Aug 9, 2011

U.S. Debt and Ratings Agencies: Not a Big Deal for Interest Rates

Common sense logic from Bill Conerly at the Businomics Blog but the SEC is partly to blame for their regulatory sympathies towards companies who get ratings from the big 3 - Moody's, S&P and Fitch - when filing. News is trickling in that the SEC is changing the wording on some of its regulations to 'adjust' this emphasis. And the recent anger of the White house against S&P's downgrade will probably give this a process a nice kick. More intriguing is the question: are sophisticated information providers prone to becoming natural monopolies? (In the world of IT and ERP solutions, let's not forget SAP and Oracle.)

U.S. Debt and Ratings Agencies: Not a Big Deal for Interest Rates:

"What if the rating agencies downgrade U.S. Treasury bonds? Does that mean our government will have to pay higher interest rates? Perhaps not.

When a borrower’s fundamental ability to repay a debt deteriorates, it’s reasonable to expect a higher interest rate on the borrower’s debt. But what if the ability to repay deteriorates (as is the case with the United States), and then some time later a ratings agency downgrades the debt? That’s what we are afraid of regarding the United States government. To answer that question, we need to understand the role of ratings agencies.

The buyers of debt (portfolio managers of mutual funds, investment trusts, insurance companies, etc.) need to understand the risk of the bonds that they buy. They often outsource that analysis to ratings agencies. Many of the portfolio managers are capable to analyzing credit as well as the ratings agency analysts, but they don’t want to spend all of their time doing that. So for small holdings, they use ratings.

However, it’s a different story for large holdings. The investors are likely to pull the raw information about a borrower, roll up their sleeves, and analyze the credit quality themselves, either as a primary decision-making tool, or as a double-check on the rating. Here’s the key point: any analysis that a rating agency does could be done by any other investor. Moody’s and Standard and Poor’s and Fitch don’t have a secret formula. They do not have secret data. They do not have analysts with super powers. In the case of the United States Treasury, the ratings agencies don’t have any knowledge that a well-trained analyst cannot obtain.

Moody’s analysis of U.S. Treasury securities is headed by Steve Hess, whom I worked with at First Hess Interstate Bank some years back. Steve is a good economist; I respect his ability. He is certainly one of the better economists who study sovereign debt risk, but he’s not so much better than the rest that everyone bows to his judgment and wonders in awe how he manages to be so astute.

If Moody’s downgrades the debt of, let’s say Conerlyville, Mississippi, that will push interest rates on the debt up. Nobody else is analyzing Conerlyville, because it’s such a small borrower, so investors take Moody’s word for it.

If Moody’s were to downgrade the United States of America, however, that would not push our interest rates by itself. All the large investors are already forming a judgment about the risk of the debt. They are not outsourcing that particular analysis to the ratings agencies.

What matters for the Treasury’s borrowing costs is the fundamentals, not the ratings. The fundamentals aren’t as great as they used to be, but neither are they so bad that anyone expects to lose money buying a Treasury bond."

Aug 4, 2011

On Colin Thubron

Christopher Tayler: Colin Thubron: "Some writer-travellers – V.S. Naipaul, for instance – like to project themselves as illusionless figures, immune to prettifying, exoticising urges. Colin Thubron isn’t shy about not liking places: he often endures bouts of melancholy on his journeys and writes about the way ‘a little architectural charm, or a trick of the light, could turn other people’s poverty to a bearable snapshot.’ But an illusionless posture isn’t his style. ‘Like a lot of English travel writers,’ he once said, ‘I began with a romantic idea about travel,’ and the temperament that got him going in the first place – his ‘rather naive love of the exotic and mysterious’, of ‘the strange and the beautiful’ – plays a large role in his depictions of himself on the page."

Thubron is one of my favourite travel writers. He brings a meditative air into his books, like a Zen Buddhist travelling across a strange land, observing and absorbing. He picks odd places to go to - a prison, a school, a mental asylum - to see how this society and its people live. He is the writer I would pick at the beginning of a journey. And perhaps end with someone like Paul Theroux where a long absence from home makes the end of a journey irritable sometimes.

Bombay: Tata Press Lane. Prabha Devi

Monsoon 2011. Peeing in the ocean


A Burger and a Happy Homecoming

A Burger and a Happy Homecoming: "A soldier returning from Afghanistan sees America with a newly grateful set of eyes."

Reading this made me think of the homecoming description of the infrantry soldier in All Quiet onthe Western Front. He talks of coming back to a devastated and poor family, an ailing mother, a small town where all the young men are gone. This young West Point graduate, on the other hand, captures the optimism of America, the feeling that anything can happen in my lifetime, not a generation hence.