Brad Setser

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Have emerging markets changed more than the markets?

by Brad Setser
May 27, 2006

Is the lesson of the most recent bout of turmoil in the emerging world “emerging market economies have changed, but the markets have not”?

How have emerging economies changed since 1997, the last time money flowed their way in a big way?   Fundamentally, by saving rather than spending the commodity windfall, and by saving rather than spending the huge wave of capital that flooded emerging economies the past few years?   Obviously, there are exceptions – Eastern Europe, Turkey, India (now) and with oil prices high, Thailand and Korea — all run current account deficits.   But in aggregate, the emerging world has a big current account surplus despite attracting (til the last two weeks) big capital inflows.

Some countries in my view have taken prudence to such excess that their prudence has become a risk.  China won’t use long-term capital inflows from FDI, let alone short-term flows to finance a current account deficit.  As a result, its burgeoning reserves are contributing to a domestic credit bubble, barely restrained by administrative controls.  Too many oil exporters still budget for oil at $25 and, since they peg to the dollar, often have weaker real exchange rates now than in 1998, when oil was $15.  

But there also have been real changes in places that needed real change.   Brazil has eliminated two of its three major vulnerabilities.   Its external debt is way down, its exports are way up.   It has basically eliminated its domestic dollar-linked debt (good move).   Alas, the combination of high domestic rates, lots of short-term debt and a relatively large fiscal deficit has proven a bit more intractable.   Turkey addressed one major vulnerability – its fiscal deficit is basically gone.   Of course, it also has a big housing and consumption driven current account deficit.   That too is a real vulnerability.  But with something like 70% of the Istanbul stock market in foreign hands, big falls in the lira and Turkish stocks now hurt London and New York more than the Turkish banks … at least one hopes.   

Important changes, all.  The emerging world looks very different today than it did in say 1997, at the peak of the previous wave of capital inflows from New York, London and Tokyo.

What of the markets?   Have they changed since the last emerging market crisis? Gotten better at differentiating the good from the bad? 

In some sense, the answer to the question "Have the markets changed?" is obviously yes.   Just look at the growth in hedge fund assets under management (and hedge fund fees – see Edward Chancellor of breaking views) and credit derivatives.  

In other ways, though, the answer seems to be no.

Flows into emerging economies recently have seemed rather indiscriminate.   And flows out certainly have been somewhat indiscriminate.    Stock markets fell in oil importers and oil exporters, in countries with current account deficit and current account surpluses.   That suggests the core cause of the correction is to be found in the markets of the center, not the policies of the periphery.    Turkey’s big and growing current account deficit didn’t stand in the way of record inflows in 2005 and the first quarter of 2006.

My post earlier this week had a rather provocative title, but as Jenny Anderson noted in Friday’s New York Times, adding a bit of exposure to fast rising stock markets in the emerging world was an easy way to boost returns over the past year and a half.  And those returns were far higher if a hedge fund had unhedged emerging market exposure.  Going long some Turkish stocks and short others did not generate the same returns as an outright long position.   There is nothing wrong with pure directional bets – relative value plays have risks of their own (see LTCM).  But it is also hard to perform well in good and bad times with a simple long position …  

Getting in early and getting out early took some skill, chasing 2005 returns didn’t.   And earlier this year, it sure seemed like lots of folks – levered and not levered – chased past performance.

Lex argues that the moves over the past two weeks reflect a general repricing of risk.  Steve Johnson of the FT made a similar point.  Rising volatility mechanically forces funds to cut back on risky positions to limit their value at risk –

“The selling was indiscriminate in emerging markets … “ said Jonathan Garner, analyst at Credit Suisse.    The selling was largely driven by a sharp rise in volatility,with the Vix index, often referred to as Wall Street’s “fear guage” hitting a two-year high.  This increased the “value at risk” of leveraged investors such as hedge funds, forcing them to cut long positions.   Many of the assets that had made the strongest gains this year, such as emerging markets, fell most sharply as a result.”

That story sounds a lot like 1998.

Last week, rising volatility meant less appetite for emerging market risk. 

But also risks of other kinds.   For example, holders of the most risky tranche of a synthetic collateralized debt obligation are demanding a lot higher premium to insure the holders of the other synthetic tranches against big losses  … 

The connection between emerging markets and the most risky (repackaged) corporate debt?  

