I have been a long standing critic of the Ratings Agencies. Recall this got me into a little hot water with my publisher — the S&P owned McGraw Hill.
I agree with Nobel prize winner Joseph Stiglitz, who called the Ratings Agencies one of the “key culprits” of the credit crisis.
So you can imagine how thrilled I was that Senator Al Franken’s (!?!) amendment on the Ratings Agencies passed, over the opposition of Banking Committee Chairman Chris Dodd:
“The Senate approved a provision that would thrust the government into the process of determining who rates complex bond deals, in a move to end alleged conflicts of interest blamed by some for worsening the financial crisis.
The 64-35 vote Thursday represents one of the strongest moves yet by Congress to change how business is done on Wall Street. The amendment aims to resolve what’s considered one of the thorniest problems in financial markets: Bond issuers choose ratings agencies and pay for ratings, meaning raters’ revenues depend on the very firms whose bonds they are asked to judge.
Under the new provision, the Securities and Exchange Commission would instead establish and oversee a powerful credit-rating board that would act as a middleman between issuers seeking ratings and the Ratings Agencies. The board would select which agency provides the “initial rating” for certain securities known as structured bonds.
Critics of the status quo say the issuer-pay model led to inflated ratings in the housing boom, particularly of those securities backed by mortgages. Many bonds rated triple-A ended up getting downgraded to junk, unleashing mayhem in the financial system. Congress has drubbed the Ratings Agencies for being too cozy with the banks that bring them business and too focused on market share rather than independent analysis.”
I have repeatedly noted that the Ratings Agencies have been prime contributors to the credit bubble and economic crisis. I have written that they are corrupt enterprises that whored themselves out to the highest bidder. I have suggested that their privileged status is an anachronism that should be eliminated. Lastly, I believe the entire ratings space should be opened up to competition.
The Calpers suit is potentially a game changer. The one thing I haven’t written — but have discussed with hedge funds clients — I think Moody’s could be a zero. Their potential liability is enormous, and their future business model is in doubt. S&P has other business lines (my experience with McGraw-Hill was less than lovely) but they too have run into big trouble. >
Previously: Blaming Moody's (December 7th, 2008) http://www.ritholtz.com/blog/2008/12/blaming-moodys/
Rating Agencies Must Defend AAA Junk in Court (September 3rd, 2009) http://www.ritholtz.com/blog/2009/09/rating-agencies-must-defend-aaa-junk-in-court/
FreeRisk: Who Needs Moody's ? (June 16th, 2009) http://www.ritholtz.com/blog/2009/06/freerisk-who-needs-moodys/
Credit Rating Firms: Worthless in a Bull Market, Damaging in a Bear Market (February 25th, 2010) http://www.ritholtz.com/blog/2010/02/credit-rating-firms-worthless/
Here are the original and changed passages of Bailout Nation relative to Rating Agencies: "¢Â Original "¢ Revised
Source: Rating Agencies Face Curbs AARON LUCCHETTI, SERENA NG and GREG HITT WSJ, May 12, 2010Â Â http://online.wsj.com/article/SB10001424052748704635204575242472908973624.html
Willfully selling your reputation for a dollar, betraying your trust, lying, cheating, and stealing have made the rating agencies a twin to the Big 4 (3?) accounting firms.
Only someone with amnesia or born two centuries from now would take an opinion rendered from these firms and act on it.
Woe betide the fund manager or anyone else who now takes an AAA rating as remotely accurate or gospel.
It is better than nothing, but I still believe that we should force them to put their money where their mouth is. Ratings should be based on the price of insurance prices on the paper. If it is highly rated, they should be forced to cell CDS at a low price. The incentives in such a system would be to get the rating right, if you rated it to high you would lose money on the insurance – and if you rated it to low you would lose customers.
Dedude — that is an interesting idea …
So, why is it that we even need any ratings agencies? They don’t exist in other parts of the financial markets?
What does do to the concept of NRSROs ?
that Cartel, given the FedGov’s imprimatur, is the Problem, in the first place.
needless to say, if it wasn’t for the NRSRO Hallmark, those ratings whores wouldn’t have had anything, for long, to Prostitute. hey, that’s just like the FedRes, their phony Notes, and the Legal Tender Laws.. some Models do work, afterall.. ~~~ and, WOFT:
where, o where, has our TurboTimmy gone?
