'Co-op Structure Hurt Analytics'

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SCOTTSDALE, Ariz.-While some clearly point to the rating agencies as culprits, Bill McGuire sees corporate staff-the investment teams and leadership-as deserving of a great deal of the blame.

The president of McGuire Performance Solutions (MPS) questions whether the corporates had the skill to manage their investment portfolios. "I have always had the impression that corporates were long on looks and short on real quantitative capacity. That is no knock to them, they are a cooperative organization," McGuire said. "You will get a certain management culture that comes out of a cooperative organization. I don't think you get the kind of analytical skills that were needed."

In his own work with the Federal Home Loan Bank, McGuire has verified the agency's "other than temporary impairment" (OTTI) testing model. "In doing that I got to look at bunch of mortgage-backed securities that were rated AAA, and they were garbage. That was clear. And they were 110% to 120% loan-to-value, California adjustable rate mortgages with no documentation."

The Home Loan Bank is similar to the corporate system, in that it serves a liquidity function, pointed out McGuire, who worked at the FHLB in the late '80s and early '90s. "We would not buy a bond because someone told us it was a good buy. We would look at the thing and we would ask ourselves what is the collateral underneath the bond," he said. "Evidently the corporates did not do that. When you buy something you should do some due-diligence, and I don't think the corporates either had the incentive, or maybe the sheer analytics, to do that due-diligence. So they found themselves with incredible amounts of what turned out to be horribly performing assets."

Moving forward an enterprise risk management solution, that functions at an independent level within each corporate, should be established, he suggested. "This should be a group that independently...analyzes all other areas of risk that could be associated with a corporate, and that includes the credit risk in supposedly good bonds. We do a lot more homework on what we are going to buy, and over time we do whole lot more work than we have done on analyzing the liquidity dimensions, the credit dimensions, and the interest rate risk dimensions of the balance sheet."

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