the economy and the crashing of major financial institutions there wouldn't have been many alternatives for them to go. 3. The economy is complicated. Assuming you didn't lose your job, had the money for a downpayment, and didn't already own a home, yes the crash presented an opportunity. Many people found themselves somewhere between crisis and opportunity, while some fall far into one or the other. 4. Many of the players in such a market make their money off the trades themselves. Think of all the commission's getting paid. Others are buying things like CDOs as insurance or as part of larger strategies and are ok if it doesn't pay off. And finally, people like burry who actually hels the short side won in the end. 5. The agencies have no real liability. It is common for people to forget the... Environment that produces ratings, and to take them more seriously than they should. That was one of the lessons from the movie and what burry/others did. They unpacked what a good rating meant, in particular what happens when extremely poor quality mortgages get bundled with extremely high quality ones, and the one-sided risk that creates.
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Jul 9, 2023 19:55
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Jenkl posted:
To expand on this: Let's say you are in a two-income household making about 75k/yr in Arizona or Vegas or something. Your wife is a server in a restaurant, you are an electrician working in construction. You have a pretty comfortable living, but you've also got some debt. CC debt has crept up, and you've got a nice fat car loan. With mortgages being handed out left and right you get a 30Y conventional 5% mortgage on a house for $250k. The monthly payment comes out to about 1700/mo, which is stretching things for you, but everyone knows that home values are only going up so really this is a way for you to save for the future. Your buddy sold the house he bought in East LA in the 90s for almost twice what he paid for it a decade later, after all. You own it for 4 years, and everything is looking good. Then the economy implodes. Maybe your loan was sub-prime, maybe it wasn't. House values start going down in the markets that saw rapid appreciation, and now your "$250k" house which was only ever supposed to go up up up is now more like a $150-200k house. Because of the way home loans are loaded heavily towards interest rather than principal in the first yers, your note is still worth $236k. You're now underwater on your loan. If nothing else changes that's a bummer but maybe you ride it out. But with the economy in the shitter and construction stopping you're not getting many jobs. You find the odd work with a buddy and do some odd electrician jobs for random homeowners, but poo poo is grim. Meanwhile with everyone else feeling strapped people aren't eating out as much and your wife's hours get cut. God knows her tips went in the shitter. So now your annual income is more like 40k/yr combined, and that's assuming that you're one of the lucky families that doesn't have one or both of you flat out laid off. So now that $1700/mo mortgage payment is a LOT less affordable. You pile on credit card debt to try and stay afloat, you cut back on discretionary spending, but $20,400/year in mortgage payments on an unstable ~$40k/yr gross income isn't sustainable. If you got hosed like this during normal times you'd sell the house, cash out any equity you had, and move on with your life. Only now, since your house is underwater, you can't even do that. If you sold the house tomorrow for $200k you would still owe the bank $36k. So you walk away from it. You stop paying the mortgage, and eventually you just mail the bank the keys to the front door. Now you've got a massive black mark on your credit, and guess what landlords want to check to determine how likely you are to pay your rent? So that's how you and your kids end up living in the car when at the beginning of the year you were a proud homeowner. edit: the house sits empty for a good while. The bank doesn't want to realize the loss, so they don't try to sell it at the depressed value. If they do that they're admitting they're never getting the full value of the mortgage. Eventually they get in enough trouble that they do this, but it's been empty long enough that it's in pretty terrible shape. It's not even being rented out (nor are all the other empty houses in your old neighborhood) so it's not even taking the pressure off the rental market. One day someone finally comes along and buys the property at auction for $100k, restores it, and either lives in it themselves or flips it in the early 2010s for ~$250k. These are the people who made out like bandits post-2008. Some were individuals who got a really affordable house, some were investors who ended up with dozens of rental properties or just made a fat buck flipping. Cyrano4747 fucked around with this message at 20:52 on Jul 9, 2023 |
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Jul 9, 2023 20:49
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Thanks pseudanonymous, Jenkl, and Cyrano, much appreciated. Let me see if I got it right. A: I'm Morgan Stanley, a bank and here I have 1000 clients, with a total of 2000 mortgages, and their full value in 20 years is $200M. The clients pay them back on average $3M per year. B: I'm Lehman Brothers, a financial institution, and I'm gonna buy that for $100M, and mix it up with other mortgages and other stuff, and call this package a CDO. C: I'm Moodys, a rating agency, and I'm gonna stamp your CDO as AAA for a nice fee, without looking into it. D: I'm a manager for a pension fund and I'll buy this great CDO for $150M. Hmm I gotta be wrong somewhere because in this story A and B don't get hurt because they sold the product and only the buyer is in trouble...
