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Author Topic:   United States Debt Default
Straggler
Member
Posts: 10327
From: London England
Joined: 09-30-2006
Member Rating: 2.5


Message 121 of 211 (625945)
07-26-2011 2:04 PM
Reply to: Message 118 by cavediver
07-26-2011 1:44 PM


Re: So Where Are We Now?
That does actually make sense.

But it seems like the credit agencies are as much a part of the economic system (i.e. have a direct impact on economies) as they are passively making judgements and reporting to potential investors.

To what extent do credit agencies take into effect the credit ratings they give out having an effect on the economy of the country in question and thus it's credit worthiness?

And how subjective is this analysis? Is it number crunching or humans estimating? Or - I guess - A bit of both?


This message is a reply to:
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Replies to this message:
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cavediver
Member (Idle past 2268 days)
Posts: 4129
From: UK
Joined: 06-16-2005


Message 122 of 211 (625950)
07-26-2011 2:17 PM
Reply to: Message 121 by Straggler
07-26-2011 2:04 PM


Re: So Where Are We Now?
To what extent do credit agencies take into effect the credit ratings they give out having an effect on the economy of the country in question and thus it's credit worthiness?

To the greatest extent they can. They are performing large scale financial modelling and they will capture everything remotely possible that can be seen to have an impact.

And how subjective is this analysis?

A very good question. There are of course multiple credit rating agencies, and it pays to be aware of all of them. I am sure the academic financial journals are full of comparison articles and retrospective analyses.


This message is a reply to:
 Message 121 by Straggler, posted 07-26-2011 2:04 PM Straggler has not yet responded

Replies to this message:
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crashfrog
Member (Idle past 91 days)
Posts: 19762
From: Silver Spring, MD
Joined: 03-20-2003


Message 123 of 211 (625953)
07-26-2011 2:28 PM
Reply to: Message 122 by cavediver
07-26-2011 2:17 PM


Re: So Where Are We Now?
These are the same ratings agencies that committing a multi-trillion-dollar fraud by rating as "AAA" various credit default swaps that were full of toxic mortgages, right? Because they were paid to do so by the sellers of those instruments?

This message is a reply to:
 Message 122 by cavediver, posted 07-26-2011 2:17 PM cavediver has responded

Replies to this message:
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Panda
Member (Idle past 2337 days)
Posts: 2688
From: UK
Joined: 10-04-2010


Message 124 of 211 (625955)
07-26-2011 2:39 PM
Reply to: Message 123 by crashfrog
07-26-2011 2:28 PM


Re: So Where Are We Now?
crashfrog writes:

Because they were paid to do so by the sellers of those instruments?


Hey!
You are always railing on about how corrupt the financial institutions are!
Have you not considered that they might also be grossly incompetent and criminally negligent?!

Edited by Panda, : No reason given.


This message is a reply to:
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cavediver
Member (Idle past 2268 days)
Posts: 4129
From: UK
Joined: 06-16-2005


Message 125 of 211 (625958)
07-26-2011 2:42 PM
Reply to: Message 123 by crashfrog
07-26-2011 2:28 PM


Re: So Where Are We Now?
These are the same ratings agencies that committing a multi-trillion-dollar fraud by rating as "AAA" various credit default swaps that were full of toxic mortgages, right? Because they were paid to do so by the sellers of those instruments?

Complete rubbish. The Credit Default Swaps, Mortgage Backed Assets, Credit Linked Notes, etc were all AAA rated as that was the rating of the issuer. And all those notes had written explicitly the nature of their default mechansim. Triple A is the highest level of rating, so if a AAA rated note states that in the event of X, that note is worth zero, you can depend your life on the fact that it is definitely worth zero. The credit rating agencies are probably guilty of not treating people as idiots.

