Sunday, December 23, 2007

Bond Rating Agencies: Investors Should Shoulder Much Of The Blame

This week's Barron's contained an article on the bond rating agencies, Failing Grade ($), that indicated more regulation was needed for the rating agencies: Moody's (MCO), Standard & Poor's (MHP) and Fitch. The article contends the rating agencies were key enablers of the subprime mortgage fiasco. This part of the article is correct. However, much of the blame should be shouldered by investors that put money into these investments in the first place. Even individual investors were placing cash in money market funds because the funds had yields that were higher then most traditional money market funds. If an investment seems too good to be true then it probably is.

Investors must understand what they are investing in regardless of whether or not it is a stock, bond or real estate, etc. The same type of due diligence that goes into purchasing a stock should be performed when purchasing a bond. If investors in these CDOs had performed the necessary due diligence, they would have discovered many of the original mortgages within the pools were formally lower grade mortgages subsequently classified AAA rated. It should be obvious that mortgage pools that have high loan to value attributes are higher risk.

In the end, before making any investment, perform the due diligence on the investment. Don't buy a stock simply because a securities analyst says it is a buy. Similarly, bond investments, mony market funds and mutual funds should be scrutinized in the same way.

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