Join 3,512 readers in helping fund MetaFilter (Hide)


When admission of liability is a risk.
January 22, 2013 12:44 PM   Subscribe

Credit Rating Agencies and their role after the Crisis
It was the rating agencies that assigned super safe ("triple A") ratings to complex financial instruments. When these blew up, the agencies accepted no responsibility, claiming they had merely been expressing "opinions".
William J Harrington, who was a senior analyst says he has asked people at Moody's why those responsible weren't fired.
"That would be an admission of liability, I was told.
The Wall Street Journal talks about downgrading the agencies.
posted by adamvasco (41 comments total) 23 users marked this as a favorite

 
i am very close with a person who worked for Moody's for 5 years rating municipal bonds. credit ratings are no different than yelp reviews, basically. it's fucking scary.
posted by spicynuts at 12:47 PM on January 22, 2013 [13 favorites]


The full interview with Harrington. Apologies, it got left out of the FPP.
posted by adamvasco at 12:50 PM on January 22, 2013 [1 favorite]


Cast out the watchmen.
posted by Apocryphon at 12:57 PM on January 22, 2013


I think it would have been better if the agencies had been carried out. Their existence does more harm than good, IMO. They boil down what ought to be a complex, individualized risk assessment to something less granular than a Michelin Guide star rating, and significantly less useful.

The presence of those ratings just encourages further abdication of responsibility on the part of fund managers (especially pension fund managers); instead of taking a critical look at individual bond issues, they instead can just lazily rely on the agency rating and go back to sleep. (When everything blows up, hey, it's not my fault!) And then government has to step in and bail everyone out, because you can't let Mr and Mrs Main Street's pensions just go down the fucking tubes.

It's a broken system and we haven't changed nearly enough to expect that it won't break again.
posted by Kadin2048 at 1:02 PM on January 22, 2013 [14 favorites]


Hashing CDOs to such a simplistic rating system was obviously dumb. It's amazing that it's taken seriously at all.
posted by odinsdream at 1:04 PM on January 22, 2013


Surprising that insurance companies didn't go after the credit rating agencies. Easier to rip off taxpayers and then sue them afterwards, I guess.
posted by Blazecock Pileon at 1:05 PM on January 22, 2013 [4 favorites]


The ratings agencies are worse than the Michelin Guide: they're paid by the parties they rate, creating a conflict of interest.
posted by adamrice at 1:12 PM on January 22, 2013 [1 favorite]


It isn't surprising at all.

Why bowb your buddy when you can just do another carpet bombing run? Who do you have afternoon cocktails with? It's not like there will ever be an actual torches and pitchforks dealio. And even if there were, Occupy has given the blue eyed knights a fun-and-games practice run suppressing urban domestic insurrection.

Really there's nothing surprising about any of this at all. I hate to be so cynical, but is there really any reason not to be? Please, I'm begging you for a reason.
posted by seanmpuckett at 1:14 PM on January 22, 2013 [11 favorites]


Insurance companies would love to go after the ratings agencies, but at least in the US they have successfully fought off suits on first amendment grounds.
posted by JPD at 1:15 PM on January 22, 2013 [2 favorites]


Their existence does more harm than good, IMO.

Harm for the taxpayer, good for the bankers. The ratings agencies were useful idiots in the financial crisis. No doubt, Goldman Sachs, Lehman, AIG all could do their own analyses and they knew that those AAA+ ratings were anything but. They put those AAA+ stamps on their own (high risk, high return) products to eliminate the risk and sold them to every sucker they could find with the taxpayer being set-up as the biggest sucker of all. It was outright fraud and in four years how many of these thieves has the Obama administration prosecuted?

Obama should also loose his AAA+ rating: on this he has been a junk bond.
posted by three blind mice at 1:16 PM on January 22, 2013 [4 favorites]


i am very close with a person who worked for Moody's for 5 years rating municipal bonds. credit ratings are no different than yelp reviews, basically. it's fucking scary.

this was the first time ive tasted midcap cyclical before. it was good but a little wierd!!! ★★☆☆☆
posted by theodolite at 1:16 PM on January 22, 2013 [28 favorites]


This is always a good time to point out that the existing credit rating agencies were granted a monopoly via government regulation. This is the poster child for the power of financial regulation to cause more harm than good.
posted by gertzedek at 1:18 PM on January 22, 2013 [6 favorites]


Obama should also loose his AAA+ rating: on this he has been a junk bond.

