Quotes
Matt Robinson, “S&P Lawsuit Undermined by SEC Rules Impeding Ratings Competition,” Bloomberg, February 5, 2013
The U.S. lawsuit against Standard & Poor’s raises pressure to accelerate competition in the ratings industry while the government itself has adopted rules that left the business dominated by the same companies whose flawed grades sparked the worst financial crisis since the Great Depression. . . .
Ann Rutledge, a structured finance specialist, has watched her application to become an NRSRO languish at the SEC for 20 months. Her company, R&R Consulting, has yet to be granted a license because some of the eight client letters don’t meet the requirements of a credit rating as defined by the 2006 law. The statute specifies that only written testimonials that are notarized from institutional buyers attesting to its ratings may be used. R&R’s clients include pension funds, hedge funds and governments. [click here for the full article]
Geraldine Fabrikant, “The Bond Market Discovers a New Leading Man,” New York Times, July 28, 2012
Recessions, crackups, bailouts–these are profitable times for Mohamed A. El-Erian . . . [CEO and co-chief investment officer of Pimco]. . . .
While Mr. El-Erian has years of experience at the I.M.F. and Pimco, some people wonder if he can successfully navigate the world’s increasingly tumultuous bond markets. Unlike Mr. Gross, Mr. El-Erian isn’t a trader by nature.
“Why would somebody with so little bond trading experience be in line for the top job?” asks Sylvain R. Raynes, a co-founder of R & R Consulting in New York, which helps investors measure risks associated with bond investments. “There are other candidates who are less flamboyant.” . . .
Phil Hall, “Weighing The Impact Of The CFPB’s Proposed Servicing Rules,” MortgageOrb, April 25, 2012
Ann Rutledge, founding principal at New York-based R&R Consulting, observes that the consumer plays a more profound role in this environment.
“The CFPB really should think of ‘consumer’ as a consumer of financial services, in general, and not just as a consumer of financing,” she says. “In today’s world, it’s hard to find a borrower who isn’t also a lender in some related sense – buying a house on credit means creating a loan asset for someone to invest in for retirement. To properly assess the attributes of the mortgage-backed securities they’re investing in, investors have a compelling need for standardization of servicer data that the Big Four trustees provide. It’s the other side of the coin in consumer protection that, right now, does not exist and, as far as I know, has not been raised as an issue.”
Bradley Keoun and Gavin Finch, “RBS Said to Scrap Sale of Bonds Backed by Own Derivative,” Bloomberg, April 3, 2012
Ann Rutledge, a former Moody’s analyst who’s now a principal at R&R Consulting in New York, said shifting risks to outside investors was a good idea in theory.
“It’s true finance,” said Rutledge, whose firm rates mortgage bonds and other asset-backed securities. “You stabilize things for the people who really want predictability and you leave more yield for the people who are willing to take a bigger risk.”
Still, elaborate financing structures don’t always work out as intended, she said.
“You’re trying to engineer more precision than may actually exist,” Rutledge said. “That kind of precision in the corporate world isn’t possible.”
Serena Ng, “Banks Want Fed to Iron Out ‘Maiden,’” Wall Street Journal, March 16, 2012
A growing appetite for risk is prompting some Wall Street banks and investment firms to show interest in buying the most complex and troubled assets tied to the bailout of American International Group Inc. . . .
“The optics would be really bad,” said Ann Rutledge, a principal at R&R Consulting, a structured-finance consulting firm in New York. “The banks were able to lay off their risks to the public during a period of extreme uncertainty, and now they are willing to buy [the CDOs] at a lower price when the downside risk is limited,” she added.
Michael T. Snyder, “11 Reasons America Would Be A Better Place Without Goldman Sachs,” Seeking Alpha, March 14, 2012
Greg Smith, the head of the U.S. equity derivatives business for Goldman Sachs in Europe, the Middle East and Africa, made headlines all over the world on Wednesday when he resigned publicly from Goldman Sachs in a scorching editorial in the New York Times. . . .
The following are 11 reasons why America would be a better place without Goldman Sachs….
#5 . . . In the years leading up to the financial crisis of 2008, Goldman Sachs was putting together mortgage-backed securities that they knew were garbage and they marketed them to investors as AAA-rated investments. On top of that, Goldman then often made huge bets against those exact same securities which turned out to be extremely profitable when those securities crashed and burned. . . .
Sylvain Raynes, an expert in structured finance at R & R Consulting in New York, said at the time that he was absolutely shocked by what Goldman was doing….
“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen”
[click here for the full blog post]
Ryan Chittum, “Audit Notes: Mortgage Bonds, Junkets, Digital Hype,” Columbia Journalism Review, January 26, 2012
Yves Smith of Naked Capitalism flags what she calls a “bombshell” analyst report on the mortgage-backed securities market. . . .
Smith quotes from the R&R Consulting report:
On the securities performing at December 2011, a universe of approximately $1.42 trillion, R&R estimate the amount of additional losses likely to materialize is $300 billion, with one-third concentrated in ten arranger names, including Countrywide, Morgan Stanley and JP Morgan. About 17,000 tranches, or 34% of the universe analyzed by R&R, may lose up to 83% of their remaining principal.
All right, Bloomberg. Get on it.
Yves Smith, “Yes, Virginia, Servicers Lie to Investors Too: $175 Billion in Loan Losses Not Allocated to Mortgage Backed Securities (and Another $300 Billion on the Way),” Naked Capitalism, January 26, 2012
The structured credit analytics/research firm R&R Consulting released a bombshell today, and it strongly suggests that prevailing prices on non-GSE (non Freddie and Fannie) residential mortgage backed securities, which are typically referred to as “private label” are considerably overvalued. . . .
