User 165905

Buffett's Soggy Logic on Guarantors' Ratings

Nice try, but your selective quotes are telling and your comments a bit dis-ingenuous
Poin1) The rating should be based on the guarantor's ability to pay claims, not necessarily the rating agencies "judgment"; the judgment has been wrong, and the ratings trends provide some reason to believe that is definitively the case here. His comments recently have focused on the rate of interest an guarantor has to pay to raise money, suggesting that 14% may hint at substantially reduced "intrinsic" value. By definition, the substantially higher cost of debt and equity capital reduces future ROE materially, especially with so little new business being written. The margin of safety, which many believed existed (i.e underwriting to zero loss ratios) proved fallacious, hence the need to revisit initial assumptions even in the event he believed they were AAA's before (which he didn't)
2) Valuations can get out of whack. But its not just that. Confidence in a company's solvency (margin of safety) are integral to its buinsse model, and its claims paying ability is certainly now hampered by the substantial reserve additions, increased cost of capital, and reduced profitability.
3) Guarantors are a small fraction of the rating agencies revenues. The intrinsic value of MCO has probably diminished, but perhaps not sufficient to merit his disinvestment.
4) Its not really trash talking, its taking advantage of a market opportunity.
For the record, many insurance companies (including AIG under Greenberg) refused to write the insurance business for securitized products, precisely because of the lack of relevant historical loss data, inaction that now seems quite prescient.