Both appealed to common set of investors chasing returns in a low-volatility world …


  • Posted by Gcs


    “Flows into emerging economies recently have seemed rather indiscriminate. And flows out certainly have been somewhat indiscriminate”

    yup yet another sound analogy

    to the old IT adage

    nbapropos are the hi fi markets “better ” today
    then ten years ago

    hedge fund don’t mean
    here’s a place to go to reduce
    your risk
    its a place to go play it

    garbage in garbage

  • Posted by Guest

    Seem to be many different perspectives on the markets:

    “…Emerging markets, which can be very illiquid at times of turmoil and where hedging to cover exposure is difficult because derivatives markets are not well developed, could pose a problem for hedge funds, but probably not for financial stability. Most emerging market hedge funds are effectively long-only in that they usually only buy and sell and borrowing or leverage to make bigger investments is rare. However, many investors have been in emerging market hedge funds for months, some even years. Most have made large amounts of money and see the current sell-off as merely a correction that will bring valuations back in line with fundamentals….”

    “CRISPIN ODEY, one of the grandees of the London hedge fund world, said yesterday that the industry could be doomed, likening it to the disaster that was the Lloyd’s of London insurance market in the 1980s…”,,9063-2194696,00.html

  • Posted by Gcs

    the shift from a perception of low to high volitility requires easier credit terms just when the profit max
    risk aversion tendency is to pull back

    next time this system shakes
    will not be
    the time for policy credit outfits to tighten up

    but i bet they do ….

  • Posted by psh

    ‘better at differentiating the good from the bad’

    Not sure whether the indiscriminate behavior can be blamed on market participants, or if it’s some emergent property of markets themselves. The way Collateralized Debt Obligations slice risk appetites, they uncover some oddities. CDO Tranches are consistently priced as though the crap and the good stuff sinks or swims together, while the middling risks diverge more. That is, default correlation falls, then rises again as you look at assets of progressively higher quality. Emerging markets get lumped together; but so do distinct high-quality assets like German and Italian sovereign debt. Emerging markets have been considered roughly equivalent in risk to domestic junk. But they’re more sensitive to commodity prices. So as speculative commodity markets make emerging markets relatively riskier, they may increasingly be priced as though they’re going to fail in lockstep. How come? The popular valuation models can’t explain it. The pattern might result from fear of a crash rather than from halfassed due diligence.

  • Posted by Steve Waldman

    One way of thinking about some of these issues, where a seemingly technical and not directly related factor can lead to dramatic repricings across the board, is the idea of risk management monocultures. (rather than writing a characteristically longish comment here, i’ve linked…)

  • Posted by HK

    Brad–I think, and I hope that the recent global selling of emerging economies’ stocks is a short-run panick, and so the markets would soon start to differentiate one country from another.

    Turkey and Hungary may have had unsustanable current account deficit, but many Asian emerging economies have current account surplus. While the Indian stock market had been in a bubble situation and needed substantial correction, most of East Asian countries are not in such an situation. Indonesia has current account surplus and fiscal deficit of less than 1% GDP, and even the Philippines has large current account surplus and only a bit more than 2% of GDP fiscal deficit. Hong Kong, Taiwan, Singapore, and Malaysia are in a much better situation.

  • Posted by kz

    To HK:
    The hottest topic today is the next FOMC meeting on June 29 (and ECB on June 8, which the market is expecting the rate to rise by 50 point maybe). If the Fed does not raise its rate on June 29, the inflation may surge and both the stock and bond markets may take hard hit. By August 8th, which will be the FOMC meeting after the next, inflation may rise to an uncontainable level. Lehman thinks the Fed will raise; Deutsche Bank says a pause. At the same time, the moment the Fed does raise its rate, I think many emerging economies who are dependant on capital inflows will take another hit and their currencies may expereince a sudden drop. Once they experience these hard hits, they may raise their rates even higher to attract more capital flows. With global liquidity running out so quickly, I sometimes wonder why we are discussing “will the world capitals flow to the emerging economies, Japan, Europe or the US?” If the global liquidity runs out, there is no capital to flow anywhere (I’m exaggerating this a bit, of course).

    I do agree with you that some emerging economies in East Asia will escape this situation with less damage. But since the USD has fallen and will fall more and the currencies of the emerging economies with current account deficits will also fall, the emerging econonimies with current account surpluses such as those in East Asia will have to stand back and watch their currencies appreciate. Euro and JPY cannot take all the appreciation in the world on their shoulders. I still don’t think the USD will fall too sharply though.

