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:
• Original
Revised

Source:
Rating Agencies Face Curbs
AARON LUCCHETTI, SERENA NG and GREG HITT
WSJ, May 12, 2010  
http://online.wsj.com/article/SB10001424052748704635204575242472908973624.html

Category: Credit, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

46 Responses to “Long Awaited Fixes for Credit Ratings Agencies”

  1. flipspiceland says:

    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.

  2. DeDude says:

    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.

  3. Dedude — that is an interesting idea …

  4. Conquistador says:

    So, why is it that we even need any ratings agencies? They don’t exist in other parts of the financial markets?

  5. 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

  6. call me ahab says:

    “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

  7. The Curmudgeon says:

    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.

  8. Cynic_FA says:

    @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?

  9. BuffaloBill says:

    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?

  10. scharfy says:

    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.

  11. Its_Science says:

    “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.

  12. tcolemanuf says:

    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?

  13. wally says:

    “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.

  14. JET55118 says:

    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 . . .

  15. JET55118 says:

    C’mon Barry . . . you’re too smart to put faith in the SEC, especially when exercising oversight.

    Please see your own posts:

    SEC Saw, Ignored Wall Street Risks
    http://www.ritholtz.com/blog/2010/05/sec-saw-ignored-wall-street-risks/

    SEC: Defective by Design?
    http://www.ritholtz.com/blog/2010/03/sec-defective-by-design/

    SEC: Regulatory Capture Hard at Work
    http://www.ritholtz.com/blog/2010/03/sec-regulatory-capture-hard-at-work/

    Accounting Fraud, Short Sellers & the SEC
    http://www.ritholtz.com/blog/2010/03/accounting-fraud-short-sellers-the-sec/

    “The SEC is utterly incapable of comprehending how markets function. They believe the criminals who commit the fraud, and ignore the whistleblowers who uncover it.”

    You can’t be a hater and a cheerleader.

  16. Mannwich says:

    Since doing a good job (and honest days work) for the sake of doing a good job and integrity isn’t en vogue anymore in our culture, the only way to put any teeth into any future regulations is to hire smart, incorruptible tough as nails people and INCENT very well financially to do their jobs. Of course, this would mean these folks can’t be then thrown under the bus by the powers-that-be every time they take on a Goldman any other entity that owns our government.

  17. dussasr says:

    I have an idea – why don’t we skip the regulation and go back to the way it was before the early 70s when bond ratings agencies were paid by INVESTORS. No conflict of interest, no shopping for ratings. If the bond rating agency puts out bad ratings they go out of business. Problem solved.

    Franken’s proposal just puts in another layer of beaurocracy. How could that ever work out? Another solution would be to just eliminate bond ratings all together and use CDS prices. These are more indicative of credit quality than the ratings are.

  18. remarkl says:

    The failure of the ratings agencies certainly was critical to the particular form of collapse we suffered. Franken’s amendment removes the agencies’ temptation to compete for business on the basis of acomodativeness, but it also relieves them of the obligation to provide decent service to their captive customers. If the supervisory board has discretion in assignments, it will need to be competent and honest, the odds of which are slim. If the board has no discretion in assignments, a dartboard would do nicely. Franken has never impressed me as the sort of guy who thinks past the next sound bite. The unintended consequences of this thing are likely to be serious.

    I prefer DeDude’s idea of having the ratings agency put some skin in the game, although I don’t like CDS contracts that are not issued to actual debt-holders. Maybe the raters should receive deferred compensation based on the ratio of actual to expected defaults in each ratings classification. I realize that there would be a time lag in the process, but I would expect Wall St. to find a way to monetize the expectancy.

    We shouldn’t be distracted, though, from the real cause of the collapse, which was too much money chasing too little sound investment. That imbalance was the result of our trade deficit putting dollars in the hands of foreign investors and Basel II giving banks worldwide a reason to demand highly rated paper. If the ratings agencies hadn’t caved, it’s not clear where the money would have gone, but I suspect we would have suffered some other version of collapse, most probably a run on the dollar.

  19. [...] a fix for the ratings agencies finally here?  (Big Picture, [...]

  20. Marc P says:

    @DeDude: I’ve seen this suggested over the past couple of months and agree that it makes a lot of sense. But wouldn’t that take all the fun out of being a ratings agency?

