Lessons Not Learned
Just when we thought the credit rating agencies might have learned their lesson, this little tidbit popped up earlier this year, very low on the radar, “Standard & Poor’s Triple A Ratings Collapse Again. The Question is Why?” wherein it refers to a recent press release, quietly put out by S&P, that it was about to downgrade nearly 1200 mortgage securities that it had recently assigned a AAA rating due to a faulty analysis.
It may have escaped the short memory of the investment world that the credit rating agencies were one of the key pillars that crumbled under the weight of the financial debacle that they helped create. You will recall that it was their admitted ignorance or understatement of the risks associated with securitized mortgages that led to a mass downgrade of billions of dollars of mortgage securities and triggered the collapse.
Expertise we can count On?
The subject of this recent mis-analysis were re-remics, a securitized mortgage instrumen
t (here we go again) comprised of repackaged mortgaged back securities that managed to survive the latest rounds of defaults. This re-rating comes right on the heels of another one that occurred just 3 months ago with aother batch of 224 re-remics.
Most disturbing is the fresh light this casts on the questionable objectivity of the rating agencies which are highly compensated for their ratings, but only after winning the business by outbidding each other. Apparently, rating re-remics commands a much higher fee and the banks are willing to pay it to get the ratings they need to be able to market the securities.
Lessons for the Taking
Individual investors can, hopefully, take away some lessons from the lessons that weren’t learned by the ratings agencies and the banks.
- First, we have no business investing in financial instruments that we don’t completely understand, especially ones that require some sort of engineering by backroom financial geeks. Seriously? When the rating agencies don’t understand them enough to develop the right methods for analyzing them, it’s time to run; run far away.
- Second, even though the loss that the banks that are holding these re-remics won’t amount to more than a blip on their balance sheets, it’s a reminder to the rest of us “sophisticated” investors that proper diversification is key in the face of these human-caused flare-ups that could possibly trigger the next calamity.
- Third, unless you have some sort of twisted financial death wish, stick to the fundamental tools. The “next big thing” in investments is usually a re-hashed, raked over financial product loaded with fees and back-door profits intended to enrich the promoters with little regard for your financial future.
None other than the notorious stock trader, Jesse Livermore, stated it the best, “Another lesson I learned early is that there is nothing new in Wall Street…Whatever happens in the stock market today has happened before and will happen again.”
The big takeaway here is that in successful investing, there are no crutches, no models, no experts, and there are no short cuts. With experts like S & P, it’s more important than ever to be able to think for yourself and move deliberately along your own course.





