“I found an almost perfect sports analogy to the national statistical rating agencies’ ratings vs. market yields for debt securities…

…I read in the L.A. Times yesterday that Utah’s undefeated football team is ranked #3 in the nation by the Associated Press media poll, yet despite Utah’s record and ranking, unranked (3-3) USC is “a three-point favorite in the eyes of the Las Vegas bookmakers.” Clearly, something is very wrong with the polls, right? Many sports junkies like myself, know the college football polls weight winning records, no matter the quality of the opponent, closeness of the win, or the luck/errors involved (especially undefeated ones) too highly. Also, a few hundred reporters or coaches decide these poll rankings, with ZERO accountability if they are wrong. Just like the National Statistical Rating Agencies, although they have fewer people who determine their highly-subjective ratings for debt securities. Like market debt yields, which are determined by thousands and thousands of buyers and sellers, the Las Vegas point spread is a market determined by thousands of bettors, putting a lot of money on the line, where they could win or lose and be held to account. Why in the world, after the 2008 crisis laid bare their inadequacies, do we still have National Statistical Rating Agencies deciding which debt securities are AAA, BBB, and so on? It make no sense, when market yields of debt securities tell theses securities’ risk. Every day, the market decides how risky each publicly-traded debt security is and incorporates that risk into its price and therefore yield. The higher the market yield, the higher the risk and the higher the capital required. Simple as that.”, Mike Perry, former Chairman and CEO, IndyMac Bank, October 22, 2015

Posted on October 22, 2015, in Postings. Bookmark the permalink. Leave a comment.

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