    @BuffaloBill: No way that the ratings agencies would want to get paid by the investor. The real beauty of getting paid by the issuer is that the issuer isn’t going to sue you for an inflated rating. The ratings agencies claim they have no legal duty to the purchasers and thus cannot be sued by them. This doesn’t seem to make sense given the purpose of the ratings, but that it the legal theory. Without a contract between the purchaser and the ratings agency, then there is no legal duty, thus no liability.

    The same technique was successfully used by the iBanks in the dot-com crash. The analysts gave fraudulent ratings to pump IPOs from their own firms (Chinese wall, gimmeabreak). When caught in the act they claimed they had no actual legal duty to anyone who wasn’t a bank customer. If the public read the analyst reports and relied on them, well tough luck, no lawsuit. The iBanks were not held accountable for the fraud then, so they just learned the lesson and repeated it. Plus they improved it. Rather than have the supposedly independent analysts as part of their own firm, they paid the supposedly independent ratings agencies for happy finishes. Now the banks have the perfect cover (we didn’t do it!) and the ratings agencies hide behind the no-legal-duty argument. The gov’t doesn’t have the cojones to start a RICO action on them all.

    Barry, what are the data on the ratings? I recall that something like 90% of the CDOs rated AAA are now rated junk. It would be interesting to compare the changes in ratings on type of bonds – gov’t, corporate, muni, etc. Everything has gone down a bit due to the economy, but it would appear that it could be statistically shown that the ratings for the CDOs have gone down so far that they could not possibly have been fairly rated in the beginning. Black swan my ass.

  21. NormanB says:

    I can see it now. A government agency is going to ‘rate’ California bonds. They preliminarily come out with a junk rating or a ‘watch’. Senators Boxer and Feinstein get very upset and bring the SEC into a hearing. Or how about a large company in the state of a Senator who get campaign contributions? You get the idea. The Government can not make qualative judgements. What we can do is not to rescue the equity or bond holders in companies that make bad bets. GS, BAC, etc all should have had their equity wiped out, all options to zip, just like what happpened to the Lehman people. One government action would be to make the last five years of compensation subject to a payback if a disaster hit.

  22. BuffaloBill says:

    While we await CalPers…

    Dusassr – I don’t believe CDS premiums were priced correctly mid-decade? Seems to me that premiums were lower than they should have been because of all the “AAA” ratings and the attitude that if there were to be defaults in the mortgage market, these might be regional, not national?

    Marc P: If the investor pays for the ratings, simply indemnify the ratings agencies so that they aren’t liable for any losses. The ratings agencies need to be arm’s length from the investor and behind a wall from the issuer with full transparency to all. Currently, it’s like trusting a used car salesman.

    Besides, ratings are simply one item to look at as an investor. I have never understood why anyone ever placed much faith in these. Do the words due-diligence or caveat emptor ring hollow?

    Assuming one CDO with a AAA rating might be the same as another with a AAA rating is suicidal as long as the ratings agencies are compensated by the issuers. History has demonstrated that adding the SEC into the mix wouldn’t likely improve this very much.

    Of course, believing that Alt-A and sub-prime mortgages were anything but “nuclear junk” is to be living in a Fred Astaire movie. It was all CRAP!

    Of course, when Ranieri created the secondary market in MBS, perhaps Freddie and Fannie should have come to their end?

  23. remarkl says:

    Besides, ratings are simply one item to look at as an investor. I have never understood why anyone ever placed much faith in these. Do the words due-diligence or caveat emptor ring hollow?

    Capital markets work on delegation of investigation. Look at IKB in the Goldman case. They went to a top-notch investment bank (GS), demanded that they hire an independent mortgage picker (ACA), and insisted that the resulting investment be rated AAA. If that’s not due diligence, who needs any of the intermediaries? If we want to run a large trade deficit and issue the world’s reserve currency, we have to be an easy place to invest. If every institutional investor who wants to buy RMBS securities has to inspect the portfolio with its own resources, the whole system collapses. For years, a good investment bank and a good rating were all any investor needed, and it should be all that they need. Those things are part of the US Dollar brand, and we need to do everything we can to defend the brand, not deny that it stands for something.

