(an email exchange)
yes, this had to have contributed to the boom/bust and encouraged/sustained the rampant lender fraud that has resulted in the elevated defaults.
hopefully the pension funds have learned their lessons (the hard way, unfortunately but as always seems to be the case) and will dig deeper than just using the ratings agencies and diversification when they invest.
> On Wed, Sep 24, 2008 at 2:50 AM, Eric Tymoigne wrote:
> I have finally found what I have been looking for a while.
> ERISA was amended on November 2000 to allow Pension Funds and Employer
> benefit program to buy ABSs with investment grade below A, and to buy senior
> tranches of CDOs as long as they have an investment grade of at least AA (at
> least is how I interpret the sentence “the Amendment permits inclusion of
> assets with LTVs in excess of 100%. However, securities backed by such
> collateral (a) must be senior (i.e., non-subordinated) securities and (b) must
> be rated in either of the two highest generic ratings categories by a rating
> All this, it seems to me that this is what has allowed, or at least initiated,
> what we have seen in the 2000s. CDS, CDOs-squared, under-regulated
> mortgage companies etc. were all there already but not until this came up did
> the all thing got out of hand and subprime mortgage started to boom.
> Any thoughts?