This is an identical situation to the emerging market crisis of 1999. If your manager tells you that you are only allowed to buy AAA rated notes for your portfolio, then that is what you do. And if he is too dense to understand that the AAA rating tells you ABSOLUTELY FUCKING NOTHING about the actual value of the note, only about the credit worthiness of the issuer of the note, then we have a problem. And we have now had this problem twice - 1999 and this time around.


This message is a reply to:
 Message 123 by crashfrog, posted 07-26-2011 2:28 PM crashfrog has responded

Replies to this message:
 Message 126 by crashfrog, posted 07-26-2011 3:01 PM cavediver has responded
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crashfrog
Member (Idle past 91 days)
Posts: 19762
From: Silver Spring, MD
Joined: 03-20-2003


Message 126 of 211 (625962)
07-26-2011 3:01 PM
Reply to: Message 125 by cavediver
07-26-2011 2:42 PM


Re: So Where Are We Now?
Complete rubbish.

No, fact. A AAA rating has always been understood to mean "money safe." As the Federal Crisis Inquiry Commission found:

quote:
"The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied on them, often blindly. In some cases, they were obligated to use them, or regulatory capital standards were hinged on them. This crisis could not have happened without the rating agencies. Their ratings helped the market soar and their downgrades through 2007 and 2008 wreaked havoc across markets and firms."

http://c0182732.cdn1.cloudfiles.rackspacecl.../...usions.pdf

Further:

quote:
Rating agencies lowered the credit ratings on $1.9 trillion in mortgage backed securities from Q3 2007 to Q2 2008, another indicator that their initial ratings were not accurate.

http://en.wikipedia.org/..._agencies_and_the_subprime_crisis

If the ratings were, as you say, intended only to refer to the reliability of the issuer and not the security of the investment, then there would be no reason to downgrade the ratings after the fact. That almost all ratings agencies are now doing so disproves your position.

The credit rating agencies are probably guilty of not treating people as idiots.

No, in fact they're guilty of not actually having done what you claim they do - explicitly disclosed the nature of their default mechanism. In many cases ratings agencies misrepresented or even outright lied about the underlying default mechanisms and rates involved in these toxic securities.

Edited by crashfrog, : No reason given.


This message is a reply to:
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crashfrog
Member (Idle past 91 days)
Posts: 19762
From: Silver Spring, MD
Joined: 03-20-2003


Message 127 of 211 (625965)
07-26-2011 3:04 PM
Reply to: Message 125 by cavediver
07-26-2011 2:42 PM


Re: So Where Are We Now?
Additionally:

quote:
In August 2004, Moody's Corp. unveiled a new credit-rating model that Wall Street banks used to sow the seeds of their own demise. The formula allowed securities firms to sell more top-rated, subprime mortgage-backed bonds than ever before.

A week later, Standard & Poor's moved to revise its own methods. An S&P executive urged colleagues to adjust rating requirements for securities backed by commercial properties because of the ``threat of losing deals.''

The world's two largest bond-analysis providers repeatedly eased their standards as they pursued profits from structured investment pools sold by their clients, according to company documents, e-mails and interviews with more than 50 Wall Street professionals.


http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ax...


This message is a reply to:
 Message 125 by cavediver, posted 07-26-2011 2:42 PM cavediver has responded

Replies to this message:
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cavediver
Member (Idle past 2268 days)
Posts: 4129
From: UK
Joined: 06-16-2005


Message 128 of 211 (625968)
07-26-2011 3:35 PM
Reply to: Message 126 by crashfrog
07-26-2011 3:01 PM


Re: So Where Are We Now?
No, fact. A AAA rating has always been understood to mean "money safe."

Yes, Crash, as ever you know more than those of us in the industry I wrote god knows how many derivative notes - do you think that Moody's inspected each and every one? Was able to value it to work out its risk profile despite the fact that we made our money because at the time we were the only ones who could value it? And individually give each separate note a credit rating. For free? Just what the fuck do you think you are doing trying to look like you have a clue?

Every note I wrote was triple A rated because my institution was triple A rated. End of.