  24. SA Rose says:

    NormanB;
    I think you misunderstand Franken’s amendment. The SEC wouldn’t be issuing ratings; the ratings would be done by the same companies as now, but the issuer of the bond wouldn’t be able to shop around for an agency promising the most favorable rating .

    The only way I can see this working is if the issuer were unknown to the ratings agency chosen by the SEC, and which agency was chosen remained unknown to the issuer until after the rating was issued. This arrangement would stop not only the issuers’ “agency shopping” but also any backroom deals between the issuer and the agency to receive a favorable rating.

  25. formerlawyer says:

    To scharfy
    I expect you are under estimating the transaction costs associated with investing, sure – in a free for all ie. no rating agencies, it may benefit professional stock pickers with time on their hands but large pension funds and trusts need some assurance that they are engaged in a prudent investment. Sure they can afford to hire someone but given the mantra of diversification can any one fund hire enough specialists? The fees alone would limit the investors gain. This does not take into account the informational imbalance: quick, what is the Chinese Market in steel doing today? The Brazilian coffee futures? You get my point, rating agencies are necessary and provide a service.

    Market regulations are not an anaethma. Laws and regulation on the most basic level make the market. Regulation, as a method of altering behaviour either through sanction or reward is the issue. How can the service of rating agencies best be regulated?

  26. BuffaloBill says:

    @remarkl – I take it you like the ratings agencies as they currently do business?

    I don’t. Someday I’ll write a book titled, “The Paranoid Investor.” I hope you weren’t long mortgages.

    I am in favor of changing the structure of rating agency compensation. I offered one suggestion – have the investor pay. As long as I have been in this business, the current compensation system has seemed to me to be in direct conflict with any investor’s best interests. The same conflicts have been eloquently covered between a firm’s sell-side research and its corporate finance departments.

    In the synthetic CDO market – we’re into far more exotic products. You’re not trading straight corporate debt. Trading exotic instruments in much less liquid markets deserves a closer look.

    Had just a few more buy-side research departments spent just a bit more time looking into these underlying CDO portfolios, we might have had more accuracy in the rating of these issues and in premium pricing within the CDS market.

    Perhaps, this bubble would never have been created or its size reduced? Regardless, the better solution is that either the ratings agencies need “some skin in the game” or the investor’s need to force a solution which eliminates the current conflict-of-interest. The SEC isn’t the answer.

  27. “Capital markets work on delegation of investigation..”

    remarkl,

    that’s remarkable..”delegation of investigation”, you may as well be spinning out Clayton Williams’ old line–””On rape. ‘It’s like the weather. If it’s inevitable, relax and enjoy it.’ ”
    http://cbs11tv.com/watercooler/clayton.williams.offers.2.570545.html?detectflash=false

    Many, Most, of the People on the “Buy-Side” are paid, as they are, to exercise a fiduciary responsibility, are they not?

    and, ya know, if not, and it’s, merely, as you say, ..”delegation of investigation”.., then, quite seriously, their Clients are, tremendously, overpaying, and would be better served having a Girl Scout, w/ an apped-out (sp)iPhone, pick their Port.s.

    BuffaloBill is asking the correct Q: “Do the words due-diligence or caveat emptor ring hollow?”

    If you want to get Paid to Intermediate, stop dissing your Clients. Lest, at the EOD, you care to find yourself, for a Change, the one disintermediated..

  28. remarkl says:

    BB -

    Did you read my post at 12:42 today? The one where I criticized the ratings agencies and said that they need to have some skin in the game?

    I don’t see how “investor pays” will work. What if the issue doesn’t sell out? Is the agency supposed to work on the come? And precisely how would having the investor pay change the pressures and incentives on the raters? They already operated under conditions where bad ratings would destroy their credibility, and that wasn’t deterrent enough. What does ‘investor pays” bring to the party?

    But not to worry. Some ratings agency on its own or as part of a settlement with the SEC, will announce a scheme whereby it stands behind its ratings, and that will be that. At least until the flood of money from abroad again runs out of places to hide, and some other part of the dam bursts. For now, the federal deficit is supplying all the AAA-rated paper the world needs. But that can’t last forever. Then what?

  29. remarkl says:

    Mark -

    Many, Most, of the People on the “Buy-Side” are paid, as they are, to exercise a fiduciary responsibility, are they not?

