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. The corrupt, incompetent and simply lousy rating agencies are unable to accurately perform their core function: To accurately assess bonds.

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Source:
Postcrisis, a Struggle Over Mortgage Bond Ratings
JESSE EISINGER
PROPUBLICA, JANUARY 5, 2011
http://dealbook.nytimes.com/2011/01/05/after-financial-crisis-a-struggle-over-rating-mortgage-bonds/

Category: Bailouts, Credit, Really, really bad calls, 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.

18 Responses to “Surprise! Ratings Agencies Still Suck!”

  1. Bob is still unemployed   says:

    I think the larger question is, why is this a surprise?

    Do you really expect Wall Street to remove any of the proven methods it has previously used to transfer money Main Street to Wall Street?

    Do you really expect Wall Street to clean up its act without the real need [from their viewpoint] to do so?

  2. mark says:

    Someone should tell Joe Mysak, who asks the question: Who you gonna believe, Meredith Whitney or an analyst from Fitch? Joe thinks the answer is the guy from Fitch – http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=a1lJFA76DLd8

    BTW, the Baltic Dry Index just broke to a new low today. Doesn’t jive with the world wide super duper economic comeback meme.

  3. Petey Wheatstraw says:

    Their core function is to aid in the commission of fraudulent enterprise. Their motive is profit. They still haven’t been held accountable for their immediate-past and easily-proved criminality. Why would they stop now? Good will?

  4. Obe1 says:

    The concept of a “rating agency” never did make any sense.

    Qoute for JP Morgan himself:

    Asked: “Is not commercial credit based primarily upon money or property?”
    “No sir,” replied Morgan. “The first thing is character.”
    “Before money or property?”
    “Before money or anything else. Money cannot buy it…Because a man I do not trust could not get money from me on all the bonds in Christendom.”

    So why would you invest your own hard earned money based how a 3rd party judges charater? Then entire concept of modern finance is broken at is very foundation of one homan lending money to another and so will not be fixed until people stop putting thier money into 401ks, mutual funds, … based on advice of others. Invest locally and directly until / if things change.

    Perhaps if rating agnecies directly purchased a large volume of the bonds that they rate themselves…would a least be a start.

  5. Sechel says:

    Frankly, I don’t see how any rating is possible for these securities. The underlying bonds were downgraded to begin with(meaning they are now levered to credit). Just a slight change in the timing of the servicer liquidating the pipeline ,short term projections to HPA , an increase in modifications, or just a realization that prior modifications are now set to redefault all mean this is a useless exercise.

    And these RE-REMICS (they feel like CDO’s to me) are just bad news. They are a huge wink and nod by the regulators, banks, traders, accountants that bad assets can magically have value if we just time tranche them. The amount issued these last few years is astronomical, and they create no value and only exist as a useless exercise in regulatory arbitrage.

  6. Sechel says:

    To understand these transactions imagine if Edmunds took a ten year old car with a bad repair history and decided to issue two ratings. The first would be \”AAA\” based on an estimate it would work well for the next two weeks and a second \”CC\” that it would perform well after two weeks.

  7. postman says:

    Seven decades of U.S. regulation have given Moody’s, Standard & Poor’s, and Fitch not only a special imprimatur but also protection from competition. Had the ratings market been deregulated, entrepeneurs like Meredith Whitney would’ve entered the ratings industry long ago. Naive proponents of regulation, take heed!

  8. curbyourrisk says:

    Do ratings agencies suck? Does a bear shit in the woods?

    It is time that we Arthur Anderson these assholes.

  9. Carl C says:

    So help me to get this clear in my mind. If a credit rating gives a bond a “AAA” rating, that means it will never default, right? WRONG! It means that the company has a better than average credit score. Nothing more, nothing less.