    On the same note, interesting to watch is RMB. If the USD falls more in its value, RMB will also fall as it already has fallen. China may experience a rather higher domestic inflation rate this year due to the inflationary pressure transmitted from the US. That’s one of the things that most non-economists do not notice. China does not export deflation or inflation to the US. Its impact is still too small. If it does, the US should have experience big inflation in 1994 when China did. On the other hand, the US can transfer its domestic inflation to China.

  • Posted by Joseph Wang

    kz: I do think that if you see inflation start cropping up in the United States, that the PBC is going to put in some more slack in exchange rate to keep inflation from being transmitted to China.

    HK: One problem with international markets is that once a panic psychology takes hold, people with good policies and bad policies all get hammered.

  • Posted by Dave Chiang

    China Stocks Withstand Emerging-Market Slump, May Extend Rally

    China’s 10-month stock rally survived the longest losing streak for emerging markets since 1998, and prices may rise further as local investors sink more of their $1.9 trillion of savings into equities.

    “We are bullish on Chinese stocks in the long term and domestic investors will still be the main force to push up the indexes,” said Zhang Xuejun, who manages the equivalent of $720 million at Guotai Junan Allianz Fund Management Co. in Shanghai. “The involvement of foreign investors here is still low and that’s why we survived the mayhem.”

    Overseas investors pulled $1.54 billion out of South Korea last week and $914 million from India for the first three days of the week, according to local exchanges. The countries are Asia’s biggest emerging-market economies after China.

    “We’re getting the classic return home of nervous American and European capital,” said Tom Murphy, who manages about $800 million in Asian assets at Deutsche Bank AG in Sydney. “I don’t expect the current turmoil to have much impact on China.” Chinese growth is sustainable in the long term.

    – Bloomberg News Agency

  • Posted by bsetser

    s. Waldman — like the idea of a risk management monoculture … strikes me as right.

    PSH — you understand cdos far better than i. I need some (and probably some help) to unpack your comment.

    guest — i hope there is enough cash on the side to come in as others pull back. certainly a plausible story.

  • Posted by OldVet

    Last two trading days on Bombay Stock Exchange were quite positive, and foreign institutional investment outflows were being countered with domestic Indian mutual fund inflows. Not perfectly, but partially. Risk to Chinese and Indian equity markets is a general worldwide decline per Jos Wang based on negative psychology rather than country-specific economic problems. Increasingly investors worldwide are working off the same page of basic information, if not psychology. Trouble with dumping non-US stocks en masse is that you are then exposed to risk of US dollar declining in relative value. Other govt’s will respond with higher interest rates that will match/counter rises in interest rates in US, as defensive measures. No?

  • Posted by Guest

    OldVet – It is my impression that everyone is not working off the same page. That global consolidation can only better facilitate much of the insider trading which moves the markets. That much of what is attributed to “investors” and “psychology” might better be attributed to speculators and strategy. So, although I may not agree entirely with the language in the FT excerpt below, it may provide some of the insights you are seeking.

    “Companies seeking to tap Asia’s equity markets may be forced to reconsider their plans amid signs of growing nervousness among big investors, including hedge funds. Investment bankers said recent market volatility was affecting the risk appetite of hedge funds, which had become increasingly important investors in Asian initial public offerings… “The big China banking IPOs will be priced to succeed because they’ll be offered at a huge discount to the Chinese banks that are already listed in Hong Kong,” said one Hong Kong investment banker. “While there is still an appetite for big, high-quality companies, small and mid-sized companies will probably have to change their listing plans.” Another sector likely to be hit is property. Analysts believe investors have become wary of real estate investment trusts, which could be hit by rising interest rates…”

    And I’ve mentioned this before, but where it all gets very confusing to me is when shares are also listed on North American exchanges and traded in dollars. If US stocks include NYSE listed shares of companies like Tata motors, any number of Chinese and other ‘foreign’ companies, ETF’s and mutual funds traded in USD, doesn’t it get difficult to read the signals sent by moves in the world’s markets? At least for the average non-insider.

  • Posted by Guest

    …and to the above post I would also have to add the many North American firms with substantial interests in EMs.