    Nope. They aren’t. Maybe they should be. But they aren’t. They do have reputations to uphold, and that used to be incentive enough for them not to screw their customers. But that’s no longer the case. That’s why IKB insisted on ACA picking the portfolio for GS’s CDO. That was IKB’s due diligence: it hired an independent american expert in American mortgages who was not selling anything, but was, in fact, taking the biggest risk on the portfolio.

    It is simply unreasonable to ask IKB, and the myriad other similarly situated investors to do more than IKB did and still expect the US to be a good place to invest. Remember, whatever it is you want an IKB to have done, every pension fund and insurance company and foreign bank in the world must also do. The duplication of effort is mind-bogglingly inefficient. What we’er talking about is financial infrastructure. If an investor has to lay its own roads and build its own bridges, he will go elsewhere.

    There is no doubt that the investors who bought subprime garbage overpaid somebody. But this is a one-off historical event. In hindsight, they could have done more. But what they did is what investors had been doing for decades, and I don’t see the sense in saying they were dumb to do so. That’s why BB is asking the wrong question. The emptors did all the caveating they could have been expected to do.

    Your last sentence is correct. But it doesn’t follow that investors did less than they reasonably should have done. On the contrary, it suggests that they kicked the ball exactly as they should have, but then our intermediaries moved the goal posts. And they are being disintermediated as we speak as the money goes straight to Washington, bypassing Wall Street entirely.

  30. BuffaloBill says:

    @remarkl – – Yes, I did see your earlier post. I am not sure how to make “investor pay” work. Yes, it becomes a problem with illiquid issues – much easier i.e., with straight debt. It is a very complicated subject and perhaps forcing the rating agencies to have “skin-in-the-game” is the easier and better route? I like this idea for its basic simplicity.

    As for rating agency credibility – I am appalled that not much media coverage has been given to this. Barry has done a good job in this blog. Yet, it seems most mainstream media have been busy picking on FHA, HUD, Fannie and Freddie as well as Wall Street , Barney, Chris and Chuck. Precious little has been written on the ratings agencies. I have no idea and on what basis these firms could have looked at a CDO built upon portfolios of mezz level alt-a and sub-prime mortgages and rated these AAA? This makes no sense. A novice would know better.

    As for your last question regarding our lovely deficits and debt – “Then what?” Perhaps Barton Biggs’ idea of buying a farm and a shotgun makes sense? Or gold which is a bit more portable than a farm should we all need to head for the hills! I expect saner heads will prevail.

  31. remarkl,

    Thank You for the further thoughts..

    I see, better, now where you’re coming from.

    Though, to cherry-pick, this: “But that’s no longer the case.”, is The Problem. Suredly, that is not what ‘Built Wall St.”, is it?

    and, to continue, this: “That was IKB’s due diligence…” = Massive Fail, no? Wasn’t it, rather, they Bought into, as is EZ, the idea that ACA was, putatively, “an American Expert”?

    further, “It is simply unreasonable to ask..”– I do not think so. They, IKB, either, for their ‘House Account’ (Prop. Trading), or, for their Clients, are representing themselves as Professionals, and Paying themselves as such, no?

    also, here: “every pension fund and insurance company and foreign bank in the world must also do. The duplication of effort is mind-bogglingly inefficient…” again, I doubt it. I do not think that each, and every, would need their own pack of Sherpas, rather, they could, justifiably be expected to pick “Indiana Jones”, as opposed to some third-rate “Jungle Guide” that winds up having them be the Cannibals next 6(x 10^6) meals, yes?

    Though, w/this: “What we’er talking about is financial infrastructure.” I concur. Yes, exactly, it is the Financial, not, necessarily, the Economic, Infrastructure we are discussing.

    With that, this: ” If an investor has to lay its own roads and build its own bridges, he will go elsewhere.”, can be seen in a different light. Those interested in building Economies understand that picks must, both, be set, and swung, to enact the play that moves the earth.

    Easier, of course, to pretend that flickering blips, on a screen, equals that kind of Forethought, and Execution, but We know, do We?, where the path of least resistance leads..

    This: “But this is a one-off historical event.”, is the most objectionable. Were there not ‘South Seas’ Bubbles, Tulip Bulbs trading for many Head of Livestock…..’29, ’87, ’98, ’000-002, et al. (to abridge, and truncate) ad infinitum..

