Thursday, May 6, 2010

The Rating Agencies Are Finally Becoming Targets: They Should Downgrade Themselves; How to Play Them

The rating agencies, those that slapped AAA ratings on pure junk papers, are finally becoming targets. Bill Gross says we do not need them. The Europeans are voicing their displeasure with them as they are now downgrading countries.

Says Gross in his latest letter:

... some of you will remember my description of their role in the subprime
crisis. “Many of these good-looking girls are not high-class assets worth 100
cents on the dollar. You were wooed, Mr. Moody’s and Mr. Poor’s, by the makeup,
those six-inch hooker heels and a ‘tramp stamp.’” Now, it seems, I was a little
long on humour and a little short on the reality. Tramp stamp and hooker heels
do not begin to describe the sordid, nonsensical role that the rating services
performed in perpetrating and perpetuating the subprime craze, as well as
reflecting the general deterioration of investment common sense during the past
several decades. Their warnings were more than tardy when it came to the Enrons
and the Worldcoms of ten years past, and most recently their blind faith in
sovereign solvency has led to egregious excess in Greece and their southern
neighbours. The result has been the foisting of AAA ratings on an unsuspecting
(and ignorant) investment public who bought the rating service Kool-Aid that
housing prices could never really go down or that countries don’t go bankrupt.
Their quantitative models appeared to have a Mensa-like IQ of at least 160, but
their common sense rating was closer to 60, resembling an idiot savant with a
full command of the mathematics, but no idea of how to apply them.
But I come not to bury the rating services, but to dismiss them".
It is true that there are not really needed, they are mostly used so that people who don't do their due diligence can claim whatever they are buying is rated AAA (so don't blame 'them').

Can they recover from here, or will they simply sink? Another potential scenarios for straddles. here are some for MCO (click to receive alerts) for various timeframes, from May to August.

Computed with StraddlesCalc Tool

Please do your own due diligence. This is not advice. Options are very dangerous and may cause 100% loss.

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