August 31, 2011
Redefining Triple-A Credits
Are Springleaf Mortgage Loan Trust 2011-1 bonds safer than U.S. Treasuries? Yes, according to Standard & Poor's. Bloomberg reports: "Standard & Poor’s is giving a higher rating to securities backed by subprime home loans, the same type of investments that led to the worst financial crisis since the Great Depression, than it assigns the U.S. government."
But that can't be right. Let's see, the United States government has the ability to print its own money, a competitive edge that doesn't apply to Springleaf. Assuming inflation doesn't overwhelm this advantage, the odds of a Treasury default are virtually nil. Granted, that's not the impression from recent media reports, but facts are facts.
I'll even go one step further: If inflation rises, and rises substantially, the Treasury won't default. The U.S. may have trouble selling new bonds, but the existing loans will be made whole. There's more to assessing Treasury risk, of course, but that ain't hay.
Meantime, Springleaf's capacity for matching that standard isn't exactly comparable. That's no reflection on Springleaf--the same caveat applies to every corporation. The business of rating bonds, by contrast, is a slightly more subjective topic.
But talk is cheap when it comes to finance. Let's see how the crowd prices Treasuries vs. Springleaf's bonds in question. Any guesses as to how Mr. Market will weigh in on the debate?
Posted by jp at August 31, 2011 12:26 PM