Maybe you haven't been paying attention but junk bonds have been doing rather well lately.
posted by spicynuts at 1:24 PM on January 22, 2013 [1 favorite]


The ratings agencies are worse than the Michelin Guide: they're paid by the parties they rate, creating a conflict of interest.

Conflict of interest? Not a chance. It was a 100% pure alignment of interest. Just not yours and mine.
posted by srboisvert at 1:27 PM on January 22, 2013 [5 favorites]


As I understand it, the ratings agencies didn't just willy-nilly assign AAA ratings to CDOs and the like. Rather, the originators of these instruments took out insurance policies which allowed them to get those ratings. Investors couldn't lose, because if the investments went bad, the insurance would kick in. This is why we bailed out AIG--they had written so many of these insurance policies that paying on them was bankrupting them.
posted by tippiedog at 1:28 PM on January 22, 2013


Part of the problem is that it's a case of foxes guarding the hen-house.

The ratings agencies don't work for charity; they get paid, by the big financial houses. So while their credibility is part of what they're selling, they also can't really look at something one of their clients are about to sell and say, "That's a load of garbage and only a fool would buy it."
posted by Chocolate Pickle at 1:28 PM on January 22, 2013


Please watch Inside Job (link is to a subtitled version. It wasn't on Netflix streaming last time I checked).
posted by nikoniko at 1:32 PM on January 22, 2013 [3 favorites]


Tippiedog you are conflating two separate issues. There were both natural AAA securities and those that were AAA because they were insured.
posted by JPD at 1:34 PM on January 22, 2013


Moody’s Gets No Respect as Bonds Shun 56% of Country Ratings
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.
The people buying the bonds have learned to ignore the ratings agencies.

From Australia: Hero of the day, CPDO edition
The case at heart is a simple one: 12 local councils in Australia bought a bunch of CPDOs, and they only did so because S&P had given those instruments a triple-A rating. S&P, in turn, should never have given the CPDOs that triple-A rating. So it’s S&P’s fault that the councils lost so much money — jointly with ABN Amro, which structured the things.

How does Jagot come to the conclusion that “a reasonably competent ratings agency” would never have given the CPDOs a triple-A rating? Simple: S&P used utterly bonkers assumptions in order to come to its conclusion.
Back in the States: Sixth Circuit Rejects Ohio Pension Fund Suit Against Rating Agencies, citing First Amendment grounds.

The Economist: Crisis In Ratings Land?
The tendency of investors to rely on ratings is reinforced by the privileged access that agencies have to information about issuers. The agencies’ defence that theirs is just an opinion wears thin when, having looked under the hood and kicked the tyres, they then tell investors to make up their own mind from a distance. It would help if regulators forced issuers of bonds and other rated securities to provide more public information. That would allow investors to do more of their own due diligence and enable more competition between agencies to provide the best analysis to investors rather than the best service to issuers.
Can Open-Source Ratings Break The Ratings Agency Oligopoly?
posted by the man of twists and turns at 2:09 PM on January 22, 2013 [10 favorites]


Christ, is there actually any good news left out there?
posted by marienbad at 2:13 PM on January 22, 2013


there has been evidence for decades that the rating agencies were essentially worthless. The one big issue has been that certain regulators - insurance and banking regulators - wrote rules that used ratings to as the main factor to determine how much capital had to be held against certain investments on balance sheets. A lot of the appeal of AAA rated CDOs or RMBS was that even though the market was treating them like riskier assets (as you can tell by the yield they earned over other AAA rated securities) the ratings agencies and regulators said they were equally safe - net result was you though you could get a free lunch. Say you thought the bond was really an A rated bond - well the benefit of this scenario was you could buy the AAA rated bond with more leverage, and even an A rated security has a de minimis default risk in theory. The really problem wasn't that they were A bonds rated AAA, they were BBB bonds with weird cash flow characteristics that n hindsight you didn't really understand.

But consensus has been for decades they were actually bad at rating securities. This is again another regulatory failure.
posted by JPD at 2:25 PM on January 22, 2013 [5 favorites]


The presence of those ratings just encourages further abdication of responsibility on the part of fund managers (especially pension fund managers); instead of taking a critical look at individual bond issues, they instead can just lazily rely on the agency rating and go back to sleep. (When everything blows up, hey, it's not my fault!) And then government has to step in and bail everyone out, because you can't let Mr and Mrs Main Street's pensions just go down the fucking tubes.