  • Posted by Guest

    I started hammering out a list of things appear to have changed quite a bit since 1998. Much of it would be obvious to participants in the forum, but interesting to look at in its entirety. Thinking about EM risks, have to wonder how quickly the ASEAN economy currencies would be able to achieve the necessary “substantive coordination”, referred to below, should that be required.

    “…I don’t see how small economies like ASEAN can hope to survive through upcoming volatility,” acting Thai Finance Minister Thanong Bidaya told a recent forum in Tokyo… Finance ministers of ASEAN Plus Three — which includes Japan, China and South Korea — have already made progress in boosting financial and monetary policy coordination, said Masahiro Kawai, head of the ADB’s office of regional economic integration. “But substantive coordination could be prompted by a sudden US dollar crunch which is possible,” he told the forum…”

    And, going forward I’ll try to ease up on the Taipei Times links, but the following reminds us that tagging behind the signals created by the informed speculators and investors are a great many unsophisticated gamblers who, lacking the information required to “invest”, are usually the last to get in, last to get out. So although they may not be moving the markets, the sum total of the damage caused by a collapse would still reverberate through the regional, if not the global economy.

    “…. Without access to company reports or an aggressive financial press, most investors rely on rumors, friends’ advice and gut feelings… “Trading stocks for them is just like gambling.”… the finance ministry recently told state banks to tighten credit for share purchases, fearing a market downturn will lead to a wave of bad loans…”

    Reports seem to indicate that the scale of this activity is greater than it was in 1998. Whether transparency is, or is not, I wouldn’t know.

    “…The definition of state secrets in China is extremely broad, and can even include routine economic statistics compiled by the government. The decision to bring Mr. Zhao to trial comes as the Chinese authorities continue one of the most sweeping crackdowns on the news media in decades. It is a campaign in which journalists and writers have been jailed, senior editors fired and news outlets reined in from covering issues the authorities have deemed a threat to political or social stability…”

  • Posted by OldVet

    Guest, interesting insights. Speculators and investors appear to not all be getting the same published info in home countries, but informed parties are able to access info on Internet, like us. Volatility, the apparent main problem, comes and goes. It comes to us now because of big global trade imbalances and perception that currency values are mismatched. What will make it go?

    Maybe the decline in the US housing market will cool the US economy and consumption demand enough to start correcting the imbalances. If so, volatility should decline as fears of sudden large changes decline. The direct investments of big multinational corp’s -US and other- are made and in place. It’s the portfolio investors and speculators incl hedge funds that are worrying more about VIX. We’re back to the different perspectives in the short run and the long run. Hopefully long run investors (including OldVet’s) won’t all be dead while we’re in the market!

    What the articles you’ve gather seem to suggest is a change of tactic from EM equity markets into EM currencies, to avoid the extra volatility risk of production/consumption cycle that may be caused by global imbalances. Retreating into US financial assets would seem to be the worst of all possible worlds. You’d be subject to FX risk. You’d also be subject to equity risk in the market most likely to contract in the near future. And you’d also be subject to foreign consumption/production risks, because as you point out, the US equity markets are affected by foreign shares and foreign-dependent US cxompany shares.

    Another speculative, or hedging tactic could be maintain EM equities but “Put” US equties. It’s a mismatch, but a protective one, and the costs are not prohibitive. The Hussman Fund and some of the other big mutual funds including Schwab’s are using variants of long/short, just not in this way. What the Big Boys are doing is beyond me, but they’re only geniuses when they’re in the middle of bull or bear runs.

  • Posted by psh

    Shoot. I was trying not to speak in tongues. From the top. Let’s say I have junky bonds and I want to make high-quality debt out of them. I can contractually parcel out the defaults so that some people get Aaa risk, for a price. Let’s say I don’t even have any junk bonds, I can still do it. The magic of CDOs. The value of a CDO depends strongly on whether or not borrowers default independently. They don’t. The market prices CDOs as though crummy credit risks are more likely to all go broke together. So does this reflect a general belief that shaky borrowers are similarly vulnerable to certain external events? Maybe. Maybe not. Good credit risks get priced as though they share that high correlation of default. So maybe all it means is that the popular CDO pricing model (the Gaussian copula, based on probabilistic time-to-default) doesn’t fit the actual world of life. That’s one of the things that make the regulators nervous. The market for new instruments could be interacting with the underlying debt markets in unsuspected ways. Everything’s all buttoned down with you and your counterparties, but the market has changed, and you’ll only find out how when something happens. You need a cybernetic-minded guy like Waldman to explain it right.