As the Federal Crisis Inquiry Commission found:

Yes, and they were woefully ignorant to write that. How stupid do you have to be to buy a note that explicitly explains its behaviour in the event of default, and then blame the ratings agency when it defaults

The ones to blame are those that bought the notes in full knowledge of their default potential, but were rewarded only on upside performance. As long as those notes were paying enormous returns, who the hell cared about risk of default, right? They were told they could only buy AAA and so they bought AAA. And those enormous returns - they weren't at all a FUCKING HUGE CLUE AS TO THE UNDERLYING RISK PROFILE.

No, in fact they're guilty of not actually having done what you claim they do - explicitly disclosed the nature of their default mechanism.

That mechanism is there to see on the note. That is what makes the default. A ratings agency can rate whetever the hell it likes, or whatever it is paid to rate. When the ratings agency is asked to rate a bunch of securities, you have to be very clear what is being rated.

In many cases ratings agencies misrepresented or even outright lied about the underlying default mechanisms and rates involved in these toxic securities.

If you are holding a note, here's a clue. Read the fucking thing. And if it refers to underlying securities, go and see how they are performing. And if you ask a credit rating agency what they think of the note, make sure you understand the note before interpreting their answer. And if you don't understand a note, here's another clue - don't buy the fucking thing.


This message is a reply to:
 Message 126 by crashfrog, posted 07-26-2011 3:01 PM crashfrog has not yet responded

  
cavediver
Member (Idle past 2268 days)
Posts: 4129
From: UK
Joined: 06-16-2005


Message 129 of 211 (625969)
07-26-2011 3:39 PM
Reply to: Message 127 by crashfrog
07-26-2011 3:04 PM


Re: So Where Are We Now?
In August 2004, Moody's Corp. unveiled a new credit-rating model that Wall Street banks used to sow the seeds of their own demise. The formula allowed securities firms to sell more top-rated, subprime mortgage-backed bonds than ever before.

If you don't understand it, don't buy it. You can't go wrong.

Let's just be very clear. The basic credit rating agency job is a "simple" one, and performs a very valuable function. That doesn't mean that the actual companies involved will not enter dubious business activity.

BUT the "blame the credit agencies" schtick is one big obfuscation to take the blame away from the banks and investment houses where it was simple greed and "blow the consequences, it won't affect me" attitude that drove the entire fiasco.

Edited by cavediver, : No reason given.


This message is a reply to:
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Jon
Inactive Member


Message 130 of 211 (625970)
07-26-2011 3:40 PM
Reply to: Message 119 by crashfrog
07-26-2011 1:56 PM


Re: By the Nose
How could the Treasury Department, the only body legally allowed to print money, print money that was counterfeit? That's what AZPaul is saying is going on, here.

That's not what I understand AZPaul to be saying. I understand his argument to be that the coins do not have any value until purchased by the Fed.

You haven't yet shown us the laws that require the Fed to purchase the coins from the Treasury, nor have you shown us the laws that permit the Treasury to enter coin into circulation.

Unfortunately, Paul hasn't really given any legal citations either; there is, however, a precedent that supports his argument. Whatever precedent might support your argument hasn't been put forward yet for consideration.

The Treasury prints or strikes it such that it says "legal tender" on it. Contra AZPaul, the Federal Reserve doesn't have a monopoly on the creation of dollars and never has.

Paper and coin are treated differently.

If, like most people, you have some $2 bills socked away somewhere, then you're the holder of a Treasury note, which is also a kind of completely legal dollar, the number of which allowed to be in circulation is determined by statute.

The last $2 bills I saw were Reserve Notes, like all modern paper money in the U.S.

Jon


Love your enemies!

This message is a reply to:
 Message 119 by crashfrog, posted 07-26-2011 1:56 PM crashfrog has responded

Replies to this message:
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New Cat's Eye
Inactive Member


Message 131 of 211 (625979)
07-26-2011 4:15 PM
Reply to: Message 119 by crashfrog
07-26-2011 1:56 PM


Re: By the Nose
I don't really know much about this stuff, but I have been reading wikipedia!