Geithner Briefs Super Power Elite, Friday Afternoon The heavyweights want a report from the Treasury Secretary, including David Rockefeller and Lynn Forester de Rothschild (Forester was introduced to soon to be husband, Sir Evelyn de Rothschild, by Henry Kissinger at the 1998 Bilderberg Group conference in Scotland. They spent their honeymoon at the White House.)
In addition to Rockefeller and Lady de Rothschild, on Friday afternoon, Treasury Secretary Geithner will also meet with the other members of the Board of Directors of the Peter G. Peterson Institute for International Economics to discuss the Administration's agenda for economic growth and strengthening the global financial system.
Here’s the hefty list of the Institute’s Board of Directors:…” http://www.economicpolicyjournal.com/2010/05/interesting-friday-afternoon-for.html
“Securities and Exchange Commission would instead establish and oversee a powerful credit-rating board that would act as a middleman between issuers seeking ratings and the Ratings Agencies.”
wow- the SEC-
now there’s an entity that deserves more trust and responsibilities
http://www.huffingtonpost.com/2010/05/14/senate-approves-new-curbs_n_575895.html
Looks like a loophole…
dammit Ahab, there you go again, spouting sense against a raging tide of nonsense. If you aren’t careful with the tone of your observations, you may win a designation as an honoray Curmudgeon.
Someone asked “Why the ratings agencies?” Because the government decrees that certain funds (pensions, etc.) can’t be invested in anything other than investments of a certain grade. Just like in the old days, all roads lead to the Whore of Babylon. The government created these monsters with its blessings that they (the ratings agencies) could be used to determine the grade of investment, and that in turn would be used to determine whether the investment was permissible. The Calpers suit, like Barry sez, could blow this whole nonsense out of the water. I hope it does.
@AHAB wow-the SEC.
right on the nose – more bad government oversight is not the answer. Maybe a civil fraud investigation or just a public slap down( like Goldman) would get the ratings agencies to take the job more seriously.
Mr. CDO issuer, would you like some porn with that AAA rating?
More government oversight which fails to oversee…. hmmmm? Considering the sums involved, it would seem to me that the easiest, most elegant solution is to build a wall between the issuer and the ratings process by having the investor(s) pay the ratings fees. I believe Jules Kroll, formerly of Kroll Associates, is working on this?
Ratings agencies just provide due diligence shelter so the public money investment crowd can mindlessly go yield hunting. “Well they WERE rated AAA – can’t blame me!!!” Institutionalizing them is a stupid, stupid idea. Rather see them exposed for the fraud they are.
How are they really any different from a stock-pickers advisory service? Should you really throw a billion dollars in pension money into Phizer because a bunch of bureaucrats rated it a buy?
I’m thinking a label on the side of the bond that say “WARNING! Buying asset may be hazardous to you financial health.” would suffice.
“The Senate approved a provision that would thrust the government into the process of determining who rates complex bond deals”
Oh yes, that couldn’t possibly go wrong…
Even when rating agencies weren’t totally corrupt, they were still typically behind the ball in adjusting ratings. It’s time to take references to ratings out of regulations. That would truly strip them of their power.
Why do we need an intermediary? I agree that giving the SEC more responsibility is giving more power to the people that flushed the financial system down the toilet dragging the rest of the economy with it.
Here is a simple rule, make all 5 rating agencies (AM Best, Moodys, S&P, Fitch and Weiss) offer a rating for everything that needs a credit rating. Take out the high and low and take an average of the three remaining ratings. No gaming, no nonsense, no middle man, more transparency. Downsides?
“Under the new provision, the Securities and Exchange Commission would instead establish and oversee a powerful credit-rating board…”
Well of course it passed. It adds bureaucracy and therefore a larger budget and crony jobs. Those things never get voted down.
Oh joy! The SEC!!!! Wonderful news- they have done SUCH a great job, especially before the Crisis. I am happy they chose an organization with such a long and distinguished track record of careful oversight. I am also happy because the SEC is not fraught with conflicts of interest . . .
C’mon Barry . . . you’re too smart to put faith in the SEC, especially when exercising oversight.
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