    And, here: “But what they did is what investors had been doing for decades, and I don’t see the sense in saying they were dumb to do so.”, still on the ‘objectionable’-train, yes, being Sheared. And, yes, they are Stupid for not realizing the sharpness of the Blades they put themselves against..

    Though, I’ll say, w/this: “..On the contrary, it suggests that they kicked the ball exactly as they should have, but then our intermediaries moved the goal posts. And they are being disintermediated as we speak as the money goes straight to Washington, bypassing Wall Street entirely..”, I’m not sure I, fully, draw the meaning you may intending..

  32. “..Precious little has been written on the ratings agencies. I have no idea and on what basis these firms could have looked at a CDO built upon portfolios of mezz level alt-a and sub-prime mortgages and rated these AAA? This makes no sense. A novice would know better…”

    BB,

    you may have answered your own Q:

    The ‘media’ cannot cover, in any detail, what the ‘Ratings Agencies’ “were up to”, for the simple Reason that they would, if Honest, have to paint them as, willing, co-conspirators in a Racket that AG “Bag” Holder would blanch before prosecuting..
    http://www.thefreedictionary.com/blanch
    def. 2, #7

  33. Henry Buttal says:

    Love DeDudes brilliant economic insight, but you are missing the sub-text here….
    The new king of schlocky legislation, formerly of similarly poor near pornographic movies and humor, Al Franken, proposes an amendment to eliminate any independent threat to the U.S.’s AAA rating:
    1) Create an ineffectual, politically controlled lapdog rating agency within the SEC
    2) Let the independent agencies, no matter how good or bad, whither and die on the vine.

    Shazaam! No chance of any politically aligned entity, like Fannie, Freddie, or the USG, ever getting a bad rating, even in a fit of misplaced honesty!

  34. remarkl says:

    Mark -

    I’m having trouble reconciling your demand that IKB do its own investigation of American mortgages with your claim that its peers would rely on Indiana Jones. ACA was IKB’s Indiana Jones. Your condemnation of ACA as “third-rate” is wholly unsupported by the facts as they existed when IKB hired them. ACA had great experience and credentials, and they put substantial skin in the game. Anyway, if all you’re saying is that IKB should have picked a better expert, then you are not saying that they should have kicked the tires themselves. Which is it? Kick the tires, or hire Indie?

    My last paragraph refers to the route the money we spend takes to reenter our economy. Historically, most of that money (along with money from exports) ended up at Main Street banks, which recycled it as capital for US capitalists. With globalization and the rise in the price of oil, more and more of our money went overseas and came back through the Port of New York. Foreign investors wanted highly-rated paper, so our investment banks created it out of drek. That’s not so hard to do in theory. Wouldn’t you rate as AAA a bond that pays off if the worst team in the NL wins at least five games in a season? That’s how senior tranches work. But eventually, Wall St. ran out of good paper, and started passing off bad, with the help of corrupted ratings agencies. That left foreign investors pretty much only one sure source of genuinely AAA paper – Uncle Sam, which is why the ten-year Treasury note pays so little interest. The money is by-passing Wall Street’s paper factory and going straight to Washington – disintermediating, if you will.

    I wrote a lot about this in the early days of my blog last spring. This post is typical. (Note that I had some suggestions then about fixing the ratings agencies that I now reject as unworkable. Maybe I’ll edit the post…)

  35. remarkl,

    I aprreciate your response.

    this: “the route the money we spend takes to reenter our economy. Historically, most of that money (along with money from exports) ended up at Main Street banks, which recycled it as capital for US capitalists. With globalization and the rise in the price of oil, more and more of our money went overseas and came back through the Port of New York. Foreign investors wanted highly-rated paper, so our investment banks created it out of drek. That’s not so hard to do in theory. Wouldn’t you rate as AAA a bond that pays off if the worst team in the NL wins at least five games in a season? That’s how senior tranches work. But eventually, Wall St. ran out of good paper, and started passing off bad, with the help of corrupted ratings agencies. That left foreign investors pretty much only one sure source of genuinely AAA paper – Uncle Sam, which is why the ten-year Treasury note pays so little interest. The money is by-passing Wall Street’s paper factory and going straight to Washington – disintermediating, if you will.”

    is the whole of the Problem. (Also, as an aside, that, ‘the low-rates on USTreas paper’, which Greenspan laughed off as ‘the conundrum’.)

    though, with this: “Which is it? Kick the tires, or hire Indie?”, IKB, at the EOD, is responsible for their own DD. The ‘Housing Market’ was an, especially, easy one to see. Beyond the, near, endless, amount of freely available commentary, anyone, with a Round-Trip ticket, a Rental Car, and sense of skepticism, could have seen what was being Engineered in that space.

