Comments on: Rating Agencies: Moody’s, S&P, and Fitch (REVISED VERSION) http://www.ritholtz.com/blog/2009/02/rating-agencies-moodys-sp-and-fitch-revised-version/ Macro Perspective on the Capital Markets, Economy, Geopolitics, Technology, and Digital Media Sat, 21 Nov 2009 19:25:27 -0500 http://wordpress.org/?v=2.8.5 hourly 1 By: foobar http://www.ritholtz.com/blog/2009/02/rating-agencies-moodys-sp-and-fitch-revised-version/comment-page-1/#comment-146841 foobar Thu, 19 Feb 2009 16:00:52 +0000 http://www.ritholtz.com/blog/?p=18824#comment-146841 It's not even half so simple. The real culprits were the pension portfolio managers and those who wrote the laws that mandated they own only investment-grade securities. The laws sucks if you're a pension PM, because it means you cannot take risk, and hence your bonus always is lower than your friends' bonuses at Fido. So, Investment Bankers (IBs) saw the need, and created products that carried investment-grade ratings yet had higher yields than Treasuries. But it was hardly the case of conniving bankers and raters ganging up to roll 'conservative, trusting' pension PMs. Instead, pension PMs, who themselves earn seven figures yearly and are hardly neophytes, bought the credits because they yielded the most of anything within the universe they were legally allowed to own. They didn't do much due dilly of their own not out of doe-eyed trust of credit rating agencies, but because there was very little risk that anyone could complain later on, sort of the 'no one was ever fired for buying IBM' defense. If things went sour, the PMs could in effect point at the law and say 'see, the state itself said it was OK to own these things'. The pension PMs knew exactly what they were doing -- its called 'regulatory arbitrage'. And the upside was more coupon income and a higher bonus for themselves. They also did not worry too much about being fired -- public pension managers, well connected politically, can usually keep their job no matter what happens. The greed of the stewards of savings themselves, the pension PMs, is the still under-reported aspect of this mess. The rating agencies were at worst dupes and clueless abetters -- relative to the $ flow they made almost nothing. The IBs did make bucks selling in what the market demanded, but the driver overall was the pension PMs thirst for higher-coupon investment-grade structured finance tranches, ie regulatory arbitrage product, that led to higher bonuses for awhile. The real story, as always, is what motivated the BUYERS with the bucks. It’s not even half so simple. The real culprits were the pension portfolio managers and those who wrote the laws that mandated they own only investment-grade securities. The laws sucks if you’re a pension PM, because it means you cannot take risk, and hence your bonus always is lower than your friends’ bonuses at Fido. So, Investment Bankers (IBs) saw the need, and created products that carried investment-grade ratings yet had higher yields than Treasuries. But it was hardly the case of conniving bankers and raters ganging up to roll ‘conservative, trusting’ pension PMs. Instead, pension PMs, who themselves earn seven figures yearly and are hardly neophytes, bought the credits because they yielded the most of anything within the universe they were legally allowed to own. They didn’t do much due dilly of their own not out of doe-eyed trust of credit rating agencies, but because there was very little risk that anyone could complain later on, sort of the ‘no one was ever fired for buying IBM’ defense. If things went sour, the PMs could in effect point at the law and say ’see, the state itself said it was OK to own these things’. The pension PMs knew exactly what they were doing — its called ‘regulatory arbitrage’. And the upside was more coupon income and a higher bonus for themselves. They also did not worry too much about being fired — public pension managers, well connected politically, can usually keep their job no matter what happens. The greed of the stewards of savings themselves, the pension PMs, is the still under-reported aspect of this mess. The rating agencies were at worst dupes and clueless abetters — relative to the $ flow they made almost nothing. The IBs did make bucks selling in what the market demanded, but the driver overall was the pension PMs thirst for higher-coupon investment-grade structured finance tranches, ie regulatory arbitrage product, that led to higher bonuses for awhile. The real story, as always, is what motivated the BUYERS with the bucks.

]]> By: SWMOD52 http://www.ritholtz.com/blog/2009/02/rating-agencies-moodys-sp-and-fitch-revised-version/comment-page-1/#comment-145370 SWMOD52 Wed, 11 Feb 2009 19:28:27 +0000 http://www.ritholtz.com/blog/?p=18824#comment-145370 Why would the fee on sub-prime vs prime be different? Either you rate the secrurity or not. How the people at these companies are not in jail but are in fact still in business is madness. Why would the fee on sub-prime vs prime be different? Either you rate the secrurity or not.

How the people at these companies are not in jail but are in fact still in business is madness.

]]> By: FrancoisT http://www.ritholtz.com/blog/2009/02/rating-agencies-moodys-sp-and-fitch-revised-version/comment-page-1/#comment-145244 FrancoisT Wed, 11 Feb 2009 08:24:08 +0000 http://www.ritholtz.com/blog/?p=18824#comment-145244 LOL! MH must have had a shock when they compared this version to the original. Like you said: "I don't do diplomacy!" LOL!
MH must have had a shock when they compared this version to the original.
Like you said: “I don’t do diplomacy!”

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