You assume they have access to the necessary resources to do due diligence.
posted by Talez at 2:27 PM on January 22, 2013




Christ, is there actually any good news left out there?
posted by marienbad at 2:13 PM on January 22 [+] [!]


It's good news that criticism is being levelled against the rating agencies. It's good news that people are talking about this and thinking about it.

Focusing lights on an organization that's afraid to make "an admission of liability" can't possibly be a bad thing.
posted by Stagger Lee at 2:28 PM on January 22, 2013 [1 favorite]


Here is a link to an old thread on the CPDO/ S&P judgement mentioned by tmtt

The problem is the ruling is in Australia and in the US there is case law that protects the Ratings Agencies that would need to be overturned.
posted by JPD at 2:28 PM on January 22, 2013


The presence of those ratings just encourages further abdication of responsibility on the part of fund managers (especially pension fund managers); instead of taking a critical look at individual bond issues, they instead can just lazily rely on the agency rating and go back to sleep. (When everything blows up, hey, it's not my fault!) And then government has to step in and bail everyone out, because you can't let Mr and Mrs Main Street's pensions just go down the fucking tubes.

You assume they have access to the necessary resources to do due diligence.


Any fund manager who tells you he allows ratings to to drive his purchase decision is a fund manager you need to fire posthaste.
posted by JPD at 2:33 PM on January 22, 2013


Kadin2048: It's a broken system and we haven't changed nearly enough to expect that it won't break again.

Actually, we've deployed trillions of dollars to make sure that it will break again. Not purposely, but that's the effect of the bailouts; nothing changed, and total systemic risk went up.
posted by Malor at 2:35 PM on January 22, 2013 [6 favorites]


The government grants these companies a government license which makes their ratings have legal weight for investment funds that are legally required to buy stuff with certain ratings (like state pension funds)

The government should really un-certify these companies.
posted by delmoi at 2:37 PM on January 22, 2013 [3 favorites]


It's a broken system and we haven't changed nearly enough to expect that it won't break again.

I dunno, the system seems to be operating just beautifully for the people who own it.
posted by FelliniBlank at 2:39 PM on January 22, 2013 [3 favorites]


spicynuts' first comment was funny, but if anything it was understating the problem. As later posts explained, these ratings are much worse than Yelp reviews: any consumer can choose to distrust Yelp reviews and keep their money out of the hands of the reviewees, but taxpayers and defined-benefit pension fund recipients can't choose to keep their money out of the hands of the "triple A" investments.
posted by roystgnr at 2:48 PM on January 22, 2013


Perhaps relevant:

The Germans Want Their Gold Reserves Back In Germany
posted by dragonsi55 at 3:01 PM on January 22, 2013 [1 favorite]


Blah blah blah. It was poor people buying houses they couldn't afford, convinced to do so by banks who shouldn't have made loans with cheap money they shouldn't have had. Blaming ratings agencies is like blaming the guy quoted on the poster for Transformers saying "AWESOME ****"
posted by Damienmce at 3:25 PM on January 22, 2013 [1 favorite]


Also the system of Nationally recognized statistical rating organizations. Gov approved. Pension fund and asset managers can't own stuff not rated by these guys.
posted by Damienmce at 3:26 PM on January 22, 2013


Pension fund and asset managers can't own stuff not rated by these guys.

Only ERISA plans have to care
posted by JPD at 3:30 PM on January 22, 2013 [1 favorite]


Article bookmarked for the next time someone exclaims, "Oh noes! Moody's/Fitch/Mouthbreathing Boogereaters Rating Agency downgraded US government debt!"
posted by indubitable at 4:04 PM on January 22, 2013


Banks were able to keep making those bad loans because it didn't affect their ratings.
posted by borges at 4:40 PM on January 22, 2013 [1 favorite]


The thing that really stings is the same firm which signed off on all the mortgage backed securities can also devalue our treasuries with a word. Their horrible corrupt failure did nothing to undermine their status as an authority.
posted by clarknova at 6:05 PM on January 22, 2013


clarknova: "The thing that really stings is the same firm which signed off on all the mortgage backed securities can also devalue our treasuries with a word. Their horrible corrupt failure did nothing to undermine their status as an authority."