To my knowledge, the R&R report is the first effort to place a dollar figure on one type of mortgage-investor-related abuses. I’m not surprised it is so large. What I am surprised at is that no investor seems to have noticed this type of pilfering.
[click here for the full blog post]
“New Research Predicts Realized RMBS Losses Will Increase,” MortgageOrb, January 25, 2012
Realized losses declared on private residential mortgage-backed securities (RMBS) are projected to rise substantially in the coming months, according to a recent analysis by R&R Consulting, a credit rating and valuation firm in New York. . . .
Rutledge warns that subordinated securities in the RMBS with probable future losses should be written down by such losses, but instead may be continuing to receive interest owed to more senior tranches. This could mean that servicers are earning fees against loans that have already been liquidated, which also reduces the amount of cash to pay senior bondholders.
Bradley Keoun, “Credit Suisse Toxic Bonuses Provide 75% Returns,” Bloomberg, January 19, 2012
Credit Suisse employees who got $5.05 billion of junk-grade loans and commercial-mortgage-backed bonds in late 2008 as part of annual bonuses have reaped gains of 75 percent on the payouts since the end of that year through Nov. 30 . . . .
“It worked out in favor of the employees,” said Ann Rutledge, a former Moody’s Investors Service analyst who’s now a principal at R&R Consulting in New York, which rates mortgage bonds and other asset-backed securities. Looking back, “market valuations would have been at all-time lows” when the internal asset pool was set up.
William Alden, “A Would-Be Ratings Agency Without Rose-Colored Glasses,” New York Times DealBook, December 8, 2011
Credit ratings agencies have few friends on Wall Street or in Washington. . . . But Ann E. Rutledge and Sylvain R. Raynes, two veteran credit analysts who founded R&R Consulting, think it is an ideal time to enter the industry. After more than a decade of running their own firm, they are applying to be officially recognized by the government as a credit ratings agency. They aim to inject a dose of reality into an industry that they say has been clouded by a desire to please clients.
Iuliia Palamar, David Abitbol, Ann Rutledge, and Sylvain Raynes, “ABSTRAK and the Greeks: The Mathematics of Valuing Structured Securities in the Secondary Market,” The Journal of Structured Finance, Fall 2011
The authors argue that the most data-responsive valuation framework for structured securities is based not on Black–Scholes (where the risk analysis is circular, being reliant on ratings) but on classical fixed income mathematics—both the price of a bond and Taylor series approximations—with an adjustment for endogenous shifts in the credit quality of seasoning structured securities.
Katy Burne, “Prime Signs of Pain Emerge,” The Wall Street Journal, Nov. 5, 2011 | Read more
Many European banks hold prime-mortgage bonds and, if the situation worsens, could be prompted to dump them to help raise capital, said Ann Rutledge, founding principal at R&R Consulting, which helps investors to value securities.
“People have begun to question prime bonds,” Ms. Rutledge said. “It’s a shift in psychology and in trust.”
Janell Ross, “Occupy Wall Street Group Looks For Financial System Fixes,” Huffington Post, November 2, 2011 | Read more
[At an October 30 meeting of Occupy Wall Street's Alternative Banking Working Group, a subgroup of attendees discussed "blue-sky" ideas for a better banking system:]
Inside [Carne] Ross’s blue-sky subgroup, a man suggested employing a progressive stack—an approach to common to Occupy Wall Street meetings that tries to ensure the voices of often marginalized groups such as minorities and women are heard. It was a refreshing change for Ann Rutledge, a former Moody’s rating analyst who co-owns and operates R&R Consulting, a securities rating and advisory company in New York. It is a male dominated industry, she said.
This week, Rutledge and a team of writers will publish a paper in The Journal of Structured Finance calling for periodic structured securities ratings so that those performing poorly or structured irresponsibly can be identified early. She would also like to see a uniform, objective and public set of standards applied by rating agencies, she said. On Sunday, she explained the concept to the group.
“Increased transparency, that would truly frighten the big traditional banks,” she said.
Bennett Voyles, “The Teflon Analyst,” Mortgage Banking, October 2011
Despite the subprime scandal, the credit rating agencies’ new era may look a lot like the old one. . . .
What made [understaffing and other problems at the rating agencies] particularly disastrous in structured finance was that mortgage risk was a very different beast than corporate credit.
“What they understand about credit is fine for a buy-and-hold investor,” says Ann Rutiedge, founding principal of New York-based R&R Consulting, a credit analytics firm.
“The problem is that in structured finance, a structured deal isn’t like a corporation. The composition of risk and value changes over time as the deal amortizes, and the agencies simply are not equipped to look at dynamic credit risk,” she says. . . .
Christopher Whalen, “Fair-value accounting, derivatives increase global debt deflation,” Reuters, Oct. 7, 2011 | Read more
At a meeting of Professional Risk Managers International Association in 2007, Sylvain Raynes of R&R Consulting, who also teaches at Baruch College, put the role of fair-value accounting into stark perspective:
Valuation is not the most important problem in finance; valuation is not the most interesting problem in finance; valuation is the only problem for finance. Once you know value, everything happens. Cash moves for value. More price does not mean more value. If you do not recognize the difference, the fundamental difference between price and value, then you are doomed.
Joshua Gallu and Zeke Faux, “SEC’s Notice to S&P May Signal Enforcement Cases Against Rating Companies,” Bloomberg, September 27, 2011 | Read more
“This was long overdue. They should have done this in 2007,” said Sylvain Raynes, a principal at R&R Consulting in New York and a former analyst at Moody’s Investors Service. “It’s not just a fishing expedition. They’re very serious about shaking up the ratings world and putting everyone else on notice.”