    Every so often a really big event comes along that causes good companies to fail – like a the recent credit crunch. In those conditions, even good companies will fail. This does NOT mean that the “AAA” rating was incorrect. Similarly, in the present crisis many individuals with good credit scores defaulted on their mortgage. This doesn’t mean that their credit score was wrong – it means that we’re living in extraordinary times.

    The problem is not the rating system or the rating agencies. The problem is with investor expectations. Many investors incorrectly assume that a “AAA” rating describes every source of risk. It does not. A “AAA” rating means that this investment is less likely than its peers to default. The “AAA” rating tells you NOTHING about the systemic risk intrinsic in our entire economic system. If the economy fails, even the best rated companies will stumble. And if you’re not prepared for that, you have no one to blame but yourself.

  10. Stuart says:

    The lack of enforced accountability and prosecutions over their complicity in manufacturing fraudulent ratings is connected with your previous post of the Florida AG’s Fraudclosure report and the lack of enforcement, accountability and prosecutions it highlights. Just another tentacle of the same beast.

  11. AHodge says:

    Dear Carl
    since you so bold as to present the “good” side of raters. let me actually answer your probably rhetorical plea to help get clear.
    1)at least one rater defined AAA as less than 2% probability of default, not “above average” per you.
    2) presenting the BS “how could we have anticipated the macro” is a bogus warren buffet defense.
    there were major AAAs defaulting before the house prices or the recession even got started. Timberwolf CDO is a good example, defaulting around Sept 2007, FOUR MONTHS after it was created and rated.

  12. carleric says:

    I wonder how we go about foreclosing on the rating agencies? The are simply dens of not particularly bright, dishonet purveyors of what they are paid for. They are baically guilty of sloth and grreed. The entire structure, regulationms and its entities need to be eliminated and then we can start with honest approches….of course, I know this to be hopelessy nqive…

  13. DeDude says:

    We need to stop these companies from issuing ratings without a simultaneous credit default insurance. Let them put their money where their mouth is. In fact lets drop the ratings and simply hear how much they will charge to insure the bond against default. A simple system where those who cannot get it right quickly are out of business and those who can will remain.

  14. AHodge says:

    As many have pointed out you cant really securitize, especially the complex, w/o raters?
    with bank credit depts shut down no one else is doing dedicated credit analysis.

    while the buy side was complicit in this scam, they are at least wary enough now to have mostly shut down all but the govt guaranteed securitization purchases.
    as banks dont “do” loans anymore, hence our mostly broken credit supply system
    that the banks used to do most of.
    the issuers are just playin a waiting game
    hopin as recovery proceeds the buyers will eventually hold their noses and buy overvalued securitizations again.
    Sadly this will probably “work”

  15. AHodge says:

    Make that
    rater blessed risky overvalued securitizations….

  16. Greg0658 says:

    CarlC at 9:11am sowing the seeds of rater love … I just don’t see how we can continue this system in an ever increasingly intelligent world of capitalists, laborers & consumers .. I mean this system only works when someone figures (thinks) they can get more over someone else (just fell off the turnip truck) … the inventions of the 2oth century and beyond into 21st 22nd 23rd will wreak havoc (easily) … widgetman says I’ll pay this wage for this product and expect someone else to pay enough for someone else to buy it /and or / I’ll dump this precaution to get a leg up on my competitor (know one will ever know) ….. go ahead play field games* instead of a hall filled with music

    *coda – the referees will keep it fair & safe

  17. [...] Don’t look now but Moody’s (MCO) stock is flying.  (Street Sweep also Big Picture) [...]

  18. KentWillard says:

    I think we need a stronger adjective for what happened. Many of the securities have so much structural and collateral complexity, while at the same time so much default correlation, that I don’t know how they could be ‘AAA’. After all, countries who issue debt in their own fiat currency are also ‘AAA’. If worse comes to worse, they print more money to pay off the loan. How can those two types of securities both be ‘AAA’?

    For more, see: http://www.kentwillard.com/5-ducats/2011/01/aaa-mortgage-default-rates-90.html