Tuesday, December 9, 2008

How Does Wall Street Trade "Recovery Rates"?

Over at Alphaville, Sam Jones writes:

A rising default rate is one thing. A rising default rate with a falling recovery rate is quite another.
This raises the question of whether Wall Streeters put yet another gun to their own head.

The research, to the extent I know it - not even close to state-of-the-art any longer, is that there is a very significant part of recovery rates that are "systemic" and that they are, in fact, quite pro-cyclical.

So, yes, in a downturn, defaults and lower recovery rates aren't oddball.

Now, has Moody's published their model, so that we can see just how they are doing with this? S&P? Fitch?

Make you a bet: they will stop rating paper before they agree to share their model with the inquiring public, who depend so obviously on the deft execution of their trade.

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