Sylvain Raynes, “The Flight of the Black Bear,” Quantnetwork, September 8, 2011 | Read more
The last ethereal Black Bear to wipe out spectacularly was the aptly named “Bear Stearns.” [click to read]
Phil Hall, “The Fall And Rise Of The Housing Market—Part Four,” MortgageOrb, September 8, 2011
“If we live in a world where we have houses, we have to be prepared to accept certain types of leverage and know the trade-off when dealing with risk,” adds Ann Rutledge, founding principal at R&R Consulting in New York.
Phil Hall, “The Fall And Rise Of The Housing Market—Part One,” MortgageOrb, September 5, 2011
“We are an information-heavy society,” says Ann Rutledge . . . . “But we were not sophisticated with information technology during this crisis. There was a failure to use technology to properly measure when risks were being created.”
Deirdre Bolton and Matt Miller, “Raynes Says S&P ‘Wrong Messenger’ for U.S. Debt Concerns” (video interview), Bloomberg Television – Inside Track, August 31, 2011
Raynes: “[Rating analysis] has to become a more sober and ordinary business, with hard analysis. . . .
“It’s not the job of the SEC to decide who’s good and who’s not good at valuation. They’re not a valuation shop. They’re a law enforcement shop. So they should let a thousand rating agencies bloom. Some will survive, some will not. But at least the impact of one agency like S&P, no matter how big it is, eventually will be diluted and will become smaller.”
Zeke Faux and Jody Shenn, “Subprime Mortgage Bonds Getting AAA Rating S&P Denies to U.S. Treasuries,” Bloomberg, August 31, 2011
S&P has said it made mistakes in structured finance since the crisis including misunderstanding cash flows and using conflicting methods to analyze the securities. . . . “These are errors that could cause airplanes to crash if this was aerospace engineering,” said Sylvain Raynes . . . .
William Alden, “Reported Standard & Poor’s Investigation Lends Credence To Senate Financial Crisis Report,” Huffington Post, August 18, 2011
Ann Rutledge [of R&R Consulting] said the economy’s most fundamental problems have not been solved.
“If we don’t have a system for channeling capital appropriately to productive uses,” she said, “then lawsuits don’t matter.”
Emily Witt, “Standard & Poor’s Ran a Credit Check on America: Outlook Negative,” New York Observer, August 16, 2011
Among S. & P.’s peers, the downgrade was portrayed as both fickle and tardy. “It’s either too late or meaningless or probably both,” said Sylvain Raynes, . . . who noted that the downgrade came after the arguments in Congress were resolved rather than before. “You can’t measure the probability of default by the fact that there is a default,” said Mr. Raynes.
Julia Taylor Kennedy, “The U.S. Credit Rating Downgrade: What Does it Mean?” (audio and transcript of interview with Ann Rutledge), Carnegie Council – Just Business, August 9, 2011
[Ann Rutledge:] I actually think that if we hadn’t had the downgrade [of U.S. government debt], we would have not focused on the crisis. There was a lot of concerted denial, a lot of concerted revisionist history that prevented the people who really wanted to know what happened from finding out what happened, because the people who knew what happened never wanted it to get out. | Read more
[Rutledge continues:] The idea was that if we just wait long enough, then eventually we’ll grow out of the problem. That’s the theory. But that’s only true if we have an economy that’s producing. If we don’t have a productive economy, the limbo state could go on forever, but we would still have the myth that the U.S. economy is fine because we have a triple-A rating. Everything is just the way it was. It’s the same U.S.A. that we’ve known and loved since the end of the war—I mean World War II. … But that is not true. So I think, in some very interesting sense, the buck stopped at the rating downgrade.
Vanessa Drucker, “Blaming the Messenger,” Fundweb, August 8, 2011 | Read more
“The credit rating agencies are meant to be apolitical,” says Sylvain Raynes . . . . “They should stay on the side and do their job without passion or prejudice.”
Both politicians and public may call for blood, but abolishing the credit rating agencies will not help investors to determine value. Who would replace them? The answer, going back to the 1970’s, is internal assessment. “If you eliminate all ratings, you just move the field to a cowboy atmosphere, where people perform their own,” says Raynes.
Christopher Whalen, “Standard & Poor’s and the ratings game,” Reuters, August 8, 2011
As my friend Sylvain Raynes, who formerly worked for Moody’s rating structured products, said at a meeting of PRMIA in 2007:
“Valuation is not the most important problem in finance; valuation is not the most interesting problem in finance; valuation is the only problem for finance. Once you know value, everything happens. Cash moves for value. More price does not mean more value. If you do not recognize the difference, the fundamental difference between price and value, then you are doomed.”
Michael Hirsh, “A Battle Royale Over Credibility,” National Journal, August 8, 2011 | Read more
Sylvain Raynes, a former Moody’s executive who has become a severe critic of the ratings agencies, says that the S&P action [lowering its U.S. debt rating] has undercut the fundamental logic of the ratings system and created an inconsistency in S&P’s other ratings. That’s because the United States has always been the touchstone—the standard—by which all other securities are rated, he says. “Does the U.S. have less ability than, say, Pfizer or Exxon Mobil to pay its debt? As a result of this rating are we going to downgrade those companies?”
Ann Rutledge, “Reducing the Risk from Securitization,” Secondary Market Executive, August 2011
If securitization markets are going to work again, we need to think about how to get continuous risk measurement into securities production and surveillance.
