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.Â
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.