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Jul 9, 2023 22:32
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Everybody bought CDOs from everyone else, so no one knew who was creditworthy.
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Jul 9, 2023 22:39
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Doctor Malaver posted:Hmm I gotta be wrong somewhere because in this story A and B don't get hurt because they sold the product and only the buyer is in trouble... Some of the details in your list aren't right but your conclusion is fine. Whoever is caught holding the bag - owning the actual mortgages - gets burned in the end. So the investors/buyers. Even the pension manager is fine here, it's the pensioners getting burned. Every step in between the final investor and the issuer obfuscated the actual risk, enough so that at the end of the day, nobody really knew who held what and how risky they were. As always there's some logic in the process, but the incentives will always push to irresponsibility and greed.
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Jul 9, 2023 23:00
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Doctor Malaver posted:Thanks pseudanonymous, Jenkl, and Cyrano, much appreciated. Let me see if I got it right. ehhhhh. Try this: A: I’m First Bank of Springfield. I’m a regional bank in a mid-size american town, and I used to operate by taking deposits from local residents and businesses and loaning that money back out as business loans and mortgages, It’s A Wonderful Life-style. That worked great when I could pay 3% on deposits and earn 6% on my loans, but now I’m only making 1.25% on loans, so even though I’m paying 0.12% on deposits I’m getting squeezed. Fortunately I can sell the loans to the Government Sponsored Enterprises, Fannie Mae/Freddie Mac/Ginnie something, so nowadays what I actually do is approve as many loans as I think I can sell, book the origination fees, and turn around and offload those to the GSEs. I don’t hold the loans so I don’t care too much about the risks so long as I can get them off my books. B: I’m a GSE. I was invented during the great depression to subsidize home-buying and i’ve been extremely successful at that. In the 60’s I was privatized; in theory i’m still guaranteed by the government, and securities I issue are treated almost identical to government bonds, but we’ve never actually tested that. I exist to make cash available to banks to loan to american home-buyers, which I do by buying mortgages off their books. In the past I would only buy loans from buyers with good credit history in non-distressed neighborhoods - i.e., suburban white folks - but over time, partly for political reasons and partly because it’s an untapped market, I’ve also started buying mortgages of “less traditionally creditworthy” buyers. The politicians are convinced I can do this without taking on any additional risk. C: I’m Morgan Stanley. I’m an investment bank representing big piles of cash - insurance companies, pension funds, the very very wealthy. The GSEs have come to me - they’ve got these so-called “sub-prime” mortgages piling up on their books, and they’re asking me to buy some. I’m willing to do it, but I don’t really know how to price them - they’re definitely riskier than prime mortgages which I’ve been happily buying all along, but how much? No one’s bought these things before. I’ll ask the ratings agencies. D: I’m Moody’s. A group of investment banks and GSEs have come to me asking me to rate these CDOs they’ve come up with for subprime mortgages. I’ll have to survey a ton of regional banks to try to understand the subprime mortgage market. I’ll get as much data on historical trends as I can and run simulations to try to understand how the value of this new product will evolve. I’ll look at default rates, home prices, unemployment… Notably, I can’t look at scenarios that have never happened before, like what happens if there is suddenly an order of magnitude more money going out into subprime loans. Will there be new, even riskier buyers? will they have the same characteristics as those in the historical data? I’m just going to assume they will. E: I’m Lehman Brothers, the most batshit highly-leveraged insane fund on wall street. All day long I look for the asset I think will give me the highest possible return for the risk, then as soon as I’ve bought it I turn around and lend it to the Fed for more money to buy more high-yield assets. The Fed will only repo me money for good collateral, but fortunately the bigger banks have invented a whole new class of investment-grade securities so there’s a lot more “good collateral" floating around out there. I’m technically not a bank so I don’t even have to worry about minimum capital ratios, allowing me to leverage myself into the stratosphere and make insane profits for my hypnophant fucked around with this message at 00:44 on Jul 10, 2023 |
