Friday, August 12, 2011

We are fleeced big time: left, right and centre

Credit ratings: wealth transfer mechanism from taxpayers to private corporations

City folks: read and cheer you up if you suffer from Friday blues tonight.

Posted by ant @ 08:21 AM (1284 views)
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12 thoughts on “We are fleeced big time: left, right and centre

  • Some of Greg articles have been good but this one is one of twisted logic.

    1. Most holders of US Bonds are the Fed/Social Security (all these owe money to itself illusion) and foreign governments (China,Japan,UK, OPEC). Since when these are ‘private cooperations?’

    After these guys, it was the pension funds, again, since when there are ‘private cooperation’ ?

    2. Treasury yields in fact turns negative after the downgrade, was that not a wealth transfer from the ‘private cooperation’ to the state?

    Rating agencies opinions are crap but Greg… you need to do better on this one..

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  • I do not see any twisted logic in Greg’s article. You simply did not understand it. You trying to convince others that the lower rating you have the lower the costs of your borrowing are. This is an absolute nonsense as otherwise the cost of Greek debt to the Greeks would be very low. But you may occasionally see some exceptions to this rule.

    So if a higher rating means implies lower costs of borrowing, if a group is given unfairly high rating they pay unfairly too little for their debt. Therefore they are beneficiaries of their unfairly too high rating. And ask yourself where their extra money (that they do not pay) comes from? i.e. from other market players.

    I hoped that was quite trivial as Pytel really made it clear.

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  • @1 – easybetman

    you really have to do better than this. Greg’s logic is actually is straightforward. You see this in real life. E.g. some privileged guys have very often access to services and opportunities in real life which are accessible to ordinary folk but far more expensive. This is a wealth transfer from the others to the privileged. E.g. you can see poor people that are provided housing at the lower costs than others. This is a wealth transfer from others to people getting cheap housing. And so on.

    Trivial, inni’t?

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  • @ant –
    I am not suggesting the lower the rating, the cheaper borrowing is. I am suggesting that Rating are ultimately an opinion/nonsense. Savvy investors (and more investor are now savvy compared to 2007) are evaluating the credit worthiness of the borrower on a minute by minute basis, regardless of what rating agencies say. It is really simple – just ignore the rating agencies rather than blaming them.

    US is still a AAA (in term of ability to meet nominal repayment of its bonds) and Greg clearly quoted Obama/US as an example to support his thesis of transfer of wealth – which was erroneous.

    By the way, Greece was still A by Oct 2009 even though is will obvious that they would crash. So rating agencies was clearly misleading
    investors in lending to credit unworthy nation which with the hair cut now, By Greg’s logic, this must be transfer of wealth from the “private cooperation” to Greece state then? During the subprime crisis, rating agencies erroneous allowed the mortgages to be rated AAA, and hence allow credit unworthy people to borrow and consume and have a good life, again, by Greg’s logic, that must have been a transfer of wealth from the private corporations (i.e. banks, Norwegian municipal who bought the AAA bonds) to the ‘poor’ then ?

    Things works both ways.

    France still have AAA but investors clear don’t think so (no rating agency to blame here).

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  • – easybetman

    you really have to do better than this. Credit ratings are part of contracts for debt not only an opinion. Greg’s logic is actually is straightforward. You’re picking up on individual examples that may be exceptions from the rule. It is a fact that overall sovereign debt is underrated in comparison to private corporation debt under the same risk conditions. And I think it is true that for some time when Greece was triple A rated when it did not deserve it was effectively a wealth transfer to Greece! And when investors realised that they started pushing the entire EU to guarantee Greek debt. If this is effective this will imply that such triple A rating of Greece was correct. So if you agree that higher rating implies cheaper costs of borrowing you agree with Pytel.

    You can see Greg’s logic in real life. E.g. some privileged guys have very often access to services and opportunities in real life which are accessible to ordinary folk but far more expensive. This is a wealth transfer from the others to the privileged. E.g. you can see poor people that are provided housing at the lower costs than others. This is a wealth transfer from others to people getting cheap housing. And so on.

    Trivial, inni’t?

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  • @Ant,

    Firstly, I am wondering if you check your facts (and hence whether you actually know what you are talking about) before posting. Greece was never AAA / triple A rated. But it was a single A rated until Oct 2009.

    Obviously higher rating may influence borrowing cost (from dumb investors) but erroneously high rating is a transfer of wealth from the lender (whoever that maybe – which is the sentimental point Greg tries to make. The holders of these debts are not just ‘banks’. Maybe if we say Rating Agency caused transfer of wealth from state to old pensioner, then it sounds better eh ?) to the borrower.

    I normally thinks Greg write better articles than Guardian or DailyMail.

    I don’t suppose you want banks to lend 90% mortgage (5% ish) at 2.5% (rates 60% LTV mortgage) as that also cause transfer of wealth from the poor home owner to the banks?

    The bottom line – savvy investors ignore rating agencies. The dumb one will pay the price (maybe they got away in 2008, and maybe not the full price, but they will now pay a price / suffer a transfer of wealth from ‘private’ to ‘state’).

    We are talking about rating agencies here – let’s leave the old Eton boy debate on another thread.

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  • easybetman,

    Don’t forget that ‘Ant’ and ‘Greg’ are the same guy (or girl..)

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  • – easybetman: you may be right with Greece rating (A rather than AAA) but it doesn’t change the underlying logic of the argument. if the savvy investors ignore rating agencies who is funding their existence? why ratings are required to issue debt? or otherwise you would be given a very poor rating. and that poor rating would reflect negatively on the costs of the debt that you issued.

    if you were right about the role of credit rating agencies they would have no money to exist. but instead they are very profitable businesses. so something clearly does not add up in your argument.

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  • – uncle tom: who cares if ant is a girl and greg is a boy? in one person:-)

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  • Aha! – you’re a ladyboy then..

    ..that figures…;-)

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  • Nice article raising some interesting questions.

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  • 10. uncle tom said…Aha! – you’re a ladyboy then..

    ~ Who said you can’t have everything.

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