Newsweek: Credit Rating Agencies Are Getting Off Easy

newsweek.com:

Moody's and Standard & Poor's, the two giants of the industry, are still around despite causing the loss of hundreds of billions of dollars by badly rating subprime-mortgage-backed securities. Not only that, they are basically doing business the same way, taking fat fees from the investment banks whose securities they rate. In testimony before the House Committee on Oversight and Government Reform on Wednesday, a former Moody's managing director, Eric Kolchinsky, alleged that the firm was criminally deceiving investors by purportedly inflating ratings on securities even into the current year, long after the subprime scam had been exposed and the market crash had occurred.

Read the whole story: newsweek.com

Comments

[SteveBerk]

Credit rating agencies assess and label the riskiness of financial instruments (AAA being the best). As a recent New Yorker piece by James Surowiecki details, a problem arises because the rating agencies are privately owned and yet the S.E.C. anointed three of them as official ratings agencies—thus instilling a special trust in them by investors. And that was forty years ago. Today everything—from rules and regulations on financial instruments to interest rates—depends on these ratings.

So what happens when these agencies drastically overestimate the soundness of mortgage-backed securities? In part, that is what caused our current economic situation. We have become dependent on the accuracy of the ratings, and yet the agencies that issue them are unregulated and are far from objective. I must commend Mr. Surowiecki for this insight. When the agencies gave mortgage-backed securities a rating of AAA, investment flooded to them, creating the all-too-famous housing bubble. When, in light of the housing crash, the agencies harshly downgraded the securities, it drastically accelerated the bursting of the bubble.

Clearly we cannot continue at status quo. As in other under-regulated fields, Main Street became the victim of overzealous and unchecked standards. What can we do about these agencies? The New Yorker suggests scrapping the ratings agencies altogether, reasoning that no faith is better than false faith. I don’t know if that is the answer—it would be preferable to merely disconnect the ratings agencies from governmental endorsement.

Steve Berk
Berklawdc.com

[blueskybigstar]

Many of these agencies that were watchdogs rating agencies of the banks were in Catch-22 situations because they could not get paid without giving people a good credit rating. Is Newsweek trying to diffuse the blame here? The blame should be on the corporate leaders, their lobbyists, the politicians, and the operatives in government who deregulated and actively rigged the system, the true people who are taking ALL the money and manipulating ALL the laws in government so that they never come to justice. They need to be held accountable and laws need to be changed to hold them accountable if there are none already.

[Gernuser]

To make matters far worse, consider what the US government has actually done to fix the underlying problems? Nothing

good articles; http://iamned.blogspot.com

The government has put the same punch bowl out that got us into the mess in the first place. More debt and consumption and don't worry about paying it back. (Berbnanke= Greenspan II)

[KarateKid]

Has anyone ever seen their consumer credit rating, from ANY of the big 3? It stunningly ridiculous and inaccurate. When I saw mine as I prepared to buy a home, I had a good laugh. Some of my largest debt was not on it, but some obscure credit card charges, long since paid, and long since cancelled by me, showed up.

The disquieting part aside from the inaccuracy is that unless you have an occasion to look at this, life goes on and you have no knowledge of how it is affecting your life. At least one should be notified, don't you think, since they're in some ways invading your privacy?

[LeftRight]

I have seen mine, but that's just because my wife and I use the federally mandated free credit report every year. The problem is that it shouldn't be a private enterprise! I should have ALWAYS been able to see my own credit report, and fixing problems should be FAR FAR FAR easier than it is!

[LeftRight]

I think that they should be taken out, but what about the CONSUMER credit rating companies?? Why is that a private enterprise, and do we REALLY want three companies knowing that much about us all?????

[KarateKid]

Hah, love the avatar...

[RJII]

pretty soon FICO will include BBR FICO (before Bush recession FICO). They'll have to revert to the good old days when the middle class had fake money to pay bills.