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Jul 10, 2023 00:29
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hypnophant posted:D: I’m Moody’s. A group of investment banks and GSEs have come to me asking me to rate these CDOs they’ve come up with for subprime mortgages. I’ll have to survey a ton of regional banks to try to understand the subprime mortgage market. I’ll get as much data on historical trends as I can and run simulations to try to understand how the value of this new product will evolve. I’ll look at default rates, home prices, unemployment… Notably, I can’t look at scenarios that have never happened before, like what happens if there is suddenly an order of magnitude more money going out into subprime loans. Will there be new, even riskier buyers? will they have the same characteristics as those in the historical data? I’m just going to assume they will. I strongly disagree that they can't examine the possibility of scenarios that have never happened before. I'm not saying they do, but they could. Also while the median home price has pretty much historically always increased in this country, there have been times when in an isolated market they fell. It's kind of a cop out to say home prices never went down, because obviously in dying towns and such they do fall, have fallen historically. Moody's, S&P etc.. the ratings agencies do not do a good job, much like auditors, because they are not incentivized to do a good job. They are incentivized to not do a good job.
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Jul 10, 2023 06:04
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pseudanonymous posted:I strongly disagree that they can't examine the possibility of scenarios that have never happened before. I'm not saying they do, but they could. OK, how? The underlying problem - or one of them - was that the correlation between different regional markets had increased. This is a measured parameter which they incorporate into their models; historically it’s been x, and now it’s >x. How much greater? you need a number to plug into the formula. More importantly you need evidence for your new number, and the evidence doesn’t exist yet. You’re not supposed to just go around tweaking numbers because they don’t “feel” right, and doing so undermines your own credibility, plus as you point out there’s no incentive to do so; there’s the profit motive (your customers want to be able to sell these securities) but also a social incentive (rating these as investment-grade will ultimately mean making more capital available to non-traditionally-creditworthy borrowers, allowing people previously excluded from the housing market - i.e, subprime - to buy homes. If you think financial institutions don’t at least want to give the image of caring about this, I invite you to try to find the largest american bank that doesn’t advertise its DEI/ESG initiative.) It’s fine to say the ratings agencies didn’t do a good job by the arbitrary standard of preventing a crisis which it wasn’t their job to prevent. It’s harder to say what they should have done differently to prevent that crisis, given the incentives they faced and without the benefit of hindsight.
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Jul 10, 2023 16:59
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hypnophant posted:
I'm going to go out on a limb and say that if there are major unknowables that you can't model, you don't give the asset a high rating. I, at least, would argue that's not doing their job. If you can't calculate the risk for something with the tools at your disposal, that in and of itself is a pretty major risk factor.
