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December 07, 2013


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As most of you know, there has been litigation seeking to hold credit ratings liable for the extremely generous rankings that these companies gave to complex subprime mortgage backed securities. However, any judge that reads this report will immediately recognize that there were no deliberate misjudgments and that the problem arose almost entirely from the fact that the people who do credit analysis for these firms are blithering idiots.


PaulB provides yet more evidence that law professors are unable to think like capable lawyers. A basic principle good lawyers understand is that they need to provide evidence to support their claims. PaulB provides none (even the litigation he cites does not support his claim, as his own post here admits). This is no surprise. In litigation ones claims are challenged by a highly motivated adversary and one is always aware they may be evaluated by a judge and jury if settlement does not occur. A law professor pontificates before law students who seek to guess what he will want to hear on the exam so they can get a good grade. Students have no incentive to challenge their professors, on the contrary, they have an incentive to simply regurgitate what they are told. Professors' other activity, publishing in law reviews, is similarly lacking in challenge because the vast majority of law reviews are edited by students at the same third rate law schools that do such a terrible job training students. Given the inability of many law professors, like PaulB, to understand the most basic principles or legal practice, its no surprise that many graduates of law school can't get jobs as attorneys.

terry malloy

Volatility is a component of pricing debt.

Their statement is important to those who purchase the debt of these organization.

Depending on their funding model, this downgrade may cost these organizations dearly.

Illustrative example: Law School X (BBB - adequate capacity to meet its financial commitments) borrows 10mm per annum to smooth out the payments it receives from the government/cash from students. Yesterday, they paid 6% to those who lent them the money (institutional investors/Mutual Funds). (.06*10mm= $600,000). S&P downgrades law School X debt to BB (faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions).

Now, in the pricing models of the Institutional Investors and Mutual Funds, the riskiness of loaning Law School X is no longer seen as profitable when demanding 6%. Further, the some institutional investors and mutual funds can't invest in BB rated or below, so called "non-investment grade."

Some of the lenders are out, the ones that are left are pricing your debt at 8% (.08*10mm= $800,000). Which isn't the end of the world, but because you're credit quality is deteriorating, they are demanding stricter covenants. How tight these covenants get depends on the strength of management. S&P's statement is "watch out, some of these people can't execute a strategy in a crisis." Basically, the school starts to lose autonomy to its creditors.

On top of this, the market for structural improvements pretty much dries up when the market for your debt is falling away from you.

The creditors all knew this before S&P put it on paper. Rating agencies are better at stating consensus views that telegraphing news (see, e.g., Mortgage Debt).

Dean Nick Allard (BLS) might have to take the Jitney bus instead of the helicopter to the Hamptons next summer. Tears.

terry malloy

gah, you're = your

No wonder I didn't do well 1L.

I'm glad a basic understanding of math understanding has saved me from homelessness.

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