Christian Doherty, “First Rate?”, GAA Accounting, October 2011
Rutledge helped formulate the new exam [to be taken by new hires at Hong Kong rating agencies] and wrote the licensing manual. . . . “Hong Kong wanted to do it first because it wanted to demonstrate its commitment to take action against problems such as the Lehman minibond crisis—events that took people by surprise.”
Grzegorz Siemionczyk, “Grecji uda się uniknąć kryzysu bankowego,” Parkiet, July 6, 2011
Boris Groendahl and Dakin Campbell, “Trichet May Save Face with S&P, Fitch Greece Moves: Euro Credit,” Bloomberg, July 4, 2011 | Read more
“The definition of a default is a distressed exchange or a renegotiation of terms” which is exactly what’s being proposed, said Sylvain Raynes . . . . “If [the rating agencies] do not downgrade them, they are caving in.”
Serena Ng, “‘Collateral Managers’: Independent or ‘for Hire’?,” The Wall Street Journal, June 21, 2011 | Read more
“The real question throughout the subprime crisis was whether the collateral manager’s role was legit, or whether these firms lent their names and the appearance of objectivity to facilitate the sale of securities that were defective,” said Ann Rutledge . . . .
Ann Rutledge, “Correcting The Flaw In The Rating System,” MortgageOrb, June 10, 2011 | Read more
After 1998, we had an opportunity to repackage securities in collateralized debt obligations (CDOs)—in particular, RMBS CDOs. But the rating process is not a valid credit risk measure after origination: It either understates or overstates credit quality.
So by using invalid credit measures, we have created a perverse incentive to put securities into the market that are not well structured and will not improve, but actually will deteriorate. And we can repackage them into CDOs without the ultimate investors realizing what is happening until it is too late. This will happen just because the rating system does not reflect current credit quality.
Thomas Adams, Ann Rutledge and Sylvain Raynes, “Joint Obligation Ratings in Consumer ABS,” Journal of Structured Finance, Spring 2011
Greg Gordon, “While Goldman raked in profits, clients squirmed,” McClatchy Newspapers, April 14, 2011 | Read more
Sylvain Raynes . . . said the Hudson deal was “full of conflicts of interest,” including Goldman’s dual role as liquidation agent.
“This deal should never have gone to market, due to the lack of transparency and the fact that Goldman was holding both ends of the deal,” he said.
Christine Richard and Bob Ivry, “Lehman Failed Lending to Itself in Alchemy Eluding Dodd-Frank,” Bloomberg, March 11, 2011 | Read more
“It wasn’t a mistake to let Lehman fail, it was a mistake to let it live so long,” said Ann Rutledge, a principal with New York-based R&R Consulting and the co-author of two books on structured finance. . . .
For Lehman itself to buy the Fenway commercial paper was a sign of trouble, Rutledge said.
“The fact that Lehman bought the Fenway notes after creating them not only raises red flags, it shows that Lehman was trying to sustain the illusion of financial health,” she said.
Barry Ritholtz, “Drawing the Correct Lessons from Lehman Bros,” The Big Picture, March 11, 2011 | Read more
“It wasn’t a mistake to let Lehman fail, it was a mistake to let it live so long.”
-Ann Rutledge, a principal with New York-based R&R Consulting and the co-author of two books on structured finance. [quoting Richard and Ivry article in Bloomberg, March 11, 2011]
Greg Gordon, “Critics: Goldman should give back $2.9 billion to taxpayers,” McClatchy Newspapers, February 15, 2011 | Read more
Irked that Goldman Sachs appears to have reaped a $2.9 billion taxpayer-aided windfall on an investment of a mere $20 million, some experts and watchdogs say the Wall Street giant should return the money to the U.S. Treasury.
“It’s a very simple call to make,” said Sylvain Raynes, a frequent Goldman critic who’s an expert in the kinds of deals in which the investment bank landed an apparent jackpot. “They should never have been given this money, and they should give it back.”
“Comment Period for Changes to Regulation AB Passes,” The Ratings Debate (Performance Trust), February 11, 2011 | Read more
By requiring so much new information, the SEC is reducing the role of ratings agencies and urging investors to do more of their own analysis. The New York Times quoted the reaction that Ann Rutledge had to the rule changes. Ms. Rutledge is the co-founder of R & R Consulting, a structured credit analytics firm in New York. “My reading of this proposed ruling is it’s a very practical way of closing loopholes,” said Ms. Rutledge. “The regulators are now beginning to understand why they put the rules on the books and how the market worked around them.”
Shahien Nasiripour, “Goldman Sachs Got Billions From AIG for Its Own Account, Crisis Panel Finds,” Huffington Post, January 28, 2011 | Read more
“At the time, the idea was the sucker could go down because there wasn’t enough liquidity in the system, money wasn’t moving, and you could see a domino effect,” said Ann Rutledge . . . .
In reality, she contends, those fears were overblown: There was ample money in the financial system. Rather, individual institutions did not have enough cash on hand to survive their losses, she asserts. But the fear of a broader liquidity crisis was used as justification for what now appears to have been a backdoor means of bailing out Goldman, said Rutledge.
The details in the commission’s report leave Goldman “naked,” she added. “It doesn’t have the fig leaf of a systemic risk argument. Normally what happens when you have a sophisticated institution that’s doing stupid credit stuff is you let them eat it, but that didn’t happen in the bailout.”
Susanne Craig and Ben Protess, “Everyone Was to Blame, Crisis Commission Finds,” New York Times DealBook, January 27, 2011
Sylvain Raynes . . . is quoted in the report as calling Goldman’s practice “the most cynical use of credit information that I have ever seen,” and comparing it to “buying fire insurance on someone else’s house and then committing arson.”
