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What’s The Deal With … AAA-Rated Debt?

By Matthew Yglesias  

"What’s The Deal With … AAA-Rated Debt?"

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This is the chart everyone’s writing about today:

Alarming, I guess.

But it reminds me of one of these things I keep being embarrassed to write about given that it does a fair amount to expose my own ignorance. What’s the deal with there being all these different kinds of AAA-rated debt? After all, the idea of AAA debt is that it’s safe. Like, really and truly safe. But if something represents the maximum level of safeness, then it should all be equally safe. Safe is safe. Which means it should all have the same yield, since the differences in the yields represent differences in the risk level. Clearly, though, different AAA-rated assets don’t have the same yields. That’s why people wanted to invest in complicated AAA-rated mortgage backed securities. They paid a yield that was sufficient higher than the yield on other AAA-rated debt that it was profitable to take the time to create them. But if the yield is higher, then it’s not as safe as the other assets. So how can they all get the gold standard for safety? It seems like a pretty transparent dodge. You have regulatory or marketing reasons to want to have “safe” debt. But safe means low-yield. But higher-yield is more profitable. So you find the least-safe possible “safe” debt. But what’s safe about that?

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