Strategy: Why Not Just Make Bets on Mispriced Risk Rated By Moody's and S&P

New Yorker's picture
Rank: Gorilla | banana points 658

The people working at Moody's and S&P aren't the brightest crayons in the box, so why not just make bets on ratings they've clearly fucked up on? i.e if they rate something Aa/AA and it's really Baa/BBB, short it...

Clearly they didn't understand that just because mortgages come from different locations, that doesn't necessarily mean there is less "risk"

Comments (12)

Mar 8, 2011

Holy fuck dude REALLY? Dude that is the most original shit i have ever heard.

You are the man... of course it hasn't cracked yet and there aren't a million paulsons shorting that thing and the borrow of course is going to be in your favor. Of course protection wont be like 90 points up front.

Dude. You're just a regular Paulson. Take ALL my money. Just manage the fuck out of it. Short everything in sight. Just lift a ton of protection.

Pure genius

Mar 8, 2011

op why do you think they are dumb?

Mar 8, 2011

OP,

I don't think RA's are necessarily "stupid". Most likely, they rated garbage MBS AAA because they wanted to get future business from the IB securitizing the deal, not because they actually thought it was AAA.

Mar 8, 2011
<span class=keyword_link><a href=/finance-dictionary/what-is-london-interbank-offer-rate-libor rel=nofollow>LIBOR</a></span>:

OP,

I don't think RA's are necessarily "stupid". Most likely, they rated garbage MBS AAA because they wanted to get future business from the IB securitizing the deal, not because they actually thought it was AAA.

No they are, OP is right. And they are called 'agencies' not RAs. RA = dorm RA

Mar 8, 2011
DurbanDiMangus:
<span class=keyword_link><a href=/finance-dictionary/what-is-london-interbank-offer-rate-libor rel=nofollow>LIBOR</a></span>:

OP,

I don't think RA's are necessarily "stupid". Most likely, they rated garbage MBS AAA because they wanted to get future business from the IB securitizing the deal, not because they actually thought it was AAA.

No they are, OP is right. And they are called 'agencies' not RAs. RA = dorm RA

we called them RAs when i was in banking

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Mar 8, 2011
bankbank:
DurbanDiMangus:
<span class=keyword_link><a href=/finance-dictionary/what-is-london-interbank-offer-rate-libor rel=nofollow>LIBOR</a></span>:

OP,

I don't think RA's are necessarily "stupid". Most likely, they rated garbage MBS AAA because they wanted to get future business from the IB securitizing the deal, not because they actually thought it was AAA.

No they are, OP is right. And they are called 'agencies' not RAs. RA = dorm RA

we called them RAs when i was in banking

We call them agencies on the buyside. I think we automatically know which word is more relevant now.

Mar 8, 2011
<span class=keyword_link><a href=/finance-dictionary/what-is-london-interbank-offer-rate-libor rel=nofollow>LIBOR</a></span>:

OP,

I don't think RA's are necessarily "stupid". Most likely, they rated garbage MBS AAA because they wanted to get future business from the IB securitizing the deal, not because they actually thought it was AAA.

Actually, they were incentivized to give good ratings to get more biz AND they are dumb. I know from personal experience trying to explain stuff to their rocks-for-brains analysts.

See the 2nd and 3rd Question/Answer from this article. http://finance.yahoo.com/expert/article/moneyhappy... . I laughed out loud when I read that a couple years ago because 1) it's some dumb yahoo columnist trying to use the buzz phrase "smartest guys in the room" to describe the RAs and 2) the guy's response is dead on. Some of the people working at the RAs really were breathtakingly stupid.

Mar 8, 2011
New Yorker:

The people working at Moody's and S&P aren't the brightest crayons in the box, so why not just make bets on ratings they've clearly fucked up on? i.e if they rate something Aa/AA and it's really Baa/BBB, short it...

Clearly they didn't understand that just because mortgages come from different locations, that doesn't necessarily mean there is less "risk"

a lot of rated securities don't trade solely based on their ratings

Mar 8, 2011
bankbank:
New Yorker:

The people working at Moody's and S&P aren't the brightest crayons in the box, so why not just make bets on ratings they've clearly fucked up on? i.e if they rate something Aa/AA and it's really Baa/BBB, short it...

Clearly they didn't understand that just because mortgages come from different locations, that doesn't necessarily mean there is less "risk"

a lot of rated securities don't trade solely based on their ratings

ding ding ding we have a fkn winner

Mar 31, 2011

Doesn't matter the rating, the price wasn't AAA.
Needless to say you can't fool the market.
And there's actually a paragraph about this topic on the McKinsey valuation book ...

Apr 3, 2011

Ratings agencies look at the rear-view mirror, markets look through the windshield.

They just got around to downgrading european periphery sovereign debt - after CDS blew out hundreds of bps.

@DurbanDiMangus - I work on the buyside as well and we call them ratings agencies at my firm - agencies refer to the government sponsored entities (GSEs): Fannie, Freddie, Ginnie.

Nov 7, 2013