Caveat Emptor

Abstract

Recent distressed transactions have shown investors how reality can overwhelm appearance in the triple-A, asset-backed securities market. What the investor doesn't find between the covers of a thick prospectus, NRSRO pre-sale report, or glossy road-show flip book can make the difference between a good and bad investment. Lawyers have limited analytically useful information in prospectuses to minimize their liability for errors. Securities laws prevent investors from retaining copies of road-show flip books that contain valuable information. Regulation FD (Fair Disclosure) makes issuers less likely to answer questions if the answer cannot be distributed to all investors simultaneously. Because new-issue ratings are more profitable for NRSROs, those agencies spend less time monitoring previously issued triple-As. NRSROs give insufficient explanation of how they assess unquantifiable factors that are subject to judgment calls. Investors have had to learn the difference between an issuer's or enhancer's capability and willingness to make principal payments.