This week in encouraging news, we learn that the Securities and Exchange Commission may finally be pursuing one of the prime enablers of the financial crisis — the ratings companies. Previously, it was reported that disclosure violations were on the SEC’s radar, but truth be told, those are minor offenses.

The SEC’s Office of Credit Ratings, a division whose sole purpose is essentially to oversee Moody’s and Standard & Poor’s, seems to be stirring. The Wall Street Journal reported that the “government’s top credit-rating watchdog has kept a low profile since taking the job two years ago to help prevent another financial crisis. That may be about to change…” Multiple cases have reportedly been referred to the SEC’s enforcement division, and new regulations are due.

And a welcome change it would be. Of all the players that helped cause the financial crisis, the ratings companies have gotten off scot-free. Banks have had massive fines while many mortgage and derivative underwriters have had their garbage securities put back to them at great cost. Since 2008, there have been 388 mortgage companies that have gone bankrupt. All of that junk paper found its way into AAA-rated securitized products and derivatives. The penalty for Moody’s and S&P has been essentially nil. Fear of so-called reputational damage — the theory that concerns about their good name keeps companies in line — is the latest economic nonsense to be thoroughly debunked by events. Continues here

Category: Analysts, Bailout Nation, 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.

12 Responses to “Are the Rating Agencies About to Get Their Comeuppance?”

  1. NoKidding says:

    Given changes in data availability and their consistent uselessness at key moments, why does the USA need these federally sanctioned rating agencies?

  2. BoKolis says:

    Whether NASCAR, Luis Suarez, finance or government, when the prevailing mantra is if you ain’t cheatin’, you ain’t tryin’, it’s difficult to figure a solution involving anything short of napalm. In the same vein, this is likely why no one seriously considers hey, WTF is a book publishing company doing mixed up with S&P.

    • BennyProfane says:

      “WTF is a book publishing company doing mixed up with S&P.”

      Well, technically, they consider themselves reporters, or that’s the way it started out. That’s why they use the first amendment to shield themselves from various lawsuits, and probably will again in this case, all the way to the Supreme Court.

  3. farmera1 says:

    I’ve heard this rather stupid comment that companies won’t do anything to tarnish their reputation. That is one of the worst, untrue, completely false statements I have ever heard.

    -My own up close and personal experience has seen this happen numerous times in some good companies. Management in any company uses risk assessment to make decisions. Short term financial incentives cloud judgements that often results in decisions that accept more risk than what is in the best long term health of the company.
    -Most are more much more interested in their next bonus check than what happens to the company down the road. People do react to incentives. It is just the case that the short term incentives often don’t align with what is best for the company long term. This is the old “I’ll be gone, you’ll be gone” in action. We can either deal with this problem and spend a lot of money now or we can accept the risk get our bonus and the problem probably won’t blow up anyway. Lot’s of ways to make the short term numbers look good or over look problem at the long term risk to the company.

    “I would suggest the SEC focus on the changed business model of the ratings companies. In the 2000s, they charged the underwriters rather than investors for the ratings. Any company is free to do whatever it wants in terms of its business model. But the major raters are not just any business; they are Nationally Recognized Statistical Rating Organizations, in essence a government stamp of approval. The SEC, in turn, lets other companies rely on the raters credit evaluations for regulatory purposes.”

    As long as the payer is being rated, management (humans) will eventually succumb to the incentives to do really stupid things. It is inevitable.

  4. ch says:

    Barry- you are operating under the assumption their purpose is objective economic analysis.

    But that assumption is demonstrably false.

    Their job is to help uphold US dollar hegemony. Witness the recent downgrades of Russian debt by both ratings agencies, even though the Russian economies mathematical statistics are vastly superior to the United States.

    Why are they being investigated now? Because the US dollars’ hegemony officially ended yesterday with the announcement that the US would begin exporting crude oil.

    • BennyProfane says:

      “the Russian economies mathematical statistics are vastly superior to the United States.”

      Really. Could you enlighten us with those statistics? I’m not sure what math you speak of, but, I don’t see how an essentially third world country run by a corrupt mob with really only one strength in it’s economy, oil and gas, can compare to ours, the most vibrant, still, in the world. Then it doesn’t help their situation when they decide to bully their neighbors, so much so that the western developed economies have teamed up on them so much that a Russian citizen can’t even have a Visa card account. This is an economy equal or better than ours?

