US sues S&P over ratings of subprime mortgages

by Manshu on February 6, 2013

in Economy

It has been quite some time since I last read any news related to the subprime crisis so it came as a bit of surprise to me when I saw that the US government is suing S&P for their rating of subprime mortgages. 

Apparently, the US government has internal S&P emails that show at least some S&P employees didn’t think the mortgages they were rating deserved AAA and cautioned about the out of control market. But as pointed out in the article, not everyone thought that way in S&P and it’s hard to see how the government can win the case because almost everyone got it so wrong at the time, but they may be successful in getting a big settlement like they did with Goldman Sachs who paid $550 million over their subprime related lawsuit.

In an Indian context, there are plenty of debt issues these days, and most of the time these are government owned or controlled companies whose debt is rated AAA.

This is taken as a guarantee by almost everyone and I would be really surprised if anything were to go wrong with one of these companies. However, if you asked someone before the subprime crisis if they thought the market would implode so badly, there was no way they would’ve predicted it. We simply don’t know what we don’t know.

And if experts get it so wrong then what hope do retail investors have in looking through the books of a company and predicting a collapse? Close to zero I would imagine.

I think it is important to remember this at all times, and as far as debt is concerned, another important thing to keep in mind is that there is just no upside of not diversifying your debt holdings.

If all your money is concentrated in a stock then you can lose all of it but you can also make a lot of it if the stock turns out to be a ten-bagger, but in the case of debt, if you’re heavily invested in just a few instruments and they turn out to be wrong bets, you can lose a lot of money without having any upside at all.

The best defense against this is to own many different kind of assets including many different kind of debt assets and be diversified.

The other big learning from this is never send an email that you wouldn’t want to be published in front of the whole world.

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{ 9 comments… read them below or add one }

harineem February 6, 2013 at 9:57 am

Nice way to revive US economy. Sue everybody around.The question to be asked is how did they get something so big wrong?

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Manshu February 6, 2013 at 11:02 am

But haven’t these things be happening since the beginning of time? How did the Tulip mania ever came to be? With the benefit of hindsight, everything looks crystal clear, but not so much when it is happening in real time.

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shaviv February 6, 2013 at 12:07 pm

Do you know the best performing asset class in the US in 2012? Yeah, subprime mortgages! The asset class returned something like 30% for 2012 (and that was until Oct).

http://www.businessweek.com/news/2012-10-04/subprime-up-as-funds-target-shrinking-market-mortgages

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shaviv February 6, 2013 at 11:28 am

I couldn’t suppress a laugh about Indian companies backed by the govt being AAA and all that. Everything in India is govt backed, or else you can’t do business (except for some IT companies). Furthermore, we don’t see failures because we don’t have a bankruptcy code and we don’t have transparency. Instead, we just have institutionalized failure. Like Air India, like SBI, which needs capital infusions every year. But, nobody questions it, nobody talks about SBI being a scam. I wonder why! SBI is a joke really. I’ve been to their branches lately for some work and its pretty pathetic. And, they can’t make profits even when we have stupid preferential rules like oil companies have to hedge via public banks, various services that only they can offer or the fact that they have govt backing which should reduce their cost of capital. No one in India questions the capital infusions in stupid companies like SBI. Secondly, its misleading for Indian companies to be rated AAA when the country itself is not rated AAA. Indian PSUs will be rated well until a shock like 1991 will force privatization. Until then, of course they are AAA. Why wouldn’t they be when backed without limits by 4% of the Indian public that pays taxes?

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harineem February 7, 2013 at 4:45 pm

I kind of disagree on SBI . We are in essence not a capitalist country(more socialist) to allow major bankruptcies. Considering the poverty I dont think its a good idea also to allow big companies to fall.
Air India was led to bankruptcy by corrupt Aviation ministers and can be a success story even now if there is a will from govt. SBI has more penetration than any bank and it serves areas where your regular private banks would never go. So please dont base your opinion on customer service provided.It has more ATMs than any bank.And how many banks offer you zero balance account(some in very recent times have started) without charging a fine.It offers the best loan rates and has some of the best performing MFs and fairly good deposit rates compared to other MNCs.
I am not saying it doesnt have problems but let us not paint it all black.

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shaviv February 8, 2013 at 1:45 am

So, considering the poverty, you think it makes sense for the govt to put money into an inefficient business (Air India), and that too in a sector in which there is no need for PSUs? Don’t you think the money can be spent better in the main functions of government? If you are worried about the jobs, privatizing AI would keep most of those jobs and make the company run better too. What is the issue with that? The point isn’t whether AI can be profitable or not. Ofcourse it can, but should GoI be running an airline? Surely, not?

Same for SBI. The ‘good’ features of SBI that you cite are at the cost of taxpayers. What is the point of those features if its only because of access to public money?

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harineem February 8, 2013 at 11:27 am

I have nowhere said that Air India need not be privatized.I just said that the bankruptcy is govt driven. Govt has no business in Airlines or Hotels but I would also add Air India flies routes that no private airline would do.
As for SBI I diasgree on the privatization. Yes they cost the taxpayers money but these ultimately are to help the people who dont have access to banking facilities like the urban and well-off folk. I have a parent who worked in a state bank and I myself am in a private bank and I know the difference. And have heard stories how rural folk benefitted from the nationalizaton of banks. One example I myself saw marble quarrying in Rajasthan in such remote areas financed by SBI or its subsidiaries, areas when no private bank will step in.
A country should not be run like a corporation. Yes the country needs money but that is not the main goal there is a social responsibilty too.

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shaviv February 8, 2013 at 3:32 pm

Hopefully you aren’t talking about discriminatory policies in favor of AI that prevent private airlines from running certain routes, because that’s a bad thing against AI and not something to be proud of. And, expanding airlines to various routes should not require a national carrier.

I wasn’t talking about SBI’s rural network, which is the only positive trotted out in favor of PSU banks. The question is why can’t the same incentives be given to private banks? Why can’t the govt drive the same process via private banks. Furthermore, that reason is hardly valid any more. Private banks are willing to go to rural areas now, so there is no reason any more, is there? And, again, its not because of the brilliance of SBI management or the goodness of their hearts that it went to remote areas. Its because it has a lower risk because of govt backing and because of govt mandates. So, whats the big deal about it?

A profitable private bank is far more socially responsible. If you think SBI is being socially responsible, just go to their branch and see for yourself. I’d rather see a transparent, focused policy to incentivize the private sector to do the specific thing that needs to be done. They will do it better and they can be held accountable in a better way. You seem to have an implicit point that a private company is not socially responsible, which I don’t agree with at all. A well functioning, well regulated private sector has been shown to be the most socially responsible way of organizing business activities, all over the world. Its pretty common consensus, don’t you agree?

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harineem February 11, 2013 at 4:50 pm

Again I am not supporting AI being backed by govt but AI flies routes that others wont because of not having full flights.Anyway dont want to keep debating on this.
I think you are assuming lot of ideal scenarios for private banks. For any private concern the bottomline is more important than anything and they will work to find loop holes no matter how much regulation you place.
We are just looking at the financial fraud of the century the LIBOR rate manipulation all private profitable banks as you call it! JPMC is under investigation for blatant misselling of CDS.
A private company is not in business to be socially responsible, it takes management will to be. Take GE and do a search to see how many violations they have done.
I dont want to continue the debate as I have time constraints but please understand I am not against private sector just feel govt needs to back certain areas to improve reach to certain sections of the society.

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