I believe they tried and failed to devalue our treasuries. ;)
posted by wierdo at 6:22 PM on January 22, 2013 [2 favorites]


Blah blah blah. It was poor people buying houses they couldn't afford, convinced to do so by banks who shouldn't have made loans with cheap money they shouldn't have had. Blaming ratings agencies is like blaming the guy quoted on the poster for Transformers saying "AWESOME ****"

This was a good joke comment.


Right? It's a joke comment. Isn't it.
posted by odinsdream at 6:25 PM on January 22, 2013 [4 favorites]


Former ratings agency analyst here. I worked in corporates; that is, I rated a group of corporate issuers. We were separate from the structured product side of the house (the side that rated CDOs, etc.).

The corporate side was old school compared to the structured product side. It was an academic job to some extent. We spent many, many hours reading SEC documents and other similarly tedious documents to understand the intricacies of our issuers. Some people, including me, also spent many hours building custom financial models to project issuer cash flows, debt levels, etc. (others just used a plain vanilla financial model provided by the firm). The hardest part was learning an issuer the first time. Once you'd covered an issuer for a few years, it was easy. You just monitored the headlines, read investor call transcripts and met with company management once a year. You only published a report if they were issuing debt, if there was some material corporate/event (merger, acquisition, etc.) or if the last report was very out-of-date.

This meant the hours were very easy compared to Wall St. If you had no new credits, you could get by (literally) on 20 hours a week. I worked maybe 45 hours a week because of my personal neuroses, and was often first-in/last-out at the office. Compensation was very low by Wall St. standards (roughly $250K/year for managing directors) but when you factored in the hours, the dollar per hour was incredible.

This resulted in some long-termism by which I mean a number of the folks I worked with had been there forever. And they never planned to leave. It was just too easy. (And I make no judgment about them.)

The other group of folks were people gunning for Wall St.-type jobs. I was one of these folks. As a group, we were very motivated to assign accurate ratings to issuers. Analysts that produced interesting research or made good calls ahead of the market got to move up and out. The most coveted positions were on the buy-side because it meant good money without the abuse common in most banks.

The structured finance side of the house made all the money. It was a mill. Quants with serious math and physics PhDs buil black box models and econ and business majors were hired out of undergrad to feed the machine. Numbers went in one side, a rating came out the other. The managing directors on that side of the house--I was led to believe--were better compensated than the old school folks in corporates.

When it all went bad, most of the structured folks were laid off in large numbers over a few months. Some of the folks came over to the corporate side. I was floored by the lack of knowledge by the few folks I came into contact with. They couldn't read financial statements. They didn't know credit risk. It was pitiful.

There was an obvious conflict of interest on the structured finance side; this was a common water cooler meme at the time. The firm was just making too much money. The models were getting reverse-engineered to generate the needed rating (or so the rumors went).

On the corporate side, the conflict was less evident. I issued a number of opinions that were not popular with my issuers. There was a formal process for conflict resolution, and except for one time, I generally felt supported. This is NOT to say the conflict doesn't exist. With time and hindsight, I think it's a broken model. The whole "it's just an opinion and shouldn't be relied on" defense illustrates how chickenshit the managers of these firms are. It makes me sick. But that doesn't mean everyone working there is intellectually dishonest; some of the analysts I worked with tried really hard to be right.

Understand that, in the end, ratings are assigned in essence by determining, qualitatively, the issuer's business risk, and then looking at how the firm's financial ratios compare to the ratios baskets of firms with more, the same, and less business risk. The agencies have many years of financial ratios and default data, and over the long-term these ratings are usually accurate. Visit www.defaultrisk.com for about every white paper published ever on this subject.
posted by jchilib at 8:17 PM on January 22, 2013 [25 favorites]


There was an obvious conflict of interest on the structured finance side....

It gets even worse, but in a different way. I worked (briefly) at one of the big three agencies just as the "esoteric" structured instruments were rolling out.

These were relatively new products at the time. That means no one knew how to price them, i.e., what to charge customers (the companies being rated) for them. Obviously, you don't want to overprice; people will go to your competitor first. Obviously, you don't want to underprice and leave money on the table.

Now, how do you think the agencies figured out what the other agencies were charging?
posted by digitalprimate at 11:12 PM on January 22, 2013 [3 favorites]


Bloomberg : Libor Lies Revealed in Rigging of $300 Trillion Benchmark (previously)
posted by jeffburdges at 1:50 AM on January 30, 2013


« Older This iconic photo of the first Aboriginal woman to...  |  Has Slate's well known, some w... Newer »


This thread has been archived and is closed to new comments