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Reply #16: I think you are overly optimistic [View All]

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zipplewrath Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Jul-22-10 02:05 PM
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16. I think you are overly optimistic
In the short run, no one will rate bonds, even good ones, because they don't know what the legal risks are. That's what has brought this to a full stop. Furthermore, again in the short run, the default position of a rating agency is going to be that ALL bonds are risky, with little differentiation between them.

Potentially, in the long run, without further legislation, all we'll ultimately get is a bunch of "low ratings" with nothing getting "high" ratings. So the rating companies can always claim they informed you they were "risky", but the market will be stuck chosing between "risky, very risky, hugely risky, amazingly risky.....".

As I say, the predominate problem here is that they created effectively a risky "legal" environment, without establishing guidelines for how an agency can actually state risk accurately. Ultimately the courts, and the regulators will establish some guidelines, but I strongly suspect they won't particularly change the underlying problem, which is that the investments basically are hard to assess in terms of risk.

There is a chance that the rating agencies might actually find a way to "expose" and quantify the risks so that you can see the underlying instruments. But that will be hard, especially for new products, as the liars always tend to be one step ahead of the rating agencies.
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