Great article on how Fitch rated CDOsThis is a great article and revealed a fact I was unaware of. Fitch assumed housing prices would go up forever to make its "AAA" ratings on CDOs and insurers. Fitch admitted that if prices were just flat that their models would break down. That's scary. The insurers are going down.
EXCERPT:
Because of the very nature of the market, it takes the convincing of nearly everyone to believe that something cannot happen to actually cause it to happen. Consider housing. Everyone became convinced that housing was a one way ticket north, that all housing was local, and housing would not decline nationally.
This mass belief in a faulty housing premise in spite of evidence to the contrary in Japan is what helped form the US housing top. Greater fools everywhere who came to believe that faulty theory eventually rushed in to speculate in housing. That made the top. Even the rating agencies got into the act.
Please consider Fitch Discloses Its Fatally Flawed Rating Model. As amazing as it might seem now, Fitch disclosed as recently as March 2007 that its model for rating CDOs assumed low to single digit home price appreciation forever into the future. It even admitted its model would break down if home prices were flat for an extended period of time. There is a shocking conference call discussed in the above link where Fitch described those fatally flawed assumptions.
Fitch placed so much faith in its models (as did Moody's and the S&P) that the biggest financial speculation in housing history took place. Greenspan and the Fed cheered the miracle of derivatives most of the way. Such foolishness has already cost Citigroup (C) and Merrill Lynch (MER) their CEOs. It may cost Citigroup its entire company. See More Writedowns Force Citigroup To Sell Assets.
Housing speculation is likely to cost both Ambac (ABK) and MBIA (MBI) their companies. See Buffett Signs Death Warrant For Ambac & MBIA for more on the demise of the guarantors.
LINK TO FULL ARTICLE:
https://www.minyanville.com/articles/MER-S-C-MBI-abk-Fitch/index/a/15373/from/yahoo