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Jul 10, 2023 17:21
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The primary problem with the ratings agencies is that they are paid by the banks, to rate products the banks offer, and that is a basic and unresolvable conflict of interest. There are several ratings agencies and they're perfectly well aware that if one consistently rates banks' products lower than the others, they'll simply stop getting business. That many smart people within ratings agencies actually try to do their job is more or less irrelevant because of this basic issue. Imagine if the three credit agencies that rate personal credit all only got paid by us, the public, and not by the people who want to look at our credit reports and decide if we get a loan or can rent an apartment, and also imagine that you could simply choose not to do business with any of them if you felt they were rating you too low. You could literally pick which of the big three (or some new up and comers, sure!) gave you the highest score and tell the others to gently caress off. Do you think your credit score would be the same as it is today? Keep in mind that while many aspects of the credit scoring process are obvious (a recent bankruptcy will tank your credit with any agency of course), the actual algorithms are proprietary and secret and obscure, which is why you can have identical information going to all three agencies and still get (moderately) different scores from each one. Doctor Malaver posted:I just watched The Big Short again and I have some questions... I hope it's OK to post them here. Others have addressed your questions well but I wanted to circle back to this one. Getting a 48.9% return on your investment is a huge return. Massive. Most of us are happy to average 7-8% a year over inflation on our long-term investments. It is increasingly difficult to get a large return the more money you are investing, too, because of how larger purchases can individually push up the price of the thing you're buying. E.g. if I'm investing $1000 I can gamble on a $1/share stock of a company with a $100M market valuation that sees a daily trading volume of 100,000 shares on average, but if I'm investing $100M that stock isn't worth bothering with: if I put in a market order for just 10,000 shares that'd instantly push the price up (a bid of 10% of the daily volume) significantly, so some of those shares I'd get at $1, then some at $1.10, then some at $1.50, the market sees this action occurring and the price goes up some more, and if I think that stock was "really" worth $1.25 (so buying at $1 was a great bargain) I'd be done buying it after only a few thousand dollars and I still have almost all of my $100M to invest. That's an extreme example to illustrate the point, but the point is that outfits with billions of dollars under management have to work very hard to find good value for all of that money. There's intense pressure on the overall financial markets to create new investments that can absorb billions of dollars and still return 5%+ annually. In an environment where interest rates are low (and so for example government bonds, which can absorb billions in purchases, are only returning like 1%) that money seeks risk. One of the actual attractions of the mortgage-backed securities market is that it was making new, higher risk (and therefore higher return) investments available to the broader investor market which had previously been held by banks. Lehman had all that cash because lots of people with huge amounts of cash wanted outfits like Lehman to tell them that they could find places for a billion dollars that could potentially return a hundred million, or more. I forget for how long Burry had his billion invested, so I don't actually know if that $489 was over one year or what time frame, but even if it was five years that's a decent return and if it was less than that it's a great return.
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Jul 10, 2023 17:29
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Jenkl posted:Some of the details in your list aren't right but your conclusion is fine. Whoever is caught holding the bag - owning the actual mortgages - gets burned in the end. So the investors/buyers. Even the pension manager is fine here, it's the pensioners getting burned. Another movie that goes into more of the actual crisis as it unfolded rather than the circumstances that led to it is Margin Call which is another good watch https://www.youtube.com/watch?v=Hhy7JUinlu0 Not nearly as good as The Big Short but if you want more The Big Short then it's a worthwhile watch
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Jul 10, 2023 17:42
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fake edit: ^^^ Heh funny we both reference the same person who uploaded this stuff to Youtube. I was going to comment this before but I didn't feel I had the ability to answer the other questions, but: Doctor Malaver posted:1. Burry invests over a billion and at the end of the movie writes to the fund owner that his profits are $489M. Isn't that small, relative to the investment and risk? It was 489% not 489m. That scene also says the profit was 2.69 billion.
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Jul 10, 2023 17:47
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Just for reference, if anyone's looking for a comprehensive (but not perfect) overview of the '08 crisis and what led to it, it's worth your while to read the 2011 Financial Crisis Inquiry Commission's report. https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf For a taste, here was one of their conclusions regarding the ratings agencies (with supporting material in the main text): FCIC posted:The Commission concludes that the credit rating agencies abysmally failed in their central mission to provide quality ratings on securities for the benefit of investors. They did not heed many warning signs indicating significant problems in the housing and mortgage sector. Moody’s, the Commission’s case study in this area, continued issuing ratings on mortgage-related securities, using its outdated analytical models, rather than making the necessary adjustments. The business model under which firms issuing securities paid for their ratings seriously undermined the quality and integrity of those ratings; the rating agencies placed market share and profit considerations above the quality and integrity of their ratings.
