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Credit Rating Agencies Finally Get Rated

What’s cooler than watching TV on Friday night? Watching C-Span on Friday night, of course.

Whats been very surprising to me after the unfolding of the financial crisis in 2008, has been how little attention the rating agencies have attracted for their role in the systemic breakdown of the mortgage process.

There was no separation between (church) sales and (state) underwriting. Nothing has changed. Same goes for appraisers and the pressure still being applied by financial institutions.

Its actually a scary since it’s not clear how we get investors back into the secondary mortgage market if they don’t trust the ratings that are issued. That would be an important step in helping ease investor concerns. Again same goes for appraisers operating in a neutral environment.

How can someone with their hand in the cookie jar be trusted with an independent rating system?

Crazy

On Friday night I watched the following panel discussions of former, disaffected employees arguably thrown softballs by the panel. I found it to be riveting because the the agencies were primarily concerned about their market share, not the quality of their ratings and the dollars and ramification were massive. The rating agencies were “enablers” by rating everything “AAA” so countries like Iceland could go bankrupt. Just like appraisers were the “enablers” of mortgage fraud by mortgage brokers.

I remember having lunch with several guys at an investment bank back around ’06-’07 who spoke with disdain, if not venom, at how the rating agencies didn’t understand the products they were rating. More as a respect issue, not for concern of the wrong rating.

Panel 1 [1]

There are two other panels for this hearing also worth listening too [Panel 2 [2]] [Panel 3 [3]]

How can anyone charged with neutral assessment of the value of an asset who is fearful of their ending their career or losing their job, do a proper assessment if they are too “low”? Or someone who can be “morally flexible” and therefore make millions personally.

Human nature.

Good grief.

Here’s a must-read article relating to trust and self-dealing by Michael Lewis:

Bond Market Will Never Be the Same After Goldman [4]

And the closing quote:

Indeed, the social effects of the SEC’s action will almost certainly be greater than the narrow legal ones. Just as there was a time when people could smoke on airplanes, or drive drunk without guilt, there was a time when a Wall Street bond trader could work with a short seller to create a bond to fail, trick and bribe the ratings companies into blessing the bond, then sell the bond to a slow-witted German without having to worry if anyone would ever know, or care, what he’d just done.

Yikes. Maybe there is hope for change after all.