U.S Treasury Bonds? Or invest in a small hotel?

The big news last week was the downgrading of U.S Treasury Bonds from their AAA rating to AA+.

It’s significance was not lost on the market, nor was the message it sent.

It was met with as much bluster and bravado as one would expect; from Alan Greenspan‘s “the U.S can print as much money as it needs” comment, through to protests of the downgrade being a result of a mistake. Whatever the reasons for the downgrade, no one can deny that the U.S economy has been on borrowed time for a while. Most would suggest the downgrading of U.S Treasury Bonds was well overdue.

However, it has now thrown up some incredible market comparisons in terms of investment options, and comparisons between various financial instruments and their ratings can now be drawn.


One of my all time favourite sites, in terms of alternative financial data and commentary is Zero Hedge, particularly the razor sharp analysis of Tyler Durden. It’s a ‘must bookmark’ internet offering.

From that site comes the following contribution from Bruce Kasting, which caught my attention;



On AAA’s

We lost ours a week ago. I’m not sure how important that was for the violent markets this week. It played into the mix of crazy things that happened.

A new AAA was created this week. A country rises to this lofty rank? No, that’s not going to happen. One of the strong global companies gets a higher rating? No, that’s not likely either. Is this a name we all know? No, not unless you trade CRE CDOs for a living. This AAA goes by the moniker of:



This is a Commercial Real Estate Collateralized Debt Obligation. (Remember those ugly things?) The total deal is $685 million. The security for this borrowing? $685mm of mortgages on 168 hotel properties in 33 states. (Note: 100% leverage, O% equity). The average loan size behind the deal is $4mm. This means we are not talking big properties. I call this the “Red Roof” deal.

The CDO is structured with (get this) six tranches. The bottom of the credit pile is therefore just swill. The most subordinate piece is a $110mm. Somehow this junk managed to get a BB from Fitch.

The most senior tranche came to $350mm. (Note: This does not even have 2X coverage). Fitch took a quick look at this and gave it AAA.

My guess looking at some of the details is that the senior tranche has a very good chance of getting their money back. But this is by no means a sure thing. It was just three years ago when we last had deals like this. The vast majority of those AAA’s got smoked. (Note: Only “Sophisticated” investors can participate in this deal)

I’m scratching my head. If a bond secured by a bunch of so-so hotels can get a AAA just what the hell does a AAA mean?


Was nothing learnt from the derivative fed crisis from two year ago?
Once again, the Wall Street Pigs are lining up to swill down on dodgy derivatives and conjured up gambling wagers with dubious rating agency gradings. What does it take for lessons to be learnt.

Mind you – let’s ‘get real’ – with the historical policy of Corporate Socialism dressing the traders and market makers with a cloak of invincibility and as many ‘get out of jail free’ cards as the U.S Treasury can load off the printing presses, how can lessons be learnt when it is a consequence free environment? Who cares if they screw up again? Joe and Mary Public will simply be burdened with the debts again, Congress will issue the Wall Street addicts with yet more ‘win-win’ legislation, and the commercial juggernaut will continue to roll down the road, destroying everything in its wake.


When we were raised by our parents, destructive behaviour was met with a stern reprimand and direct consequences for actions. That’s basic parenting; you would expect corporate regulation to mirror that. If an industry screws up – as the financial industry most certainly has, with global consequences – then is it too much to expect them to be reined in and for there to be ‘no go zones’ established so that there could be no repeat of the mistakes until such time they were able to demonstrate some new found maturity and competence? Isn’t that what our mother and father expected and laid down as ‘the rules?


Am I really asking too much for there to be the same ‘rules’ and ‘consequences’ for those on Wall Street and similar?




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