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Jul 10, 2023 21:11
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the ratings agencies structurally cannot succeed. rating securities is a mugs game, if you knew more about securities than other schmucks you would trade on it
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Jul 10, 2023 21:31
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the true scathing opinion is "this entire small financial industry is both retroactively and proactively useless"
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Jul 10, 2023 21:32
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 I keep hearing noise about the pending BRICS currency (bricbucks?) that will be formally announced in August and diminish the status of America's reserve currency and somehow unite the world against America & Its Buddies while also bringing back the gold standard. Would so many countries, even rivals and otherwise violent neighbors, band together to hurt the US dollar, with cutting off SWIFT access to Russia being the catalyst? And the supposed use of gold to peg this new currency's value - doesn't every gold-backed currency turn to poo poo 'cause 1) no country wants to exchange their gold hoard over and 2) eventually every country tries to print its way out of catastrophe and gold can't keep up with that kind of desperation? Space Fish fucked around with this message at 22:24 on Jul 10, 2023 |
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Jul 10, 2023 22:21
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Leperflesh posted:The primary problem with the ratings agencies is that they are paid by the banks, to rate products the banks offer, and that is a basic and unresolvable conflict of interest. There are several ratings agencies and they're perfectly well aware that if one consistently rates banks' products lower than the others, they'll simply stop getting business. This is boggling. Why only rating agencies suffer from the same problem? You want to know how your product / politician / radio station fares on the market, you pay a polling agency and get a realistic research response. If you created an agency that consistently over-rated everything clients pay them for, it'd lose credibility and business. In the same vein, I can imagine an honest rating agency appearing and starting to rate their customers realistically. They'd get less business at first, but then buyers could start demanding you use them. Hmm yes very nice that you got AAA from those agencies, but we want the Honest Agency to rate you before we consider the deal. Leperflesh posted:It is increasingly difficult to get a large return the more money you are investing, too, because of how larger purchases can individually push up the price of the thing you're buying. E.g. if I'm investing $1000 I can gamble on a $1/share stock of a company with a $100M market valuation that sees a daily trading volume of 100,000 shares on average, but if I'm investing $100M that stock isn't worth bothering with: if I put in a market order for just 10,000 shares that'd instantly push the price up (a bid of 10% of the daily volume) significantly, so some of those shares I'd get at $1, then some at $1.10, then some at $1.50, the market sees this action occurring and the price goes up some more, and if I think that stock was "really" worth $1.25 (so buying at $1 was a great bargain) I'd be done buying it after only a few thousand dollars and I still have almost all of my $100M to invest. Yeah I remember an investing workshop where they told us there Warren Buffett copycat ETFs exist but they are sub-optimal for small investors because he's limited by the size of the funds he has to operate with. But I didn't realize this was an angle in this situation too.
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Jul 10, 2023 22:25
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Ratings are not paid for by buyers. The firm or issuer of the security being sold pays for the rating. The incentive is for a good rating, not an honest one.
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Jul 10, 2023 22:38
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Space Fish posted:
Gold-bugs gotta gold-bug. They have a near-religious zeal for anything that they think will move countries back to the gold standard, and they loudly herald any news that portends that second coming. (Even if it's all on their head.)