    Though, as you laid out, the imperative was to ‘Buy U$D’. (here, “Foreign investors wanted highly-rated paper”) Their Financial consequences stem, moreso, from Political, rather than Economic, considerations..

    which leads back to ““But what they did is what investors had been doing for decades, and I don’t see the sense in saying they were dumb to do so.”, still on the ‘objectionable’-train, yes, being Sheared. And, yes, they are Stupid for not realizing the sharpness of the Blades they put themselves against..”

    Hope that makes sense, was running into the “5 minute conversation v. pages of text”- ‘problem’..

  36. remarkl says:

    Mark -

    One more try on the DD issue . I think you are Monday morning quarterbacking an unacceptable duplication of effort by every money manager in the world. And you have not explained what you would have had IKB do that you would not have asked every investor in every RMBS also to have done.

    Money management is a competitive business. Customers in 2006 were only willing to pay for the DD that IKB did. For it to have done more, it would have had to charge more, and if it had charged more, it would have lost customers. IKB was defrauded – not by GS/Paulson, necessarily, but certainly by Countrywide and WAMU; it was not behaving unreasonably for people in its situation.

    But now we’re just going around in circles.

  37. remarkl,

    there are, at least, two different things that are trying to be discussed..

    but, is IKB an Actor w/ Fiduciary Responsibility?

    if so, this: “Money management is a competitive business. Customers in 2006 were only willing to pay for the DD that IKB did. For it to have done more, it would have had to charge more, and if it had charged more, it would have lost customers.”, is no Shield. and, worse, this: “it was not behaving unreasonably for people in its situation.”, is no excuse.

    this: “IKB was defrauded..”, is a different story..

    note, IKB may as well be XYZ.

    and, as far as the MMQ-deal, see http://www.doctorhousingbubble.com/ note his ‘blogroll’, many of those sites have been talking about these issues for a long, long time..

    If I can find out about it, and keep an eye peeled during my travels, it’s, beyond, pathetic that XYZ is trotting out the “Everyone else is doing it..”/”Woocoodanode?” -PR spin points..

    and, be sure, this is not meant to be directed, personally, to you, just those ideas..~

  38. remarkl says:

    I disagree. Even if IKB were a fiduciary, it was not a guarantor. Its insistence on ACC as portfolio picker and a AAA rating was prudent by contemporary standards, and that’s the test. Anything more would have put it out of business. To ask more of IKB, you have to assume that IKB had better vision than ACA, and that assumption is just not warranted.

    Why avoiding corporate suicide is not “an excuse” for merely being prudent isn’t clear to me. In a competitive business, industry practice determines survivability. In malpractice cases, docs are judged against a “standard of care.” So are fiduciaries. That “everyone is doing it” is a complete defense when the issue is commercial diligence and not moral turpitude. You seem to be conflating the two.

    You are saying that IKB is incompetent because it was not as astute as John Paulson but only as astute as the other 99% of the investment world that continued to buy senior tranches of US RMBS securities. If that isn’t MMQ, I don’t know what is.

  39. remarkl says:

    Mark -

    Let me put the MMQ thing in context of my Grand Unified Theory of the collapse. If IKB should have been skeptical of ACA’s portfolio-picking ability and S&P and Moody’s ratings, then the US had already forfeit its right to run the trade deficit it was running. We were essentially exploiting our comparative advantage in money-storage. The USA was the best place to sell stuff because the USA was the best place to repatriate export dollars, because we had the best credit and the best financial infrastructure. To say that AAA-rated USA paper could not be trusted is to say that we no longer had that comparative advantage, which means that exporters would shortly figure out that there was no point in trading with us if they could find other customers.