Bennett Voyles, “Tiger-Riding for Fun and Profit,” CFO India, January 2011
Jody Shenn, “S&P May Reduce 1,196 Securities Tied to Residential Mortgages After Errors,” Bloomberg, December 15, 2010
“An admission of guilt by a rating agency: How refreshing, and also what a wonderful Christmas-time present,” said Sylvain Raynes, a principal at R&R Consulting in New York and co-author of “Elements of Structured Finance,” published in May by Oxford University Press. “What I want to know is, is anyone going to get fired over this?”
Serena Ng and Liz Rappaport, “How Fed Crisis Aid Got Tested,” The Wall Street Journal, December 9, 2010 | Read more
Amid the crisis, however, it was difficult, if not impossible, for the Fed to unmask all the motivations and financial engineering of borrowers that turned to its liquidity facilities, analysts say.
“There was an incredible informal network of vehicles that were moving money around and hiding risk. The aim was to get funding the cheapest way possible and regulatory capital relief,” says Ann Rutledge, a principal at R&R Consulting, a structured-finance consulting firm in New York. “This is how Wall Street innovates, and it was hard for the Fed or anyone to keep track of.”
Caroline Salas and Matthew Leising, “Federal Reserve Withholds Collateral Data, Denying Taxpayers Gauge of Risk,” Bloomberg, December 2, 2010
It is “specifically impossible” to know how much risk taxpayers were taking by looking at pools of collateral grouped by asset class and rating, said Sylvain Raynes . . . .
“I need to know the individual composition because a $2 billion pool can be one asset of $2 billion, which would be very risky, or 2,000 assets of $1 million each, and that’s not risky at all,” Raynes said. “The spirit of Dodd-Frank was not respected, and [the Fed] used the vagueness in the wording of the law to weasel out of fulfilling their duty to the American people.”
“ABCP for Indie Films?”, BNN SqueezePlay, November 16, 2010 (video interview)
Caroline Salas and Jody Shenn, “New York Fed Faces ‘Inherent Conflict’ in Mortgage Buybacks,” Bloomberg, October 21, 2010 | Read more
The Federal Reserve Bank of New York’s effort to recover taxpayer money used in bailouts during the crisis may be at odds with its mission to ensure the stability of the financial system. . . .
“This is a highly unusual position that the Fed has put itself in,” said Sylvain Raynes . . . . “They made their bed and now they have to lie in it.”
Ariana Eunjung Cha and Jia Lynn Yang, “Lack of proper mortgage paper trail could leave big banks reeling again,” Washington Post, October 14, 2010 | Read more
Ann Rutledge, chief strategist of the structured finance advisory firm R&R Consulting, said not much more could go wrong in the mortgage-backed securities market.
“It’s certainly not an indication that [the market] doesn’t work,” she said. “It’s one more indication that it hasn’t worked.”
Gretchen Morgenson, “BB? AAA? Disclosure Tells Us More,” The New York Times, September 4, 2010
“My reading of this proposed ruling is it’s a very practical way of closing loopholes,” said Ann Rutledge . . . . “The regulators are now beginning to understand why they put the rules on the books and how the market worked around them.”
Caroline Salas, Craig Torres and Shannon D. Harrington, “Fed Made Taxpayers Unwitting Junk-Bond Buyers,” Bloomberg, July 1, 2010 | Read more
The Fed hasn’t disclosed how much was tied to below- investment-grade debt. Geithner, who is now Treasury secretary, said in an addendum to the text of his remarks only that the Fed was assuming “related hedges,” without elaborating. . . .
“I strongly object to the mischaracterization of the portfolio,” Sylvain Raynes . . . said in an interview. “The ratings that were purportedly investment-grade had long lost their utility” and to call several billion dollars of derivatives “related hedges” is “nonsense” and a “material omission.”
So-called hedges aren’t without risk, said Raynes . . . . “You can be on the wrong side of a hedge, by definition. Which side are they on?”
Greg Gordon, “Goldman admits it had bigger role in AIG deals,” McClatchy News, June 29, 2010
Sylvain Raynes, an expert on structured securities of the types that AIG insured, said it’s “implausible that Goldman can say ‘I had no idea that AIG was in dire straits or in weak financial condition.’”
Karen Brettell, “Franken bill unlikely to make ratings more reliable,” Reuters, May 14, 2010
Some industry professionals are skeptical, however, that selecting an agency via a committee would lead to more accurate ratings.
“You cannot have someone decide who is the best rating agency for any deal,” said Sylvain Raynes, founding principal at R&R Consulting in New York, and former analyst in structured securities at Moody’s Investors Service.
“I cannot imagine this responsibility will not be corrupted immediately,” he added. | Read more
. . . More ratings agencies in the pool to provide the benchmark rating on assets, would also increase the chance of potentially less reliable agencies gaining more influence.
“Even bad rating agencies would be screaming for their allocation,” said R&R’s Raynes.
“Were Rating Agencies Duped?” Business News Network Squeezeplay, May 13, 2010
Carolyn Sissoko, “The de(con)struction of the ‘market maker,’” Synthetic Assets, May 12, 2010 | Read more
[In Goldman Sachs' prospectus for the Abacus CDO,] Goldman is (appropriately) disclosing that there is no secondary market in the Abacus CDO, and that, while Goldman may choose to buy the CDO back in the future, the firm is under no obligation to do so. The mystery is why the terms “make a market” and ”market-making” are used in the disclosure that there is no market. The effect of this new usage is to create a new definition of “to make a market” . . . .
Maybe Ann Rutledge is right: the first step in fixing financial markets is to clearly define the words we are using.