  • Posted by gillies

    ‘risk management monoculture’ –
    so the old patterns of panics and routs
    still apply.

    to make money you need to heed
    the sage who says – ‘this time it is different . . .’
    to keep your money you need to heed
    the sage who says – ‘it is always the same . . .’

    so it is not so much what you believe,
    as when you believe it ?

  • Posted by Guest

    Yup. But always tempting to try taking things a few steps further and guess where the damage may be most and least extensive if things get really ugly.

  • Posted by bsetser

    Old vet — alas, we had (slightly smaller) trade deficits and currency misalignments in 2005, and far less volatility. I am not sure that there is a direct linear relationship. Something changed, and maybe it was a slight widening of the imbalances. But I am not totally sure that is it.

    PSH — long the equity tranche of a cdo is not quite long correlation per se, as I understand it. equity tranch loses if one or more than one name default, going long correlation, again, based on my limited understanding, requires a slightly more complex position. the ft story suggested the equity tranche blew out, but your post suggests that more than that happened. I don’t follow this market closely, but tis something of an interset, so i do appreciate your explanations.

  • Posted by psh

    You got it right, I think. CDO tranches can be quoted in terms of implied copula correlation, but the real risk you’re taking is that too many borrowers default. What I was talking about was the correlation smile, a longstanding anomaly that crops up when you try to keep your pricing model simple. The equity tranche can be priced as though default correlation is several times higher than the next tranche, and the most senior tranche might be priced as if its “implied correlation” is highest of all. (It gets compared to the volatility smile for currency options, but I don’t know that that sheds any light on it.) Even if the correlation smile is just an artifact of the CDO market, it can have repercussions on credit default swaps used to make the CDOs, and on the underlying bonds. So if you wind up treating all your riskiest bonds as if they were one big asset, dumping them en bloc, at least you can blame the model everybody’s using. Cuz if that’s the way the world works now, you have to go along, the irrationality is systemic, not individual. Shades of Oct ’87.

  • Posted by Guest

    “…”One of our key concerns with India’s recent economic trends has been with the increasing dependence on potentially volatile capital inflows to fund the widening current account deficit,” said Rajeev Malik, JPMorgan economist. India’s monthly trade deficit ballooned to a seven-month high of $4.2bn in April, the first month of the current fiscal year. Last year, high oil prices and surging demand for imports caused the deficit to expand by 52.7 per cent to reach a record $39.6bn…”

  • Posted by Alex

    Its pretty obvious what’s happening and can be best summed up in three words : “Flight to quality”.

    When interest rates are low investors are desperate to find higher yields so they go to extremes in order to chase yields (i.e. buy Argentinian bonds after the default).

    However as interest rates start to kick up, especially in places with grade A debt like the US and European Union, its now possible to get decent rates of return on high quality debt and at a minimal historical risk. Although who visits this site with any frequency will realize that the modus operandus is historical ,especially vis a vis the dollar.

  • Posted by Joseph Wang

    Guest: The economic press is actually relatively open. There are some red lines that you can’t cross (i.e. calling for the overthrow of the Party), but macroeconomic policy is fair game.

    The strange thing is that for the last several years, every effort to restrict the press has been labelled “strongest Chinese crackdown in decades” talk which makes me wonder if I’ve missed a “golden age of free speech” in China. Just once, I’d like to hear a reporter mention, yes the Chinese authorities are closing newspapers just like they did last year and the year before.

  • Posted by Steve Waldman

    I’m a CDO novice. So this is probably way off base. But thinking about what you’ve written, here’s the naive model that comes to mind.

    1) Divide the world into systemic risk and basket-specific risk. Systemic risk means a credit crunch, mass exodus of lenders from credit markets in deteriorating business conditions putting even good credit at risk of a cash flow crisis. Basket-specific risk is (from the very, very little I know) what the copula models try to capture, calculate the risk of a default of basket securities, given a uniform marginal probability for each security, but a more complicated, clumpy joint probability of defaults.