      • ch says:

        Benny – did you mean to write such a brilliant piece of political satire? If not, well done. I needed that laugh today.

        Russia – one of two biggest oil producers in world, Russian debt to GDP is a fraction of the US’. Corrupt mob with only one strength in their economy? Absolutely.

        But explain to me slowly how different Russia’s corrupt, mob-driven unilateral economy is from the US, a nation where 7 of the 10 richest counties surround corrupt Washington DC and it’s economy has only two real exports – exporting dollars and exporting military violence to force 3rd world nations to keep taking aforementioned dollars.

        Bullying neighbors? That’s rich. Who is putting missiles near the other nations’ border? Us near their border or they near ours? (Hint – the Russians haven’t put missiles near our border since 1962, b/c who knew – we didn’t like it, yet we are surprised when they don’t like our missiles right on their border?) Which nation has more bases around the world than any other by a multiple of 10? Which nation unilaterally invaded another nation in the last 10 years? (Hint – Not Russia.)

        Western economies have teamed up on them? Please pick up something to read other than the NYT and WaPo…get some perspective on what the Asians and Europeans and South Americans and Africans think of your shining beacon…

      • BennyProfane says:

        Well, what can I say. You seem to lack a very crucial ability to recognize the winners and losers. Hint: We’re still winning. Since this is a site I come to to help me recognize how and where to invest my money so that I won’t be old and poor some day, I hope you agree, because if you of a mind that Putin’s Russia is in any way a healthy economy, I’m afraid that you may be old and very poor someday. Yes, the world is filled with bad guys, and we have more than our fair share walking around in suits and perfect hair in DC, but we at least know how to keep a majority of our population extremely comfortable, entertained, and overweight, and somewhat free to think and talk with the bread and circus. Maybe it’s all propaganda, but when I open the paper, I usually close it and say, damn, thank god I don’t have to live in a hundred places in the world. We are so wealthy in so many ways it’s absurd.

        Besides, imagine living in a country that you need to have an operating dashcam in your car at all times. What does that tell you?

      • ch says:

        Benny-

        I am very grateful I live here. I am also very cognizant of why the US is richer than everywhere else. If you wish to stay that way, I would advise that you understand the same.

        It has nothing to do with some sort of inherent superiority. It has everything to do with the fact that America has been the only nation on the planet that can print IOUs it never has to cash for oil for 43 years. That’s it and that’s all.

        And Russia, China, Germany, Brazil, and a long list of others are sick of it. And since the US doesn’t export anything they need anymore, they are moving away from the Petrodollar.

        And that is why Obama is suddenly approving US oil exports. After all, why would the US ever export oil for (wait for it)…DOLLARS…if the world was so enthralled with holding ever-growing supplies of printed dollars?

        The answer is: They’re not.

        The way to big wealth is getting the big trends right. Pay attention to this one…it’s more obvious to me than the housing bubble in 05…and there will be even bigger winners and losers this time.

  5. Are the Rating Agencies About to Get Their Comeuppance?

    BR,

    you, or your “Headline Editor”, make it sound like it involves RICO..

    not? guess what? File this Distraction under: “More of the Same.”

    http://www.law.cornell.edu/uscode/text/18/part-I/chapter-96

    note:
    (5) “pattern of racketeering activity” requires at least two acts of racketeering activity, one of which occurred after the effective date of this chapter and the last of which occurred within ten years (excluding any period of imprisonment) after the commission of a prior act of racketeering activity;
    http://www.law.cornell.edu/uscode/text/18/1961

  6. willid3 says:

    what could ever go wrong when some pays you for an opinion? and makes how much you get paid how well they rate what you are selling?

    seems like we saw this a few times before. like when DJ’s took money to play music?

    sounds just like payola.

    only nobody rates the raters do they?

  7. NoKidding says:

    Hint
    noun
    The rhetorical suggestion preceding a baseless emotional claim wrapped around the assumption the writer has access to truth and the reader is a fool.

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