Sunday, August 29, 2010

What a flabby pillar!

When the credit ratings are perfect, borrowers pay the exact interest rate and lenders earn the exact interest rate and so there is no profit for anyone.

Therefore the implicit profit driver in any operation using credit ratings is for these to be off as much as possible.

That is when you can sell a badly awarded mortgage of $300.000 at 11% for 30 years for $510.000 because when packed in a triple-A rated security you could convince someone 6% was a great rate.

And so I ask… how on earth could the regulators use as a pillar of their regulations the assumption that the credit ratings were to be right and people would trade without a profit motive? Seems to me like a very a flabby pillar!