Comment by anigbrowl | Hacker News Reader

Comment by anigbrowl | Hacker News Reader

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Looking at the line graph, the % of total securities issues rated AAA, it's apparent that between 1991 and 1994 the proportion jumps up from ~20% to ~50% and then floats in a bracket between 50 and 60% for most of the next 2 decades. This obviously happened ahead of the dot com boom, and while I think you make many valid points, none of them address this startling change in the distribution of ratings.

Unfortunately the chart only goes back to 1990, and I don't have time to dig up historical figures. Perhaps more financial instruments used to enjoy a AAA rating until the Savings & Loan scandal of the late 80s, and the sudden upward jump in ratings represents the purging of bad assets from the financial system following the recession of the early 90s. But really, I don't know. Without disputing your observations above, I think we could learn a lot from looking at the largest discontinuity here rather than focusing on the absolute volume figures from recent years, notwithstanding the significant increase in securitization following the repeal of Glass-Steagall.

Prior to the 90's there were a number of AAA-rated bank holding companies in Japan, France, Germany, etc, who participated in securitizations by issuing Letters of Credit, lending those bonds their AAA ratings. The downgrades of those led to alternative structures, e.g. reserve funds built up from the collateral pools streams of principal and interest, to garantee timely payment of the bonds' P&I obligations.

A lot of the AAA growth from 1990 forward comes from the application of these structures to securitization of non-mortgage consumer loans, first auto and credit card loans, then others.

> downgrades of those led to alternative structures

Proliferation of "credit enhancements" certainly did spark the AAA bubble, but I'm quite certain that participating financial institutions became much more profitable under this new regulatory regime.

Specifically, the deregulation of OTC derivatives[1] in 2000, which allowed issuers to purchase insurance against loss, caused massive growth in AAA ratings for ABS (dark purple section). In fact, there is an excellent Frontline piece on the story[2].

[1] http://en.wikipedia.org/wiki/Commodity_Futures_Modernization...

[2] http://www.pbs.org/wgbh/pages/frontline/warning/

Yes, there were several factors that spiraled up together: the entry of 2 new rating agencies, the new credit enhancement structures, the new types of collateral that the agencies deemed to have "predictable enough" P+I cashflows, and the pension funds and insurance companies' appetites for AAA.

One other factor (from the early 90's, I think), was when getting asset sale treatment for GAAP and RAP (bank regulatory accounting) while still getting debt for tax treatment become standardized. That was a breakthrough.

No - AAA was always meant to be the best of the best.

Interestingly, there's now the question of whether the US debt should be rated AAA : Is there more than a 1-in-100 chance that the two sides can't get to some compromise (or, more likely, agree on how to kludge things) by September?

AAA is meant to lead to default at a 1-in-10000 per annum rate (it's a standardized measure). So, by that argument, USA downgrade should have already occurred.

And, since companies cannot be rated higher than the countries that they're in, that would lead to the immediate downgrade of Microsoft, etc...

Companies cannot be rated higher than the country they are in? I don't understand why that would make sense, especially in a case like the US - congress being unable to extend the debt ceiling shouldn't have that significant of an impact on Microsoft, a globally diversified company, being able to pay back it's debts...but then, the financial world is full of fun, arbitrary rules.

Microsoft's debt would be issued in dollars. If the US fails to back the dollar, Microsoft's debt is also worthless, because it's also dollars. So it would make no sense for MS bonds to be rated higher than the US.

The rating only covers default risk, not currency risk.

Wow I never looked at it like that before. Of course if the currency collapses the companies operating in it are f'd. We need to resolve the housing foreclosure mess and stop accruing debt.

There are a lot of messes that need to be resolved, but notice that mortgages barely figure in the chart, the housing foreclosure mess is 'merely' shit rolling downhill in this picture

Really downvoters. You think we need more debt and to ignore the the housing crisis? Really?

I don't understand the jump in logic you are making from "the US government is at risk of defaulting on it's debt" to "the US dollar is at risk of failing as a currency". Can you explain this?

You seem to be jumping from one conclusion to another which much reasoning to link them, and then drawing another conclusion from that.

I'm afraid there is no jump. If the US defaults interest rates will rise but they can't as the market is dependant on cheap money. That why interest rates have been at 0% for a long as long as I can remember and it is also why QE1 and QE2 were done. To increase the supply of cheap money. If the US defaults the dollar will crash. Look at what happened to Argentina in the late 90s. No I don't think the chances are very significant now but the conditions are certainly there for it to happen. I'm sure a whole paper could be written on this but I am only trying explain where I am coming from.

> And, since companies cannot be rated higher than the countries that they're in

There's no such rule. In fact, Japanese companies have been rated higher than Japanese sovereign debt.

http://www.bloomberg.com/news/2011-01-27/toyota-canon-rating...

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