Why the Ratings Agencies Deserve the Death Penalty. The very belated Federal civil suit against Standard & Poors is based on one very specific deal, with an extremely egregious email trail. Looking at the entirety of the crisis, the Credit Rating Agencies (the properly blamed CRA) were major players. Standard & Poor’s and Moody’s as well as the much smaller Fitch ratings agencies all appear to be culpable for similar frauds. Here is what I accuse them of doing: 1. Business Model: They shifted their business model from an investor-pays-for-research to an underwriter-pays-for-ratings. Normally, any company is free to change their business model. 2. 3. 4. There are more examples, but let me simplify this for you: In an ultra low rate environment, Fixed income managers were under tremendous pressure to find yield.
Had they not engaged in this sort of fraud, an enormous amount of securitizations of junk paper COULD NOT HAVE HAPPENED. It started with the Greenspan Fed, but the next group in our Calvacade of Blame are the rating agencies. Time for Legal Liability for Rating Agencies. “Ratings firms fear litigation more than they fear regulation because past regulation efforts haven’t “been that draconian.” -Scott McCleskey, a former Moody’s compliance officer who has testified before Congress about the industry.
Of all the various contributors to the financial crisis and economic collapse, none loom larger than the Ratings Agencies. They were the prime enablers of the entire crisis, allowing global asset managers to purchase all manner of junk paper due to their triple AAA rating. Had these various securitized RMBS been rated properly, i.e., reflecting their true value and risk factors, most of the crisis would have been avoided. The big 3 ratings agencies have escaped much blame, liability and scrutiny for most of the post-crisis period.
As Columbia Law School professor John Coffee noted, the credit rating agencies have been “essentially liability proof and it’s not because they’re infallible.” Until now. Category: Credit, Legal, Regulation. Rating agency worker: 'I am genuinely frightened' | Joris Luyendijk. We are meeting in the heart of the City after the banking blog called on rating agency employees to talk about their experiences. The man I am meeting is British, in his early 40s, a fast talker and very friendly, the sort of person to apologise profusely when arriving four minutes late. He orders an orange juice. "Every time I read about a new financial product, I think: 'Uh-oh.' Every new product is described in those same warm, fuzzy phrases: how great they are and how safe. "I still get so angry when I think about it. "The reality was very different.
"Moody's and S&P are the two major credit rating agencies in the world. I was there when the great collapse of 2008 happened, giving me a ringside view. "I was on holiday in the runup to the collapse of Lehman Brothers, when the crisis exploded. Now here we are four years later, and the most incredible thing has happened – we've learned nothing from the whole thing. "Have you read Gillian Tett's Fool's Gold about the crisis?
S&P was Flat-Out Wrong — No Caveats" Rating Agencies and the securitization process. Michael Hudson: The Case Against the Credit Ratings Agencies. By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College In today’s looming confrontation the ratings agencies are playing the political role of “enforcer” as the gatekeepers to credit, to put pressure on Iceland, Greece and even the United States to pursue creditor-oriented policies that lead inevitably to financial crises. These crises in turn force debtor governments to sell off their assets under distress conditions. In pursuing this guard-dog service to the world’s bankers, the ratings agencies are escalating a political strategy they have long been refined over a generation in the corrupt arena of local U.S. politics. Why ratings agencies public selloffs rather than sound tax policy: The Kucinich Case Study Moody’s, Standard and Poor’s and Fitch focus mainly on stocks and on corporate, state and local bond issues.
It was to block this privatization that Mr. Nationally recognized statistical rating organization. A Nationally Recognized Statistical Rating Organization (NRSRO) is a credit rating agency (CRA) that issues credit ratings that the U.S. Securities and Exchange Commission (SEC) permits other financial firms to use for certain regulatory purposes. Originally, seven rating agencies were recognized as NRSROs, a number that dwindled as a result of mergers to six by the mid-1990s[1] and then to three by 2003.[2] As of November 2011, nine organizations were designated as NRSROs.[3] Ratings by NRSROs are used for a variety of regulatory purposes in the United States. In addition to net capital requirements (described in more detail below), the SEC permits certain bond issuers to use a shorter prospectus form when issuing bonds if the issuer is older, has issued bonds before, and has a credit rating above a certain level. SEC regulations also require that money market funds (mutual funds that mimic the safety and liquidity of a bank savings deposit, but without U.S.
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Moodys. Fitch Ratings. Moody's downgrade: both Osborne and Balls get it wrong. The reaction of politicians to Moody's decision to put the UK's AAA rating on "negative outlook" was predictable - and predictably tendentious. The Chancellor described it as "proof that, in the current global situation, Britain cannot waver from dealing with its debts" while the Shadow Chancellor said it was a "significant warning. " They are both wrong.
