As a follow-up to his great piece on the Awesomeness of Equities, Baruch now posts on the Bogosity of Bonds!
I love this part:
Reasonable but uncharitable people have concluded that bond investors must be either lazy or stupid, and this is backed up by observation. Get this: most of them don’t even do research into the bonds they buy. They can’t even be bothered to pay someone else to do it for them! Instead bond issuers pay analysts who work for organisations we are pleased to call “rating agencies” to do the research and say whether these bonds are Good or Bad. These ratings agencies almost always agree with each other. Amazingly, bond investors are happy to ignore the inherent conflicts of interest in this relationship and actually seem to believe the rating agency. They are flabbergasted and shocked when the analysts get it wrong and the “investment grade bonds” blow up on them! Rather than blaming themselves, the investors can now blame the ratings agency, who only have to lower the investment grade rating after it is finally obvious to everyone, including the issuer, that the bond is no longer investment grade. This is fine by the ratings agency, as they are protected from competition by the government, and no one can get rid of them! Ha ha ha. Imagine if someone suggested doing that with equities, with government-sanctioned, paid for research (paid for by the company issuing stock). They’d be laughed out of town. But it’s fine for bonds. Baruch is really not making this up.
Sweet!
2 comments:
Very nice, thanks for sharing.
Michael Lewis has a scathing indictment of them too. He says the guys working at the ratings agencies are the dumbest on the street. One piece of evidence: Investment banks almost never hire people who have worked for the ratings firms (even though they would seem to have relevant knowledge and skills).
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