Actually, Social Security has been paying it’s own way until recently. The problem which should be attacked is the giant increase in the federal budget and debt during the last two years unrelated to entitlement spending. Oboma has doubled the size of the EPA whose job it is to inhibit the development of U.S. energy resources.

Address the current huge increase in the size of government then deal with entitlements.

Thank you very much!
Maria

No they will not. You use the ratings the regulators tell you to use. If Kroll’s ratings are politically incorrect, no one will dare use them. If, then, the regulators tell banks to loan large sums of money to members of non asian minorities with no income, no job, and no assets, Kroll will rate those loans as just fine.

OT…. and FYI…

http://www.nytimes.com/2009/11/20/business/global/20rating.html?ref=business

Moodys former compliance officer testified to the House Oversight and Reform Committee last month that Moodys did no surveillance of its muni ratings. They issued them and then left them static although they continued to bill the issuer.

This means that retail investors who were sold those securities had no specific or general sense of the accuracy of the rating or the pricing that derived from the rating.

I’m sure that once the ratings are available for analysis we will see lots of market and academic scrutiny of ratings accuracy. Long overdue.

The SEC is requiring the raters to expose the histories in XBRL for more ready comparison. Here is a presentation that I gave at a conference at the FDIC last month on the topic:

http://shopyield.com/2009/10/06/xbrl-and-credit-ratings/

You’ve asked several excellent questions. And you hit the nail on the head regarding some of our strongest issues with the current ratings system. The current ratings system has no way of representing the magnitude of losses on a security. The ratings provided by the rating agencies reflect the likelihood of a bond not paying 100% of principal, but make no representation of how much principal they are projecting will be lost once that bond is determined not to pay back 100% of principal. For example: Are you going to lose all of your money or just 1%? The current system does not tell us this. This becomes a serious issue when dealing with multiple-obligor securities. The example you provided refers to a multi-obligor security (in this case a Mortgage-Backed Security) which is comprised of a large amount of excellent borrowers who are still paying their mortgages as contracted. Unfortunately, in your example, the rating on the bond would be downgraded to CCC or lower, even if all 900 paying borrowers continued to pay their mortgages until full payment is made.

For an individual investor, the rating may not be prohibitive. However, for banks that own this security, once it’s been downgraded to below investment grade (and possibly purchased originally with a AAA rating), the entire balance of their investment will be classified as substandard. You read that right. Even the “performing” portion of the security will be classified since the entire security has been rated CCC (or worse).

As you might suspect, this in turn creates a much larger problem in the securitization market since many banks will not want to continue to own these securities after they have been downgraded since they will become classified as substandard (and now perceived as “toxic”). And certainly because of the substandard classification issue, other banks are extremely hesitant to buy more of these securities. So what we are now left with is a huge decrease in demand for these securities, and a lot of banks being forced to sell these securities because of downgrades (increasing supply in the market). This, in a nutshell, is why prices have plummeted for mortgage securities and the secondary mortgage market is no longer functioning as it used to.

I hope that helps. Your example and questions touch on the very reason we feel so strongly about the need to revamp the current ratings system. This must happen before we can realistically expect to get the secondary mortgage market moving again, which in turn must happen before our economy truly recovers.