That is right. The bastards who stamped a ‘AAA’ on crap MBS had legal immunity under the First Amendment free speech clause - like a movie critic does. They only present their ‘opinion’.
Should this continue?
What would you charge them with?
I’d let them continue to rate credit, but make them put “for amusement only” in the disclaimers, like Madame Cleo. They were slightly more accurate than a Magic Eight Ball, but not much.
There are claims that these agencies rate their customers higher than comparable companies. If that is true, bust 'em up Eliot Ness style. But I’ve seen nothing to validate those claims.
But we are in a free market economy.
If they can sell their 'AAA’s for millions - what is wrong with that? Should not the buyer beware?
Or the buyer of the buyer?
They can sell their AAA’s for millions if they make clear that’s what they’re doing. But they represent themselves as applying impersonal algorithms to assign a rating, and upon the basis of that representation, people purchase things from their clients for many billions of dollars. If they were just selling good ratings while pretending to actually assess the risk of an asset, it’d be fraud and they could be prosecuted for such.
I don’t actually know of any evidence that they do engage in such fraud. But if they did, I don’t think they’d have “legal immunity”. They can’t be prosecuted purely for being wrong due to the first amendment, but they still can’t willfully mislead people to profit themselves.
Is anyone aware of any studies that examine how effective the ratings agencies are? Everyone says they got it wrong with some RMBS but how many did they rate AAA that then collapsed? How good are their ratings outside of RMBS?
I’m not trying to defend the ratings agencies in any way, just curious. All of the reporting I’ve seen has been similiar to the OP, they rated RMBS as AAA and they’re bastards.
I agree that these agencies were complicit and should be held to account and I think it is one of the many travesties of the financial crisis that they haven’t been. Having said that though, the situation regarding MBSs wasn’t that cut and dried. These were extremely complex instruments that contained multiple tranches of thousands of individual loans. I can’t remember the details, but I think that you might have some tranches that were in fact investment grade and others that were anything but. I believe the banks putting these instruments together were aware of this. They also probably realized that it was impossible to accurately rate MBSs constructed in this way.
So when they dropped one of the turd sandwiches on a rating agency, they realized it was a black box. The agency basically had to take the word of the bank that it was AAA since there was no way they could look at every loan in every tranche and independently determine what rating it should get.
In addition, it was the bank offering an MBS who paid the agency for the rating. That by itself was a questionable practice. The only proper response from the agencies would have been to not give a rating at all since there was no way that their ratings had any basis in reality - simply by virtue of the impenetrable complexity involved. However the amount of money to be made was too huge to ignore.
New law: in order to retain their broadcasting licence, any television station that reports a credit rating on a news program must require the newsreader to roll his or her eyes in a theatrical manner.
You tell us. This isn’t the Pit, it’s GD. Make your case. You might well be right, but all you’ve done so far is sneer.
Has the SCOTUS ruled that they have “immunity under the First Amendment”? Where are you getting this from? Commercial speech is not accorded First Amendment rights that political speech has.
Umm no. They represent they do credit analysis, of which analytical risk models are a part.
There is not any. They clearly fucked up.
Most people seem not to understand that most of their business has been in rating bonds, not the crazy structured instruments of the past decade. Track record in bonds when I studied finance during my business school days was decent, in any event people see utility in it. Free market. I don’t track this myself, but the finance people who buy bonds do (like my retirement funds).
Of course the regulators using these ratings is probably a bad idea.
Was it a fuck up or wilful ignorance.
Ratings work used to be a sleepy little corner of the finance world that was one of the places you mgiht have landed if you were a credit analyst at a mid-rank investment firm or a lawyer at a mid rank law firm. It offered decent compensation for relatively decent lifestyle. A company might have a bond offering every couple of years that needed to be rated. All of a sudden people wanted ratings on dozens of these things every day and they were willing to pay a premium over what you historically received.
Aside from some of the CDO squared or CDO cubed, etc. transactions, what were they rating that they didn’t have a good frame of reference for? Cuz the stuff they were monumentally wrong about was also stuff they had rated for fannie and freddie in the past. And frankly, it wasn’t that tough to rate the CDO squared stuff either. They were rubber stamping AAA on stuff because the folks that were paying them millions of dollars were asking them to. You think Moody’s and S&P are the only credit rating agencies out there? Fitch was bucking for a lot of this work and they were given just enough to make Moody’s and S&P willing to play ball.
Dodd/Frank scrubbed all legislation and regulation of credit rating agency benchmarks.
Everything I have read suggests they had too much confidence in their statistical models, which did have enough time dept.
??
I have no idea what you’re on about, but I was talking about regulators using the ratings themselves or requiring the use of the ratings. I do not follow whatever American legislation is doing.
My reading of it is that it was systemic incompetence.
I really don’t think they were deliberately lying, but it wasn’t a simple screwup, either; their business model is systemically fucked up, they’re in an inescapable conflict of interest (which affects your performance even if you sincerely try for it not to) and their quality of employees isn’t the greatest. As long as they work for the investment banks it always will be that way. It’s not fraudulent, it’s ineffective.
There’s no law against sucking at your job.
And I’m saying that this overconfidence was actually wilful ignorance that sprang from fat fees and large bonuses, at least in part.
I just meant to point out taht the recent Dodd/Frank bill has eliminated the use of credit agency ratings from all laws and regulations. For example, capital weighting is no longer driven by credit ratings. Now a junk bond for which you cannot take a regulatory partial worthless reserve is given just as much capital weighting as a AAA corporate bond.
Yeah but they suddenly got a lot suckier at their jobs when their bonuses went from a few thousand dollars a year to tens or hundreds of thousands of dollars a year.
Not a criminal offence, true, but there can be civil consequences, such as liability for the tort of negligent mis-statement causing economic loss by those who relied on the mis-statement. See the wiki article on the Hedley-Byrne case: Hedley Byrne & Co Ltd v Heller & Partners Ltd - Wikipedia.
How do you know?
Maybe they ALWAYS sucked at their jobs. The ratings agencies have certainly been caught with their pants down before - there was just never this particular scenario for them to blow this badly. What makes you think they weren’t equally systemically inept before?