Should Ratings Agencies Disgorge “AAA” Fees on Junk ?
A new Bloomberg column on the rating agencies:
“Standard & Poor’s called for more regulation of credit-rating companies, recommending a global framework that would eliminate potential conflicts of interest, increase transparency and create an industry code of ethics.
New rules should ensure ratings are independently derived and unbiased, the methodologies used are disclosed, and regulators are given the authority to sanction companies if they fail to comply with “appropriate policies,” the unit of New York-based McGraw-Hill Cos. said today in a white paper outlining 10 goals for policymakers.
Ratings companies including S&P and Moody’s Investors Service, the two biggest, have come under fire from regulators and investors for the quality of their work. Flawed top ratings on securities that turned to junk lie at the root of the worst financial crisis since the Great Depression, Frank Raiter, a former S&P managing director, said last year. In the paper, S&P acknowledged assumptions haven’t held up in evaluating structured securities backed by subprime mortgages. . .
The U.S. Securities and Exchange Commission has criticized the ratings companies for conflicts of interest that may have led to excessively high bond ratings and a failure to warn investors about default risks. Financial institutions worldwide have taken almost $1.2 trillion in writedowns and credit losses since the beginning of 2007 as the subprime mortgage market collapsed, weakening the global economy.”
I call on Congress to investigate the fees the agencies charged for junk paper, payola rated AAA, and consider a full disgorgement of fees
Let’s start looking into the firms that started the credit crisis in the first place . . .
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Source:
S&P Calls for Greater Regulation on Credit Ratings
Bryan Keogh
Bloomberg, March 4 2009
http://www.bloomberg.com/apps/news?pid=20601087&sid=a6vbtRVWxOjc&
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March 4th, 2009 at 10:38 am
why aren’t investors suing the rating agencies?
March 4th, 2009 at 10:41 am
The statement tracks those used by all criminals who know the jig is up:
“I just discovered that I have been discovered. In light of this development, I plead ignorance, and call for greater awareness of the law among my fellow, similarly situated, criminals, and for stiffer penalties to be applied should they, or I, commit similar crimes in the future. I offer this new-found wisdom in the fervent hope that I will be allowed to keep the profits from my crime, or at a minimum, not be relieved of them AND be subject to a lengthy period of imprisonment.”
March 4th, 2009 at 11:01 am
Wait a minute here, this sounds fishy are you trying to say that it was all the fault of the ratings agencies?
I knew there was a housing bubble, I knew it was going to pop. I am not an analyst, I have no MBA, Nonetheless I was interested in the market for home buying purposes and the writing was clearly on the wall, heck you could have called it a mural. So there were a lot more people involved in this, then some ratings agencies, If you’re going to demand they cough it back up, lets go after everyone involved.
Freeze and Seize, that’s my mantra.
March 4th, 2009 at 11:04 am
Somebody should write a book! Oh, wait.
March 4th, 2009 at 11:07 am
How about the folks at Countrywide now making bundles buying up the bad mortgages they made two years ago. It just ain’t right.
March 4th, 2009 at 11:16 am
Come on guys, let’s be reasonable. I suggest an even trade: the ratings agencies return the cash and in return they get equal value (per their ratings) in sub-prime MBS.
March 4th, 2009 at 11:36 am
bman,
see: “Standard & Poor’s called for more regulation of credit-rating companies, recommending a global framework …”
this: “recommending a global framework …” is the currency they’re using as their “Get out of…”-Card.
the people publishling this, the above, story (faerie-tale) already know: “So there were a lot more people involved in this, then some ratings agencies…”
that isn’t the point. a big diff. ‘tween “being Blind”, and “paid not to See/Tell.”
March 4th, 2009 at 11:42 am
“The U.S. Securities and Exchange Commission has criticized the ratings companies for conflicts of interest that may have led to excessively high bond ratings and a failure to warn investors about default risks.”
The SEC??? Who are they to be giving criticism – top officials there ought to be on trial for criminal negligence. Besides, it really isn’t the job of rating agencies to warn of systemic failure that is an outgrowth of both government policy and general participation in a credit bubble. That falls to the Treasury, the Fed, Congress and the President.
March 4th, 2009 at 11:52 am
Any system that relies upon credit ratings that are paid for by the issuer is fundamentally flawed. Why this requires any sort of explanation is beyond me.