    To me – as it was to Alexander Hamilton – protecting the brand is crucial. You are saying that the brand doesn’t matter, that foreign investors should simply do more of their own DD and continue to trade with us. I don’t believe that’s how the world works. Our financial brand is what enables us to import. Our idiot politicians, including the Blamer-in-Chief, spend their days trying to figure out how to sully the brand to curry favor with populist yahoos. New York is where our import dollars have to re-enter the country, and yet we post a statute in the harbor, shine a light on Wall St. and declare “We’ll make you tired and poor.” Smart as hell, that BHO.

    Connect the dots. You seem to agree that our trade deficit has generated a demand for safe dollar-denominated paper. Right now, the US Treasury is meeting that demand. But when we finally do address the deficit, the Treasury will stop meeting that demand, and the private sector will be the sort of place that folks cannot invest in without first renting a car. We need to make investing here easy and yet you posit how much more work a foreign investor should have to do. The system will not equilibrate with effort being unnecessarily duplicated. Some other bad thing will happen to wring that inefficiency from the system. So the point isn’t that IKB shouldn’t have done more; it’s that IKB should not have had to do more, and so we cannot claim, without shooting ourselves in the foot, that it should have done more.

  40. remarkl says:

    That’d be a “statue” in the harbor…

  41. engineerd1 says:

    “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.”

    Nothing to disagree with here. But I simply do not have the organ required to put my faith in government to fix this, and shake my head in wonder at seemingly intelligent people who apparently do. In particular this govt of leftist whores. Do you imagine that Al Franken or little 0 and his team of commie perfessers is going to do anything in any way related to opening anything up to competition?

  42. remarkl,

    any forthright analysis of the Structural Decay of the Economic underpinnings of U.S. would lead to: “then the US had already forfeit its right to run the trade deficit it was running. We were essentially exploiting our comparative advantage in money-storage.”

    it is a story of the Petro$-era, in a nutshell.
    ~~
    I did not say: “You are saying that the brand doesn’t matter”. And, I concur with: “To me – as it was to Alexander Hamilton – protecting the brand is crucial.”

    it’s a, totally, different point.
    ~~
    “… foreign investors should simply do more of their own DD and continue to trade with us.”
    “… All investors should simply do more of their own DD and be circumspect about whom they trade with.”
    ~~
    “Our idiot politicians, including the Blamer-in-Chief, spend their days trying to figure out how to sully the brand to curry favor with …see:
    http://www.economicpolicyjournal.com/2010/05/interesting-friday-afternoon-for.html
    and http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Trilateral+Commission+Council+on+Foreign+Relations
    for starters..
    ~~
    “You seem to agree that our trade deficit has generated a demand for safe dollar-denominated paper.”–mainly, to keep Exchange Rates tilted in favor of Exports to the U.S. ..
    ~~
    You want to talk about ‘idiot politicians’ and think that the current “Dollar” paperchase makes sense (?) I disagree.

    The problem begins here http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Federal+Reserve+Act
    ~~

  43. remarkl says:

    Mark -

    To me, “protecting the brand is crucial” and “foreign investors should simply do more of their own DD and continue to trade with us” are mutually exclusive. Brand name shopping is due diligence. Otherwise, the brand has no value. If you’re going to perform a chemical assay on your acetaminophen tablets, why waste you money on Tylenol?

    As for fiat money, I’m for it. People who are against it have no idea how bad a hard-currency industrial economy would be. They think boom and bust cycles and the risk of hyperinflation are worse than whatever is the alternative, but they won’t do the math on what that alternative is, so how do they how it stacks up? I reject utterly the idea that a country’s economy should be determined by how much yellow metal its miners can find or its soldiers can steal. Nuts. Just plain nuts.

  44. remarkl,

    even though, I, truly doubt this: “Brand name shopping is due diligence.”, Tylenol is a really bad example.

    see.. http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Tylenol+recall for the latest mishap.

    and, I said nothing about ” a country’s economy should be determined by how much yellow metal its miners can find or its soldiers can steal. ”

    nor, even, “hard-currency”.

    do some reading, note: you don’t need the FedRes to have a Fiat Currency.

  45. remarkl says:

    I’m done trying to decipher your cryptic nonsense. If you’ve got something to say, write a coherent paragraph that says it, if you can.

    “Do some reading,” my ass.