How could the Treasury Department, the only body legally allowed to print money, print money that was counterfeit?

The way I understand it, the Federal Reserve is in charge of the money supply and the Treasury Department is not supposed to go around them in creating money.

The Treasury prints or strikes it such that it says "legal tender" on it.

It doesn't seem right that they could just put "legal tender" on something and then it is. I figure that there has to more of a process than just that.

Contra AZPaul, the Federal Reserve doesn't have a monopoly on the creation of dollars and never has. It has a monopoly on reserve notes, which is the predominant form of money in the United States, but it's not the only possible form.

So if they stamp the word "legal tender" on a chunk of the Washington Monument then it would be legal tender?

What if the bank refuses it?

If, like most people, you have some $2 bills socked away somewhere, then you're the holder of a Treasury note

I have some at home, I'll take a look at them when I get there later.

Unless they're coins. Coins issued by the Treasury aren't reserve notes, they're fiat money.

Isn't that kinda just a left-over consequence of the way that coinage and then later paper money emerged within the US? It wasn't planned specifically to be like that, right?

A $1 trillion coin struck by the Treasury has that value because the Treasury says so.

IMHO, it has that value when you can get $1 trillion worth of stuff for it, regardless of anyone's "say so".

That's what "fiat currency" means; that's what Buz is always complaining about, that our dollars are dollars not because they're backed by a dollar's-worth of something, but because the Treasury department says they're dollars. And everybody agrees to play along.

What if the bank refuses to accept the $1 trillon dollar coin?


This message is a reply to:
 Message 119 by crashfrog, posted 07-26-2011 1:56 PM crashfrog has responded

Replies to this message:
 Message 134 by crashfrog, posted 07-26-2011 4:24 PM New Cat's Eye has responded

  
crashfrog
Member (Idle past 91 days)
Posts: 19762
From: Silver Spring, MD
Joined: 03-20-2003


Message 132 of 211 (625981)
07-26-2011 4:18 PM
Reply to: Message 130 by Jon
07-26-2011 3:40 PM


Re: By the Nose
That's not what I understand AZPaul to be saying. I understand his argument to be that the coins do not have any value until purchased by the Fed.

And he's completely wrong. The Treasury released its own notes for almost the entire nation's history, and they remain legal tender. You can still spend a $2 treasury note like it's worth $2 because it is $2, by fiat. The fact that the Federal Reserve never issued it is irrelevant - they don't have a monopoly on dollars in the United States.

You haven't yet shown us the laws that require the Fed to purchase the coins from the Treasury, nor have you shown us the laws that permit the Treasury to enter coin into circulation.

This is nonsense, and it bears no relationship to the legalities of monetary policy in the United States.

The proof of it is the $2 bill.

Paper and coin are treated differently.

Yes, exactly. So while statutory Note limitations prevent the Treasury from minting a $1 trillion bill, there's no law against the Treasury striking, issuing, and spending a $1 trillion platinum coin. Which must perforce be legal tender because it says legal tender on it and has been designated as legal tender by the United States Treasury.

AZPaul has it completely backwards. Treasury notes aren't legal tender because they're accepted by the Federal Reserve Bank; Federal Reserve Notes are considered legal tender because they're accepted by the United States Treasury. AZPaul gives many indications that he has no idea what he's talking about, if you look closely enough to see. The fact that he conflates coins with bills is one of those indications; the fact that he thinks a private company has the authority to make up money is another. It's nonsensical.

The last $2 bills I saw were Reserve Notes, like all modern paper money in the U.S.

Yours must be relatively new, then; $2 bills were United States Treasury notes until 1976. But United States Treasury notes have not ever stopped being currency; they just stopped being printed. There's a statutory limit on the number of US Treasury bills that can be in existence at any one time, but no such limitation on the number of platinum Treasury coins.