“« Les pays européens en faillite les uns après les autres »,” Come4News – C4N (Nanterre), May 4, 2010
Vanessa Drucker, “Second Rate,” FundStrategy, May 6, 2010 | Read more
Along with neglecting systemic risks, the [credit rating agencies] gave inadequate heed to ongoing surveillance in a fluid environment. Sylvain Raynes and Ann Rutledge were working at Moody’s in the late 1990s until they founded R&R Consulting in New York 10 years ago. Rutledge explains how, in a properly structured deal, all the tranches except for the first loss piece should improve as amortisation capital goes down. She recalls discussions from her Moody’s days, that the ratings were “fine for origination but meaningless after that.” In other words, a decade ago the ratings were too conservative. “But since no one knew what they were worth in the secondary market, no one knew when they became under-collateralised either,” she says. . . .
There has also been discussion on addressing incentives and compensation structures on an individual, as opposed to a firm-wide, basis. “People will always be greedy. To blame the crisis on greed is like lamenting too much sex in a brothel,” Raynes says. Whereas top down management policy is guided by the clients’ hand that feeds it, the analysts in the committees who are making the decisions are also subject to motivation and self interest. . . .
Rutledge agrees that transparency is the key to a healthier system. Markets have been reliant on S&P and Moody’s, which used fixed scales with fixed benchmarks for the numerical meanings of AAA, AA, matching quality to the scale. She says: “Triple A was like a gold standard in receivables. If you got it correct, and benchmarked it to stringent numerical definitions, the deal should not go wrong.”
Alan Chernoff, “The other economic culprit,” CNN, April 30, 2010
Alistair Barr, “Out of Thin Air: Synthetic CDOs, at the center of Goldman suit, inflated the credit bubble,” MarketWatch, April 26, 2010 | Read more
“Structured finance is nothing,” [Sylvain Raynes] said in an interview. “It’s always been nothing. We were always on the edge of the abyss and what kept us from going over the edge was Moody’s.”
Raynes, who used to work at Moody’s Investors Service and co-authored a book on structured finance, said the rating agency put AAA ratings on many parts of CDOs, giving investors the confidence they needed to buy the products.
“You needed a third party to analyze the structures,” he added. “That’s what provided the value for these deals.”
Peter Cohan, “Behind the $4 Trillion in CDOs: Sneaky Banks and Worthless Ratings,” DailyFinance, April 26, 2010
Rutledge, whose help was acknowledged by A.K. Barnett-Hart in her 2009 summa cum laude Harvard College thesis on CDOs made famous by Michael Lewis’s latest book, contacted me after reading my story about why we don’t need traditional banks anymore. As Rutledge emailed me on April 15: “This is the first time I have seen anyone make the bold but true assertion that the bond market has made the role of banks as lenders redundant.”
“Interview with Sylvain Raynes, principal of R&R Consulting,” Quantnetwork, April 25, 2010
Bernard Condon/Associated Press, “Does Goldman case tarnish Cassandras of the crash?,” Yahoo Finance, April 21, 2010
“« Le grand déballage ne fait que commencer »,” Les Echos, April 20, 2010
Pierre De Gasquet, “Comment la « machine à bulles » est entrée dans la tourmente,” Les Echos, April 19, 2010
Barrie McKenna, “Goldman Fraud Charges Cast Shadow over Wall Street,” CTV News, April 17, 2010
CaptJJYossarian, “Jim Cramer vs. Sylvain Raynes: Who is Mr. Raynes?,” Firedoglake, April 17, 2010
TraderMark, “Who is Sylvain Raynes and How Did He Make it on CNBC?,” Fundmymutualfund, April 16, 2010
Steve Krakauer, “CNBC Guest Calls Jim Cramer ‘Public Relations Officer’ For Goldman Sachs,” MediaIte, April 16, 2010
“Sylvain Raynes, tells truth on CNBC show, is yanked off air,” Quantnetwork, April 16, 2010 | Read more
Those of us at Quant Network who know Sylvain Raynes personally aren’t stranger to his unconventional remarks. He called Ben Bernanke “mammoth incompetence” in his most recent guest post, Hollow Men of Financial Engineering. His previous article on the state of financial engineering generated a lively discussion on our forum.
But they all pale in comparison to the latest episode when, during a guest appearance today on Jim Cramer‘s CNBC’s “Street Signs” with Erin Burnett, he called Jim Cramer and others who’ve been talking about the Goldman Sachs fraud charges, “public relations officials for Goldman.”
Greg Gordon, “SEC’s Goldman charges could be just the beginning,” McClatchy Newspapers, April 16, 2010 | Read more
Sylvain Raynes, a New York expert in structured securities of the type described in the SEC charges, said the stakes are huge for Goldman.
“To lose its reputation,” he said, “Goldman does not need to be found guilty many times. They only need one instance.”
Bob Ivry and Jody Shenn, “How Lou Lucido Helped AIG Lose $35 Billion With CDOs Made by Goldman Sachs,” Bloomberg, March 31, 2010
“Through the worst credit environment in our lifetimes, this CDO is still performing,” [a spokeswoman for TCW Group in Los Angeles] said. “It’s still paying interest to investors, and it hasn’t had any event of default, which is a credit to TCW’s skill in security selection.” . . .
The CDO’s maturity date is 2039, so any declaration of success is premature, said Rutledge of R&R Consulting.
“A man who jumps off a 100-story building can pass the 98th floor and say, ‘So far, so good,’” she said.