    2) Allocate to each tranche a uniform spread (over some risk-free-ish benchmark) for systemic risk, and a varying spread for basket specific risk. The senior tranche is nearly all systemic-risk-spread. The mezzanine is same systemic risk + a smallish basket-risk spread. Equity gets same systemic risk + large basket-risk spread. Note that systemic-risk-spread is uniform and changes uniformly across tranches, but basket-risk-spread varies between the tranches, and varies nonuniformly. While the mezzanine has significant basket risk, the odds of a small clump are higher than a large one (one default portends just one more, rather than three more), so equity basket-risk-spread moves more than mezzanine. This means that equity’s basket risk moves as though default correlation is very material, while mezzanine basket risk is less sensitive to default correlation.

    3) Stuff happens in the credit world. Senior tranche spread moves very little, but what movement there are looks like the whole credit world is correlated, because it’s about systemic risk. The equity tranche moves a lot, and looks like the world is highly correlated, because movements are a combination of perfectly correlated systemic risk and a basket risk spread that presumes that any default presages many more. Mezzanine movements are between senior and equity in absolute terms, but behave as though there is less correlation of defaults. Mezzanine’s systemic-risk-spread moves identically to the other two, but its basket-risk-spread moves as though individual defaults are relatively isolated.

    In effect, senior tranche spreads are determined solely by perfectly correlated systemic risk, equity tranche spreads are determined by an average of perfectly correlated systemic risk and highly correlated basket risk, while mezzanine tranche spreads are determined by an average of perfectly correlated systemic risk and only loosely correlated basket risk. Does this make any sense?

  • Posted by Steve Waldman

    (err, the previous post [novel? sorry!] is missing a line, “psh –“. it’s all uninformed handwaving in response to psh’s intriguing/informative posts on a CDO “correlation smile”.)

  • Posted by Guest

    Really interesting stuff on the cdos. The math is beyond me. More concerned about the intersects between synthetics and reality. Perhaps we may be seeing a ‘flight to reality’ as money flows to real entities with the greatest capacity to produce and distribute real essentials – even if those firm’s shares are traded in a weakening (at least for the time being) USD.

    Can’t help but wonder if some of the selling is also associated with the profit taking required to pay fees – and taxes (see When someone receives x number of millions in compensation, there are most assuredly any number of ‘associates’ who are seeking a cut. Always have to wonder how that money is recycled through the system. But just looking at few of this morning’s headlines, another risk may be the legal mess which could erupt if things go seriously wrong. i.e. ‘Inevitable’ a London hedge fund manager will face a US court one day says expert’ and: ‘The CFTC has announced a public hearing on the issue of what constitutes a ‘board of trade, exchange, or market located outside the United States’

    OldVet – you’re right. Lots of bright, well-connected ‘insiders’ have spiraled into some pretty spectacular bankruptcies by placing a bit too much confidence in the methods and interpretations of a few close friends. My interest in firms like Factset Systems Research – I don’t have a position as I don’t understand that asset class – is that I’m wondering if changes in data demand, which must be substantial in these markets, may be reflected in FDS’s shareprice. As with all commodities, the real value has to be in its capacity to process the stuff and get it to the most productive end user. But if we are also in the midst of an information market bubble, also have to wonder about the triggers and consequences of a collapse.

    Joseph – My general impression is that a growing intersect between economic policy and the interests of very large transnational financial interests – especially as most are likely to be heavily involved in public private partnerships – is making it very difficult just to ask very basic questions without getting a bit too close to private business interests. As with any social network anywhere, those with a strong sense of what can and can’t be discussed may not see the barriers. But interesting to watch cultural differences and controls on the way information is produced, processed and shared, especially as economies integrate.

  • Posted by bsetser

    much as i love the dollar, i find it hard to call the currency of any country with a current account deficit as large as that of the US “quality” … unless, of course, your income and future consumption is in dollars. but for non-us creditors looking for a long-term store of value, well, maybe not.

    psh –thx

  • Posted by Alex

    “much as i love the dollar, i find it hard to call the currency of any country with a current account deficit as large as that of the US “quality” … unless, of course, your income and future consumption is in dollars. but for non-us creditors looking for a long-term store of value, well, maybe not. ”

    Lol you’re starting to sound alot like Michael Milken Brad! When I was a student I once read a book about him and in it he was quoted as saying the problem with ratings agencies versus his junk bonds was the fact the ratings agencies were “backward looking” and evaluated credit risks based on the past rather than the future.