“If ever there was proof positive that ratings were a lagging indicator, it’s certainly been true with the way the rating agencies have responded to Europe’s three-year debt crisis.”

-Bonnie Baha, the head of global developed credit at DoubleLine Capital.


One of the unrepentant and unprosecuted villains of the credit crisis were the major ratings agencies, especially Moody’s and S&P. They slapped triple AAA ratings on securitized products that were junk. They did so not due to an error or omission or miscalculation, but rather, because they were paid to do so by the underwriters of those products.

They were, in a word, corrupt.

The net results of that corruption is starting to show up in how credit buyers treat their ratings. For that, we go to a fascinating article in Bloomberg this morning:

The global bond market disagreed with Moody’s Investors Service and Standard & Poor’s more often than not this year when the companies told investors that governments were becoming safer or more risky.

Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of the 32 upgrades, downgrades and changes in credit outlook, according to data compiled by Bloomberg. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974. This year, investors ignored 56 percent of Moody’s rating and outlook changes and 50 percent of those by S&P.”

There are lots of reasons to doubt the value, even the validity of Ratings Agencies view of credit. Off the top of my head, I can think of four:

1. Broken Business Model: Ratings used to be supported by bond buyers through a subscription model. In the 1990s, it morphed into an underwriter paid for model, also known as Pay for Play.

2. Lagging the markets: Credit Ratings are lagging, chasing changes that have been largely priced into the market already.

3. Error Prone Models: The Treasury said S&P made a colossal $2 trillion error in its calculations, leading to a shift in S&P budget projections. Whether this was due to inherent problems in the models or simply poor execution, the net results were the same.

4. NRSROs: The SEC recognition of NRSROs seem to have created a moral hazard of relying on ratings. We may even have an institutional error built into credit markets.

It is encouraging to see credit buyers doing their own research and ignoring the failed ratings agencies.



Moody’s Gets No Respect as Bonds Shun 56% of Country Ratings
John Detrixhe & Matt Robinson
Bloomberg, December 17, 2012

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.

7 Responses to “Ratings Agencies Ongoing Obsolescence”

  1. [...] Rating agencies ongoing obsolescence (TBP) [...]

  2. constantnormal says:

    @BR …

    “It is encouraging to see credit buyers doing their own research and ignoring the failed ratings agencies.”

    When you say that, are you referring only to Wall Streeters, or does that extend into the ranks of pension funds and annuities companies?

  3. AHodge says:

    aside from blaming ratings users who dont know better
    and may be legally required to get this crap for documentation
    this is massive misfeasance #19 of the SEC
    who actually licence these folks
    the only rater the SEC has gone after is Egan jones
    the only good rating agency i know of
    who was prosecuted for
    get this,
    keeping its buyer paid- for ratings private to the buyer and not publicizing,
    tho in most cases the rating was known anyway
    how can a buyer paid model possibly function if they have to massively publicize their results for everyone immediately???
    i kid you not.
    SEC is a do over we would be better off with nothing–
    theres cliff spending saving–democrats eliminate govt agency!
    and the repacemt chairman is apparently as big a stooge as shapiro

    so much for obama doin the right wall st thing
    with the election over–a nice hope
    ahh well
    buckle in and bend over for 4 more

  4. S Brennan says:

    One positive aspect of the Credit rating agencies lack of prosecution and continued existence is; Whenever the subject turns to “self-regulation” and I need an example of the corruption that results, I can whip out Moody’s and S&P…they’re such a clear example of moral turpitude in the absence of strict oversight, that the subject gets changed to something less assailable.

  5. [...] Credit ratings agencies are becoming increasingly irrelevant.  (Big Picture) [...]

  6. algernon says:

    “In the 1990s, it morphed into an underwriter paid for model.”

    It didn’t morph. It is the result of govt regulation. Govt made them monopolies with perverse incentives. It’s not complicated. What else would you expect?

  7. [...] buy only Investment grade paper. (The bond markets eventually figured this out and has learned to ignore the ratings agencies commentary as conflicted and corrupt). Thus, what should have been a tiny,  high risk corner of the mortgage [...]