This message is a reply to:
 Message 130 by Jon, posted 07-26-2011 3:40 PM Jon has responded

Replies to this message:
 Message 133 by New Cat's Eye, posted 07-26-2011 4:23 PM crashfrog has responded
 Message 138 by Jon, posted 07-26-2011 6:53 PM crashfrog has responded

  
New Cat's Eye
Inactive Member


Message 133 of 211 (625982)
07-26-2011 4:23 PM
Reply to: Message 132 by crashfrog
07-26-2011 4:18 PM


Re: By the Nose
The Treasury released its own notes for almost the entire nation's history, and they remain legal tender.

But wasn't all that before the establishment of the Federal Reserve? Isn't that irrelevant today?

The proof of it is the $2 bill.

But isn't that just "grandfathered" in? They Treasury can't make $2 bills today and they're being "phased out", no?


Sorry for the cross-post, please bundle them up if you can.

Edited by Catholic Scientist, : No reason given.


This message is a reply to:
 Message 132 by crashfrog, posted 07-26-2011 4:18 PM crashfrog has responded

Replies to this message:
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crashfrog
Member (Idle past 91 days)
Posts: 19762
From: Silver Spring, MD
Joined: 03-20-2003


Message 134 of 211 (625983)
07-26-2011 4:24 PM
Reply to: Message 131 by New Cat's Eye
07-26-2011 4:15 PM


Re: By the Nose
The way I understand it, the Federal Reserve is in charge of the money supply and the Treasury Department is not supposed to go around them in creating money.

They're not supposed to but I've shown that the law says that they can, via this specific mechanism of platinum coins.

It doesn't seem right that they could just put "legal tender" on something and then it is.

Who else would have the authority to create money in the United States, CS, if not the United States Treasury?

You know that the Secret Service is a department within the Treasury, right? Do you know why? Because their original task was the detection and prosecution of counterfeiting.

So if they stamp the word "legal tender" on a chunk of the Washington Monument then it would be legal tender?

Sure! The United States Treasury determines what is and isn't money in the United States, according to the laws created by Congress. If the Treasury was authorized by Congress to mint and issue little pieces of concrete as money, then those little pieces of concrete would be money, the same way little pieces of paper and nickel are, now.

What if the bank refuses to accept the $1 trillon dollar coin?

By law, they cannot. When the Treasury issues money, it is by definition legal tender for all debts public and private. If you have a debt with someone, they're legally obligated to accept United States notes as payment of that debt.


This message is a reply to:
 Message 131 by New Cat's Eye, posted 07-26-2011 4:15 PM New Cat's Eye has responded

Replies to this message:
 Message 136 by New Cat's Eye, posted 07-26-2011 4:47 PM crashfrog has responded

  
crashfrog
Member (Idle past 91 days)
Posts: 19762
From: Silver Spring, MD
Joined: 03-20-2003


Message 135 of 211 (625984)
07-26-2011 4:28 PM
Reply to: Message 133 by New Cat's Eye
07-26-2011 4:23 PM


Re: By the Nose
But wasn't all that before the establishment of the Federal Reserve? Isn't that irrelevant today?

No. The Federal Reserve is just a bank, basically, whose loans are given in the form of "notes" which are accepted by the Treasury as legal tender.

The Federal Reserve Act didn't cede the Treasury's authority to create money to the Federal Reserve Bank. Federal Reserve Notes are legal tender because the Treasury defines them to be, not because the Federal Reserve Bank says they are. They don't have that authority.

They Treasury can't make $2 bills today and they're being "phased out", no?

The Treasury can continue to issue notes up to the statutory limit, they just don't as there is no longer a need for them. But even after the Federal Reserve Act, the Treasury was issuing United States Notes.


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 Message 133 by New Cat's Eye, posted 07-26-2011 4:23 PM New Cat's Eye has not yet responded

  
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