The WSJ has a longish article that takes a cursory look at the agencies. It does not provide much in the way of new insight into the Nationally Recognized Statistical Rating Organization (NRSRO).

It does inform us, however, that ratings shopping is not only still going on, but has been made easier, courtesy of the credit crisis.

Here is the WSJ:

“The fate of ratings-shopping now hangs in the balance. The financial-regulation overhaul bill passed by the Senate on Thursday would limit the ability of bond issuers to pick firms to rate their securities. But the House version of the bill contains no such provision, and some key lawmakers have raised concerns about the idea. It remains to be seen whether the proposal will survive as the two chambers begin efforts Monday to reconcile their differences.

Critics say the system for providing critical information to bond investors continues to be compromised by a big conflict of interest: Bond issuers pay ratings firms, so raters have an incentive to give inflated grades to attract or maintain business. Investors who rely on ratings to assess a bond’s risk usually aren’t told if other raters were shown deals but didn’t end up rating them.

An examination of recent bond deals and interviews with people involved with the ratings process indicate that while ratings firms have become more cautious about giving top ratings to complex bonds, bond issuers and their investment bankers still shop around to obtain the most favorable treatment.

Some in the industry say ratings shopping may even have gotten easier in the wake of the financial crisis. S&P, Moody’s and Fitch Ratings are no longer as dominant in the business of rating bonds as they were, in part because they have pulled back partially from the mortgage market. Other players such as Toronto-based DBRS Ltd. are pushing to gain market share. Investors are often willing to buy a bond rated by one company, so issuers know that they can go to a bunch of ratings firms and pick the best one, says Jack Chen, a former Moody’s analyst who now runs his own consulting firm.”

You might have suspected that the prime enablers of the credit crisis would be more of a focus of Congress . . .


Ratings Shopping’ Lives as Congress Debates a Fix
WSJ MAY 24, 2010

Category: Bailouts, Credit, Regulation

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13 Responses to “Ratings Agencies Still Broken”

  1. Bokolis says:

    For professionals to be relying solely on the ratings agencies to pick bonds is parallel to trying to pick horses from the Daily Racing Form. It shouldn’t have to come to government involvement because the “efficient” market should run these jokers out of business.

    If professionals would put such faith in the agencies in the face of a glaring conflict of interest, I can only imagine the faith they would come to put in any NRSRO (should it establish any credibility).

  2. postman says:

    At one point, Einhorn was short Moody’s (and maybe still is), and, BR, you made a side comment about Mood’s in one post that could be interpreted as bearish. But if Moody’s will be in a government-protected oligopoly, perhaps their future prospects are bright.

  3. The WSJ has a longish article that takes a cursory look at the agencies.

    I can understand that. When I look at the details I tend to get all cursory myself :)

  4. jhellman says:

    Last spring there was a day-long roundtable at the SEC discussing the ratings agencies and, other than the representative of the big 3, there seemed to be universal agreement that the system is broken. Unfortunately, and I see this as the biggest issue with the system as is, there was a lack of apparently viable alternatives. At a point, eliminating the NSRSO designation and any requirements in the marketplace concerning ratings agency usage are the most credible thing that can be done. Over time, this free market based approach would likely drive the most effectual, quality analytical work. That being said, there does remain a large issue with respect to who pays for ratings. Entities like PIMCO certainly have the wherewithal to do their own analytical work, but smaller entities, particular municipalities, do not (especially nowadays). Therein lies the rub as the current system affords those parties subsidized access to research.

  5. rktbrkr says:

    Financial confusion in Euroland is pushing down US mortgage rates – but resets pegged to LIBOR must be going up and there is a wave of option ARMs coming up. Beware of interesting times!

  6. Marcus Aurelius says:

    The ratings industry (in fact, the entire banking/finance industry) isn’t broken — it’s criminally fraudulent. That much has been repeatedly established. Why does it continue? No prosecutions. Do you think these guys are going to stop this nefarious bullshit if there’s no personal penalty or if corporate penalties are less than the revenue generated from the crime?

  7. clipb says:

    the rating agencies have always gotten away with their sleazy incompetence because they are expressing an opinion, nothing more. the difference in this past/present cycle is that they worked with the bank/brokers to structure the cdo dreck to have the highest yields with the least amount of terminal dreck. so i see collusion there. also what is going on with egan jones? they were early and very negative on all this stuff, not to mention companies like mbi, etc

  8. [...] Ratings agencies are still broken.  (Big Picture) [...]

  9. Unsympathetic says:


    You forgot to include Egan-Jones in that list.. the fact that mainstream media is “ignoring” them is inexcusable, but predictable.

  10. HoldYourHorses says:

    “Still Broken” seems secondary to out continued reliance on a few credit ratings agencies to do the ratings. The only truly broken detail is that there is not market for providing the most factual info, rather its a race to the bottom to serve the debt issuers.

  11. Jim Hodson says:

    The marketplace forces seem to be working just as human nature would predict. It is a shame however the market is not set up to best serve all parties. Although ratings is an area outside my expertise, what would you think about having the ratings agency pay an “accuracy” fee based on the percentage either above OR below the actual results over the term of the bond? As such they are graded on accuracy rather than having an an incentive to inflate or deflate ratings.

    Jim Hodson
    CEO – Countdown To Buy

  12. alfred e says:

    Spectacular chart.

    To see Moodys and Fitch tank is great news. Never reward negative behavior.

    But IMHO it’s more about the other whores needing more credibility. And investors are no longer buying their ratings.

    So they have another whore making money off bad deals.

  13. seana0325 says:

    Jeez…the action today was very reminiscent of late 2008, and we’re already testing upper 1050s in AH! Yikes! I pray that this isnt the gulf coast oil issue.