[abbyrose86]

Shoot, I've been saying this for years now. ALL credit agencies...not just those who provide the ratings for companies, but also the ones who provide ratings for people.

Moodys, Standard & Poor, Experian, FICO, etc. are all the same...they use phantom data and concepts to provide credit worthiness and stability of an entity or person. Come on....and most of them are based on inaccurate data or wrong data, to boot. How can these systems be reliable.

Too much evidence to suggest they are all smoke and mirrors. IT should seem obvious to everyone by now, with all that has gone in this past 2 yeas, that their algorithms don't work. Too many defaults everywhere, on Wall Street and Main Street to think their system works.

When revenue and actual assets are not taken into account, then something is seriously wrong.

[RJII]

yep. especially last point on rev and assets

[elsellel]

Seems to me, that soon, an overwhelming percentage of middle-wage earners (many above, many below) will end up with bad credit ratings. I wonder what the actual numbers are today. The 'lenders' are quick on their toes to try and deal with the brewing eventuality of this.

What to do... what to do. Just how do we lend to a populace whose credit scores have gone kaput. Continuing foreclosures and defaults, revert back to holdings of compounding toxic assets, like a vicious circle inflating on each go-around, and any and all lending eventually becomes a risk that cannot be taken. It looks like, we're approaching the summit of that mountain.

Keep on cooking the numbers, boys, but if the majority of the population ends up with bad credit, how can there be any lending of any sort without complete fudging of the numbers, which only lasts so long before the jig is realized. I have no formal training in this area, as is obvious, and could be missing the mark by a mile, but I had a gut-wrenching, 'gut' feeling over this yesterday, and today a relevant to the thinking story pops up.

Anyway, a fledgling idea that could be still.birth'd and misguided, but there's oh-so-much to think about these days.

[SwampeastMike]

Now they say it?

Such was apparent even to this hick from Swampeast Missouri well before the crisis hit this time last year.

Without the complicity of the ratings agencies (as well as old-fashioned appraisers) the housing bubble would not have grown to dangerous size with a disastrous amount of sub-prime lending.

Their argument that they are not in any way liable because of first ammendment protection borders on the absurd as their "opinions" are defacto requirements. They did not shout "Fire!" in a crowded room; they failed to ring the alarm knowing that a fire was raging all around the room. Instead they continued to add fuel and played a disturbing role in the initial spark.

[beckpod1]

Racket.......corrupt.....makes you mad as hell!

[hellboundtrain]

U.S. authorities are treating these bandits with kid gloves; yes, even holding the door open for them; in spite of the fact that these companies (Moody's & Standard and Poors) are responsible for hundreds of billions of dollars in losses. What the he// is going on here! It used to be (and, maybe it still is?) that if you stole a man's horse you'd get shot or strung up on the nearest tree!
Now steal hundreds of billions and get a powder puff thrown at you!

Nothing guarantees the destruction of a corrupt system as coddling to those that corrupted it. Investors around the world will flee in droves assisting in the collapse!

[Bloggerrogr]

Along these lines, you might find this interesting...
ACORN, Republican financial mismanagement and CDS’s the real story:
http://www.dailykos.com/storyonly/2008/11/16/1002/9542/629/660423

FWIW

[alnc]

Its time to break up and arrest all the crooks that stole and almost robbed us from a nice living. Take Wall St and its buddies and put regulations back on them. No more free rides to do what you want at our expense.

As for the CB agenices who the hell needs them....vultures.

[andycan]

The credit agency executives are bandits: they misled the whole financial establishment.
Not to sentence them to heavy jail - as was the case of Madoff - would be to invite the same kind of felomious mendacity in the future. They should pay for the monumental robbery they contrived.

[petef59]

Sure-like Enron's account firm Arthur Anderson: just change their name like a typical PR huckster.

[nopilikia]

Enron management dead or in prison.

[LeftRight]

But Arthur Anderson, the accounting firm who did all the dirty paperwork for Enron is still in existence, just under a different name....