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Jul 10, 2023 22:53
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Doctor Malaver posted:This is boggling. Why only rating agencies suffer from the same problem? You want to know how your product / politician / radio station fares on the market, you pay a polling agency and get a realistic research response. If you created an agency that consistently over-rated everything clients pay them for, it'd lose credibility and business. The mistake you're making is assuming that the accurate information among all market participants assumption is something that holds up outside the realm of spherical, frictionless, vacuum-dwelling cows found in Econ 101 classes. What incentive do the other market actors have to go to the agency that consistently disagrees with the established players, rates your products lower, and does the equivalent of starting Twitter beef constantly by calling everyone else frauds? The buyers, who really want to look good on paper, just won't buy from the new upstart Honest Ratings Inc. and the firm will go out of business. As Jenkl put far more succinctly: Jenkl posted:Ratings are not paid for by buyers. The firm or issuer of the security being sold pays for the rating. The incentive is for a good rating, not an honest one. This is one of the situations where expanding the SEC's mandate to provide risk assessments of financial instruments would make sense, to nominally remove the conflict of interest. Because so long as the ratings are paid for by the people being rated, and the continued existence of the rating business being dependent on people wanting to pay for said rating, there will always be a finger on the scale in whatever direction the purchaser wants. This is even if you are trying your best to toe the line and provide the fair and honest rating--the fact that money changes hands between the judge and the firm being judged is enough. "Trust me bro" is never an excuse when it comes to a conflict of interest.
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Jul 10, 2023 23:35
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All of this applies to public companies and audits fyi. I’ve watched poo poo in real time over email as a company flip flops accounting treatment with a big 4 audit partner based on the impact to EPS.
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Jul 11, 2023 00:22
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Doctor Malaver posted:This is boggling. Why only rating agencies suffer from the same problem? You want to know how your product / politician / radio station fares on the market, you pay a polling agency and get a realistic research response. If you created an agency that consistently over-rated everything clients pay them for, it'd lose credibility and business. In addition to what others have said: actually this is also a huge problem with for example political pollsters. There are some big independent pollsters, many are paid by journalists who at least somewhat want an honest real answer: but there's tons and tons of political pollsters paid for basically always by campaigns or political parties on the left or right; they have a heavy bias in their results, and so of course they're terrible (but great if all you wanted was to put glowing poll numbers onto your political campaign's posters and flyers). Push polling is just one example of how bias can be injected from the outset to produce the results you want, and of course it happens because the people paying for the poll have no interest in paying for results that look bad for them. To get back to investing, then: the buyers are mostly disparate and disconnected, and most buyers aren't interested in like, paying a fee for ratings. Although some do! Investor-paid ratings agencies have been experimented with, and they have a different problem. If the agency knows whether a given investor already has a long or short position on a particular security, that can also inject bias because that position dictates what the investor wants the market to do, and the market can respond to ratings. For example an investor holding a bunch of bonds wants those bonds to be rated highly so that they retain or gain more value on the market, and the investor makes money. Similarly, an investor that has already shorted a stock wants that stock to go down and would prefer a low rating. There is research on this but I don't see a clear consistency of results across different countries, methods, situations, etc. at least with a small sample size (I'm just googling a bit) but I did find a paper that says that the existence of investor-paid ratings may improve the quality of issuer-paid ratings so maybe we'd be better off with a mix of sources of ratings (much as we have a mix of sources of political polls...) IMO ideally we'd have ratings agencies paid for by a generic fee from both investors and issuers, that has access to all the info it needs to properly rate securities but is firewalled from both issuer and investor interests, or ideally would not even be responsive to what either issuers or investors say or actually want. The SEC could be that rater.
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Jul 11, 2023 00:38
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Space Fish posted:
Gonna make a hot prediction here and say that China is not gonna be abandoning its currency to join some multinational currency by committee that also requires full gold reserves.
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Jul 11, 2023 01:14
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I'd agree securities ratings oughta be handled by the regulator or other central body. The incentives are completely misaligned otherwise. And it's not like government intervention isaking this market inefficient - it's fundamentally built on information asymmetries, it was never going to be (econ) Efficient (TM) anyways.
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Jul 11, 2023 01:32
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Does this gold-backed currency chat count as "de-dollarization is overhyped" if the currency is 1) designed to perform de-dollarization and 2) headed by countries that make up *checks notes* 26.6% of global GDP?
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Jul 11, 2023 01:42
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