March 4th, 2009 at 11:55 am
Almost everyone is in favor of fee disgorgement, and in favor also of bonus “clawbacks” that are related directly or indirectly to the creation and sale of mortgage-backed products (except those, of course, who would be targeted).
I just don’t know what the legal basis would be for doing it.
March 4th, 2009 at 12:04 pm
“I just don’t know what the legal basis would be for doing it.”
That the product (ratings) was defective. Make it a product liability case, and there’s strict liability in many states. If lawyers can convince juries that their smoker-clients had no idea cigarettes were dangerous, making ratings into a “product”, subject to product liability law, ought to be a cakewalk.
March 4th, 2009 at 12:39 pm
“I just don’t know what the legal basis would be for doing it.”
_____
Fraud and conspiracy to defraud.
March 4th, 2009 at 12:54 pm
The Curmudgeon @ 12:04
I certainly wouldn’t mind seeing the ratings agencies get “taken to the cleaners” in the courtroom as payback for their recent transgressions. But at the same time, the rules of the game should be sufficiently clear so that in the future, a course of action would exist such that if followed, the ratings agencies would be relatively immune from lawsuits.
March 4th, 2009 at 12:59 pm
I call on Congress and the Basel Committee to stop running protection for the ratings agencies by designating them as “External Credit Assessment Institutions” and “Nationally Recognized Statistical Rating Organizations” and allowing regulations and capital requirements to be based on their judgments. Let them earn their reputation and value, don’t grant it to them.
March 4th, 2009 at 1:11 pm
I suggested elsewhere, some months ago, that the Underwriters Laboratory model might be a good one.
1) UL is funded by the insurers, not by the product manufacturers. Their interests are thus aligned with the purchasers of the products (albeit indirectly), not the sellers. For the ratings industry, this corresponds to a reversion to their old business model, where the buyers of the securities paid for the ratings.
2) UL’s evaluations are based on standards which they develop and publish. This lets the manufacturer know how to make the product, and lets the consumer know what the product can and can’t do. For the ratings industry, this would involve developing a list of securities products that they are willing to rate, and publishing the standards that a security must meet to get a rating.
3) UL will not ever pass any product that does not conform to one of their standards. Manufacturers are free to develop other products, but they won’t have the UL seal, and both consumers and insurers can take that into account. In the ratings case, this would mean that banks are still allowed to come up with novel financial products, but they won’t be eligible for a AAA rating (or any rating at all) from the agencies – and traders, insurers, and others dealing with those products can take that into account.
4) UL will sometimes evaluate a new class of products and develop a new standard covering those products. Financially, this would correspond to seeing how those novel-but-unrated financial products behaved over a few years (or perhaps decades) of use. If they didn’t seem to be faulty, the necessary ratings standards would be developed and published; the “novel” products could then receive ratings like any other product.
March 4th, 2009 at 5:40 pm
Ken I like the sound of it .. UL seal … and I think an engineering based industry in charge sounds good too .. the industry of Wall Street needs some external eyes
March 4th, 2009 at 7:27 pm
“Frank Raiter”?
When he left S&P, it should have been a clue.
March 4th, 2009 at 7:40 pm
“Let’s start looking into the firms that started the credit crisis in the first place . . .”
Agreed. These people have greater influence than most and there is still a huge risk that this will all get swept under the carpet after the worst of the bear is over. Future regulation and restoring common sense to the system is, IMHO, more important than fixing the present, which only can be fixed to a degree.
The SEC doesn’t seem to have much to do with its time so when will they start to do something about this?
It’s clear that the ratings model is fundamentally flawed and the potential for payola, again involving changes to the remuneration structure, must be eliminated.
Your book can help keep this Agenda visible and high in the public awareness. I agree that you will lose the moral high ground by going overboard and being seen as vindictive towards MH. Low key prose and factual detail would not allow them, especially having now released this White paper, to gain back to advantage.
March 4th, 2009 at 9:36 pm
Observors complain that issuers underwrite the bond rating process and recommend that buyers should pay for the process. But if the issuers don’t have some incentive to give info to the agencies, why would they?
And what is a rating worth? Does PIMCO pay the same as the local investment advisor to get the up to date rating on GE?