Erik Schatzker, “Interview of Ann Rutledge,” Bloomberg, March 31, 2010
March 31 (Bloomberg) — Ann Rutledge, founding principal of R&R Consulting, talks with Bloomberg’s Erik Schatzker about how collateral replacements for collateralized debt obligations helped drive American International Group Inc. to the brink of disaster.
Stephen Gandel, “Does Michael Lewis’ Harvard Thesis Exonerate Goldman?,” The Curious Capitalist (TIME Magazine blog), March 20, 2010
Few think Blankfein & Co. are innocent, but a report that is getting a lot of attention lately because of Michael Lewis’ new book The Big Short offers some fodder for Goldman’s side of the story. . . .
Kevin G. Hall and Greg Gordon, “Goldman under scrutiny for its role in Greece’s fiscal woes,” McClatchy Newspapers, February 25, 2010
Sylvain Raynes, a frequent Goldman critic who’s an expert on swaps, said that by assisting Greece in hiding its debt, Goldman behaved like the family of an alcoholic concealing his addiction while simultaneously obtaining “inside information on what’s going to happen.”
Raynes, who worked briefly for Goldman, called the Greece episode “a repeat of Goldman betting against its customers” in the subprime mortgage market while becoming the only major Wall Street firm to make a tidy exit before the U.S. housing crash. “Nothing is perfect, but we have to stop the boundless volatility possibilities of the credit-default swap market,” Raynes said.
“Großbanken spekulieren mit Griechen-Krise,” Der Spiegel, February 25, 2010
“Credit Default Swaps geben die Illusion von Sicherheit”, sagt Sylvain Raynes, Experte für strukturierte Wertpapiere beim Finanzdienstleister R&R Consulting, der “New York Times”. “Doch in Wahrheit vergrößern sie die systemimmanenten Risiken.”
Christian Toto, “Sleeper Material?”, Boxoffice.com, February 25, 2010
Nelson D. Schwartz and Eric Dash, “Banks Bet Greece Defaults on Debt They Helped Hide,” The New York Times, February 24, 2010
Greg Gordon, “Goldman’s Chief Gets Bonus of $9 Million in Stock,” in McClatchy Newspapers, February 5, 2010
Sylvain Raynes, a former Goldman employee and a critic of the firm, told McClatchy that Blankfein deserves praise for taking “a significant and substantive step in stopping the greed on Wall Street” with a new compensation policy.
In the past, he said, “Usually, you got your money in cash and that’s it . . . the only possibility was for you to get rich.”
Sharon Kahn, “Why Risking a Lower Credit Rating Can Make Good Strategic Sense,” Corporate Board Member, February 2010
Sylvain Raynes . . . says that as long as companies stay within the investment-grade range of BBB- and above, a downgrade is unfortunate but not disastrous. Slipping from triple-B-minus to the speculative double-B courts catastrophe. . . .
Adds Ann Rutledge . . . : “The agencies are in the driver’s seat, but they’re open to a multi-step process that allows corporations to articulate their strategies and provide qualitative reasons that any change in liquidity is temporary.” Her advice to a board that’s steering the company on a course that risks a downgrade: “Contextualize why you might be at the bottom of a cycle and clarify what you’re doing to come back. Run scenarios and explain how various factors will impact cash flow going forward. If you’re being downgraded anyway, try to minimize the impact. Scrap for a single-notch downgrade if the agency might be thinking of two.”
Geraldine Fabrikant, “In Bonds, a Balance of Risks and Yields,” The New York Times, January 9, 2010
Ann Rutledge . . . cautions people to talk to their advisers about the bond issues they are buying and, if possible, to do their own research. . . .
For example, she said, be sure to try to understand how a bond issuer makes money.
“If a lot of that information is in the footnotes, that is a bad sign,” Ms. Rutledge said.
Greg Gordon, “Fed delayed disclosure of controversial AIG payout,” McClatchy Newspapers, January 7, 2010
Sylvain Raynes . . . called it “very odd” that “the government actually worked against its own interests by paying right away” on contracts that didn’t expire for years.
It would have been more advantageous, he said, for Fed officials to say, “We’re going to wait for the deals to work themselves out according to their terms” and demand proof of every default.
“They could have lasted years and years like this.”
Greg Gordon, “Details of one Goldman deal reveal lopsided conflicts,” McClatchy Newspapers, December 30, 2009
“[The Broadwick CDO deal] is not an arms-length situation, as brokering always pretends to be,” said Raynes . . . . “Goldman can easily and selectively sell the riskiest securities into the deal with no oversight from anyone.”