It proves nothing and signifies less. The misdeeds and incompetence of the credit ratings agencies in the run-up to the financial crisis has been well documented. What is less well understood is that when it comes to rating sovereign debt, they simply do not know what they are talking about; worse than that, they do not even understand what their own credit ratings mean. Moody's says its ratings are "opinions of relative credit risk of financial obligations...they address the possibility that a financial obligation will not be honored as promised.
" The implication is obvious. So what, in fact, do Moody's think they are saying?
Is the SEC Finally Taking Serious Aim at the Ratings Agencies? If the grumblings in the comments section are any guide, quite a few citizens are perplexed and frustrated that the ratings agencies have suffered virtually no pain despite being one of the major points of failure that helped precipitate the global financial crisis. If there were no such thing as ratings agencies (i.e., investors had to make their own judgments) or the ratings agencies had managed not to be so recklessly incompetent, it’s pretty unlikely that highly leveraged financial institutions would have loaded up on manufactured AAA CDOs for bonus gaming purposes.
But the assumption has been that the ratings agencies are bullet proof. Their role is enshrined in numerous regulations and products that make ratings part of an investment decision. And they get a free pass on mistakes, no matter how egregious. A cynic might say that this action is politically motivated, a punishment for the S&P having crossed Uncle Sam by downgrading US debt. Delphinus was highlighted in a U.S. Surprise! Ratings Agencies Still Suck! More shocking news about the inept rating agencies: “The agencies rated billions of dollars worth of these bonds, mostly in the last two years. With shocking rapidity, even some of those triple A-rated bonds have defaulted. Of the more than $85 billion of re-remics issued since 2009, an estimated $30 billion may be under review by S. &P., according to Bloomberg News . . .As everyone knows by now, the credit ratings agencies played an enormous role in creating the conditions that led to the financial crisis.
Their willingness to slap triple-A ratings on all manner of Wall Street-engineered mortgage rot was enormously lucrative for the raters, but a disaster for the global economy. Unfortunately, as the episode in December shows, the credit ratings agencies are still struggling to get it right.” Go figure. Category: Bailouts, Credit, Really, really bad calls, Regulation.
The Activist Ratings Agencies and Their Poor Public Sector Predictions. In 1996 Thomas Friedman said: “There are two superpowers in the world today in my opinion. There’s the United States and there’s Moody’s Bond Rating Service. The United States can destroy you by dropping bombs, and Moody’s can destroy you by downgrading your bonds. And believe me, it’s not clear sometimes who’s more powerful.” We may have an answer soon. Dave Dayen is watching the ratings agencies, particularly S&P, say that a clean debt ceiling increase won’t cut it, and that there needs to be a $4 trillion dollar deal in order to keep the United States’ credit rating secure: This concern about the markets has happened very suddenly. All of a sudden there’s a belief that a clean increase or a small debt deal with a minor amount of spending cuts would not be enough to avoid a downgrade. Two quick sources that you might find helpful.
But their travels in the political sphere go beyond that. Check out Josh Rosner and Joseph Mason’s Where Did the Risk Go? F. Like this: Like Loading... Lets rate the credit raters. The credit-rating agencies remain pivotal in the world economy, despite their inability or unwillingness to rate credit-worthiness in a credible way in the years running up to 2007. Wolfgang Munchau's chilling op-ed in today's FT warns that the incalculable possibility of France losing its AAA credit rating means that the ECB is currently in the business of producing another opaque financial product, to rival the murky mortgage-backed CDOs that produced the (first) financial crisis.
This pantomime of quantification, resting on techniques of risk analysis whose authority has collapsed, is therefore adding to the uncertainty of the future, rather than alleviating it. The problem that policy-makers, banks and investors currently face is the absence of any higher perspective, than those which produced this mess in the first place.
Politicians largely misunderstand the nature of this organised relativism and the role it offers them. Al Jazeera interview on Rating Agencies. EmailShare 0EmailShare I’ve done numerous interviews on Al Jazeera’s news and business programs over the last 5 years; this is the first one I’ve been sent a clip of–and I’ll try to keep getting them now that the ProfSteveKeen YouTube Channel is up and running. The topic was the role of the Credit Rating Agencies and their role in the crisis. Though the interviews are short new pieces and don’t leave time to get into topics in any great detail, the fact that Al Jazeera covers topics like this in some critical detail puts it several steps ahead of the media pack, especially in the US and Australia.
I am a professional economist and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. So What? By James Kwak Everyone (well, the media at least) seems to be acting as if Moody’s downgrading the United States would be a bad thing. I feel like I must be missing something. First of all, we know what bond ratings are worth. See, oh, the entire past decade for evidence. (It wasn’t just mortgage-backed securities; they didn’t downgrade Enron until after the SEC announced an inquiry and CFO Andrew Fastow was forced out, and less than five weeks before the company declared bankruptcy.)
Still, the point of bond rating agencies is to do research on securities that other investors may not know well. But this is emphatically not true when it comes to U.S. government debt. On top of that, we all know that the short-term likelihood of default has nothing to do with the government’s finances. But in that case, what is Moody’s thinking? So I must be missing something.