Posted on 10/24/2009 4:32:27 AM PDT by TigerLikesRooster
Calpers burns in subprime fire
24 Oct 2009, 0000 hrs IST, REUTERS
SAN FRANCISCO: Faced with huge losses on subprime loans, Calpers is suing the rating agencies which it said misled them by giving top ratings to mortgage bond funds which later turned out to be a house of cards. Calpers also was overcharged for foreign exchange transactions, says state Attorney General Brown, who is suing bank State Street.
The market rally this year also has helped. “The recovery now is showing our asset strategy is doing pretty well,” Oliveira said. Calpers’ losses have been cut by about half from the market low, taking the fund to around $200 billion.
The recovery, however, remains wobbly, and California, the nation’s largest economy, is in dire straits. The state resorted to IOUs when it nearly ran out of cash, a third year of drought has left farms fallow, and layoffs have even reached into Silicon Valley and Hollywood.
If Calpers falls short on its pension commitments, taxpayers will pay. But there is growing pressure from governor Arnold Schwarzenegger and others to cut future pensions or do away with them altogether in favor of 401(k)-style programs where individuals manage their own money and both reap the rewards and suffer when risks don’t pay off.
(Excerpt) Read more at economictimes.indiatimes.com ...
Ping!
If lawsuits like this one ever get traction look out becase the rating firms would quickly be the ones ‘folding like a house of cards’.
The triple-A rating of mortgage bonds was an obvious joke for years both well before and well after the housing market collapsed.
My understanding of the subprime mortgage problem is this:
Banks make lots of loans, but if they hold them on their books their books quickly get filled up. So someone comes up with the idea to bundle (or “securitize”) the loans into a group and sell shares of them on the open market.
But no one is going to buy a bunch of random local home loans because they have no idea what’s in the bundle, and whether they’re good risks to take. So rating agencies come up with ratings for the bundles in order to allow potential investors to have a level of confidence in the security.
So they gave wrongly high ratings to these securities, and they sold like crazy. This gave the banks cash to make more loans, which they then bundled into more securities and sold off. And as long as they could continue to sell off whatever risky loans they made, they made riskier and riskier loans. It fed on itself.
Problem #1: The formula they were using to determine the risk level (what percentage of loans could go bad before hurting the overall bundle and the overall chances of those failures) had an error in the formula. So they were not correctly averaging the risks.
Problem #2: They attempted to build formulas that would assess how a small percentage of the loans going bad would affect the overall bundle. They did not predict what would happen in a system-wide fall in home valuations. So they grossly overestimated the security of the bundle.
It is no brainer that careful verification was not done. Those who made a living in financial sector may have lost their job if they went against the prevailing mood of 'irrational exuberance.'
They are paid by the entities they rate, so they have an incentive to rate high. Then banks and funds buy overrated bonds as "investment grade".
What the rating agencies are really selling is an estimate of the probability of default within X years. What should be demanded of them is a historical accounting of the real probability of default, within 5 years, of each bond rating level.
Then regulators can tell banks and such "Investment grade is defined as bonds with a probability of default no higher than X%". If a rating agency then gives excessively high ratings, and allows its percentage of defaults to rise too high, then all of a sudden its AAA-rated securities are below investment grade and nobody wants it to rate securities any more.
PONZI: They are paid by the entities they rate, so they have an incentive to rate high. Then banks and funds buy overrated bonds as “investment grade”.
Grossly underfunded State, county, and municipal pension systems are the 10,000 lb. gorilla in the room that every one refuses to see.
Medicare, pensions, Social Security ...
The Democrats keep passing entitlements which they know can’t last.
Now the Dems want to pass the Mac-daddy of all entitlements: socialized healthcare.
The Democrats are insane.
Ultimate doomsday machine. Walking WMD's.
BINGO! Money quote of the day!
The investment banks put together a big pool of mortgages.They cut up the pool into "tranches" or segments.The tranches are cut by quality from say "A" to "D". The "A" tranche is the best quality, and sells for the lowest yield to the investor. The "D" tranche has the highest risk of defaults, but also has the highest rate of return.
As an investor, you weigh rate of return versus risk of default.
Where the Feds are playing a devious game is that the bond rating is not by tranche but by the entire security. So, if I have an "A" tranche and the entire security is downgraded, my piece is downgraded too and I have to recognize a loss (mark to market) even though my tranche may be perfectly performing.
Thisis putting somebanks in jeapordy as these "A" tranches are for investment/liquidity not held for resale.
“The recovery, however, remains wobbly, and California, the nation’s largest economy, is in dire straits. The state resorted to IOUs when it nearly ran out of cash, a third year of drought has left farms fallow”
20 years of environmental extremism has left farms fallow.
“If lawsuits like this one ever get traction look out becase the rating firms would quickly be the ones ‘folding like a house of cards’”
As well they should, if they have been lying to investors.
I want paved roads and irrigation systems that deliver water to farmers.
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