Ward Harkavy, “Wall Street Crime Blockbuster: Goldman’s Lucrative Bets Against America,” The Village Voice Blogs, December 24, 2009 [quoting from Morgenson and Story's NYT article of the same date, cited below]
Gretchen Morgenson and Louise Story, “Banks Bundled Bad Debt, Bet Against It and Won,” The New York Times, December 24, 2009
“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes . . . . “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”
Celeste Headlee, “How Banks Bet Against the Housing Market . . . and Won” (interview with Louise Story and Sylvain Raynes), The Takeaway, December 24, 2009
Ann Rutledge, “Mandating ‘Skin in the Game’ is Reinventing the Wheel,” American Banker, November 30, 2009
Ann Rutledge, “The Paradox of Securitization,” Policy Innovations (Carnegie Council), October 19, 2009
Kevin G. Hall, “How Moody’s sold its ratings — and sold out investors,” McClatchy Newspapers, October 18, 2009
Gretchen Morgenson, “When Bond Ratings Get Stale,” The New York Times, October 10, 2009
Chris Whalen, “B of A: Bond Holder’s Haircut Can Restore Solvency,” Institutional Risk Analyst, October 5, 2009
Michael Hirsh, “Financial Ratings Agencies Worse than Useless,” Newsweek, October 1, 2009
Bennett Voyles, “The next unsinkable ship? Covered bonds may look more solid than securities, but could bring a new set of risks,” Mortgage Banking, October 2009
Carol Massar, “Interview with former Moody’s Senior Analyst/Vice President Sylvain Raynes,” Bloomberg, September 30, 2009
Ann Rutledge, “The Balance between Risk and Return is Everybody’s Business,” Carnegie Council — Carnegie Ethics Online, August 4, 2009
Kate Benner, “Can CIT end the bailout mentality?”, Fortune, July 20, 2009
Karen Brettell, “Help needed to reduce reliance on credit ratings,” Reuters, July 16, 2009
Sharon Coutts, “Details of Some AIG Sales Kept From Public,” ProPublica, July 15, 2009
“Morgan Stanley Plans to Turn Downgraded Loan CDO Into AAA Bonds,” Bloomberg, July 8, 2009
“Back to Basis for Securitization and Structured Credit: Interview With Ann Rutledge,” Institutional Risk Analyst, June 22, 2009
Carolyn Sissoko, “Ann Rutledge Channels Confucius,” Synthetic Assets, June 22, 2009
Christian Toto, “Summer Staying Power,” Boxoffice.com, May 15, 2009
Jerome S. Fons, “Shedding Light on Subprime RMBS,” The Journal of Structured Finance, Spring 2009
David Reilly, “Shadow-Banking System Next Up for De-Stressing,” Bloomberg, May 8, 2009
Felix Salmon, “Chart of the day: Credit convexity (ultrawonky),” Reuters Blogs, May 6, 2009
“In-Depth Look – Stress Test Methodology” (interview with Ann Rutledge), Bloomberg, April 24, 2009
Arianna Huffington, “My Late Night Visits from the Ghosts of Financial Outrages Past, Present, and Future,” Huffington Post, April 20, 2009
Ann Rutledge, “Capital, Not Toasters, Dr. Krugman,” EconoMonitor, April 13, 2009
Corine Hegland, “Why the Financial System Collapsed,” National Journal Magazine, April 11, 2009
Mark Pittman and Christine Harper, “Treasury Preserves Bank Payday with AIG Rescue Cash,” Bloomberg, March 24, 2009
Serena Ng and Liz Rappaport, “Raters See Windfall in Bailout Program,” The Wall Street Journal, March 20, 2009
Gretchen Morgenson, “AIG Bailout Priorities Are in Critics’ Cross Hairs,” The New York Times, March 18, 2009
Mark Gregory, BBC World Service, March 5, 2009, transcript posted in “The Real Villains: The Rating Agencies,” Jessica Cheam, From the Ground Up, April 17, 2009
“House of Cards,” CNBC Special Report by David Faber (Ann Rutledge interviewed), February 13, 2009
Gretchen Morgenson, “Time to Unravel the Knot of Credit-Default Swaps,” The New York Times, January 25, 2009
“Debt Watchdogs: Tamed or Caught Napping?” Gretchen Morgenson, The New York Times, December 7, 2008
“SEC’s long-anticipated crackdown on bond raters a dud, say critics,” Neil Roland, Financial Week, December 5, 2008
“Fed Risks ‘Spitting in the Wind’ With New Aid Pledges,” Craig Torres and Scott Lanman, Bloomberg, November 26, 2008
“When junk was gold,” Sam Jones, Financial Times, October 17, 2008
“Homeowners Ask: Hey, Washington, a Little Help?,” Stephen Gandel, Time, October 16, 2008
“If bailout plan won’t unclog mess, what will?” Gail Marks Jarvis, Chicago Tribune, September 24, 2008
“Bernanke Signals U.S. Should Pay More for Bad Debt,” Craig Torres and Kathleen Hays, Bloomberg, September 23, 2008
“Tunisian Co. Preps $150 Mln Film Securitization,” Total Securitization, September 15, 2008
“Merrill Lynch Sells Off Mortgage-backed Securities,” Eva Woo, Caijing, July 30, 2008
“Prophets of the credit crisis,” Katie Benner, Fortune, July 11, 2008
“SEC’s effort to ease reliance on credit raters is limited by host of other government rules,” Neil Roland, Financial Week, July 3, 2008
“Moody’s Says Workers Rated Some Securities Incorrectly,” Vikas Bajaj, The New York Times, July 2, 2008
“Credit Market’s Recovery Grinds to a Halt,” Eva Woo, Caijing, June 6, 2008
“Issuers, ratings agencies too close for comfort,” Janet Whitman, Financial Post, June 14, 2008
“Smaller raters cry foul over SEC’s proposed disclosure requirements,” Neil Roland, Financial Week, June 27, 2008
“NHK Special” interview, aired in Japan on June 23, 2008, and in the U.S. on July 6, 2008
“New Debt Products Test Moody’s Methods,” Aaron Lucchetti and Kara Scannell, The Wall Street Journal, May 22, 2008
“The Man Who Would Save the Economy,” Paul Kix, Boston Magazine, February 2008
“Citizens at eye of storm over state investment pool,” Julie Patel, South Florida Sun-Sentinel, January 13, 2008
“Credit ratings fueled subprime boom,” Kathleen M. Howley, Bloomberg, December 27, 2007
“Wall Street Wizardry Amplified Credit Crisis,” Carrick Mollencamp and Serena Ng, The Wall Street Journal, December 27, 2007
“Bond Insurers Appear Shaky As Credit Climate Worsens,” Randall Smith and Serena Ng, The Wall Street Journal, August 10, 2007
