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Subject:  The Mortgage Mess Date:  3/7/2009  4:35 PM
Author:  junkman02 Number:  26238 of 35877

The following is just a portion of John Mauldin's weekly newsletter, “Thought from the Front Line.” To read his entire newsletter, you'll have to register at his website ( linked following). Registration is free, and the whole letter is worth reading. In fact, the snippets I quote are probably even misleading, because they've been taken out of context. My reason for quoting them is to engage your interest enough to want to follow up.

In the beginning there were ratings agencies, and they rated corporate bonds from the very highest of credit quality (AAA) down to junk (CCC).
Now AAA means that the chances of losing money are very, very low. With each level of increased incremental risk comes a lower rating. If a corporate bond was at risk for losing just one dollar, it was rated all the way down to junk. And that was fine. Everybody knew the rules of the game.
But then investment banks asked the agencies to rate a large group of home mortgages in a pool known as a Residential Mortgage Backed Security (RMBS). The investment bank would divide the pool (the RMBS) into various tranches. The highest-rated tranche would be given a rating of AAA. Let's say that the AAA tranche was 92% of the loan pool. The AAA tranche would get the first 92% of all monies coming into th