The failure of the ratings agencies to adequately assess risk was one of the primary ways the mortgage crisis wormed its way into institutions like pension funds that would only take on "safe" investments. If your pension fund found itself riddled with exposure to mortgage-backed securities and took a huge hit, you can thank Moody’s, S&P and other NRSRO’s (Nationally Recognized Statistical Ratings Organizations).
Many of the NRSROs were passing out AAA ratings like Pez, without ever looking at the underlying mortgage documents. Part of the problem was the "moral hazard" built into a system where the agencies are paid by the bond issuers they’re rating (see Bill Black’s work). But reforming them is not going to be easy — see Tyler Durden’s post on how the government chose to bypass Moody’s when they wouldn’t give certain TALF deals a AAA ratings, and chose to go with S&P, Fitch and DBRS who would.
Paul Kanjorski’s Subcommittee on Capital Market, Insurance and Government Sponsored Enterprises is holding a hearing on credit ratings agencies today, which starts at 2pm ET. Witness list and prepared testimony (PDFs):
- Mr. Robert Auwaerter, Principal & Head of the Fixed Income Group, Vanguard
- Mr. Robert Dobilas, President and Chief Executive Officer, Realpoint LLC
- Mr. Eugene Volokh, Gary T. Schwartz Professor of Law, UCLA School of Law
- Mr. Stephen W. Joynt, President and Chief Executive Officer, Fitch, Inc.
- Mr. Alex J. Pollock, Resident Fellow, American Enterprise Institute
- Mr. Gregory Smith, General Counsel, Colorado Public Employees’ Retirement Association
Consider this an open thread for discussion. You can watch the hearing here.
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Don’t know what’s holding it up.
really?
It seems that the Enron debacle IRT credit rating agencies is still relevant?
Kanjorski speaking now. I guess that whole thing about how lawsuits from the public were going to incentify them to provide accurate ratings was bunk, huh?
Scott Garrett (R-NJ) — nobody from SEC here (how come?) but we should hear from them before we attempt to do anything about re-regulating them.
Investors should do their own due diligence as to the reliability of ratings agencies, and encourage competition.
Therefore, we should not discourage competition by requiring they can’t have moral hazard of charging bond holders for their ratings.
Okay now let’s look at how in the tank Garrett is…
OT but I caught this really excellent article via Naked Capitalism on derivative “regulation”:
http://us1.institutionalriskan…..sp?tag=360
Here’s Garrett’s 1Q 2009 FIRE donations:
Allstate Insurance Company PAC $1000
American Society of Pension Professionals & Actuaries — $1000
Bank of America Corporate Federal PAC $2000
Brooke Holdings: $1000
Chubb Corporation $1000
Credit Suisse $1000
General Electric Company PAC $1000
Independent Insurance Agence & Brokers of America PAC $3000
Mortgage Bankers Association $2000
National Association of Mutual Insurance Companies PAC $1000
National Mutual Insurance Company PAC $1000
Property Casualty Insurers PAC $2000
Reinsurance Association of America PAC $1000
Title Industry Political Action Committee $1000
Travelers Companies INdustries $1000
TOTAL: $20,000 — or 55% of all the money ($36,000) Garrett took in from PACS in 1Q 09.
Also it’s important to remember that ratings were used by companies in lieu of them exercising their own due diligence.
As long as ratings agencies aren’t liable for their ratings and are paid by those seeking ratings, expect no real reform.
And their models were/are crap. How does one fix that?
are you able to watch through this link? I get the media player but nothing is playing…
It makes movie ratings look more stringent…
Kanjorski called a break so they could vote on something.
so, are you watching a camera filming an empty room, or did the media player dump you? I am unable to watch, I keep getting dumped off…
I’ve got the notice that “the hearing is currently in recess” screen.
Yep, me too.
thanks. I think I’ve got that now, too. doy!
so cspan is showing that the house is voting to pass as amended the home mortgage credit and refinancing bill?
Hey Jane, for a fee, I’d be happy to give your blog a Triple A rating! :]
*crickets*
how about Triple XXX? could you use that?…
Have the committee members gotten approval on their questions from Goldman’s authorities?
so very sad but true
And we’re back
Their questions came from Goldman’s. Their opening statements, however, were only reviewed and edited by Goldman’s.
Has anyone mentioned the fact that when corporations cook their books and annual reports, the importance of ratings is distorted?
It’s the system. Everyone was in on the action. The appraisers whose opinion made things go. The lawyers who closed the deals. The mortgage brokers who made money only if things closed and the banks who made fees by selling Collateralized Debt Obligations. And it was difficult to turn stuff down.If your appraisals were low, another appraiser was available. Same true for the rating agencies. It doesn’t matter who pays them. They get paid when the deal flies so you can bet they will do what they can to make the deal fly. Then suddenly the music stopped. If you want to blame anyone, blame the bandleader.
Aren’t those corporations supposed to be audited?
The bandleader? Phil Gramm?
Was Phil Gramm a bandleader or a tool?
Senate OK’s Credit Bill
Translation: Our revenue will drop like a stone because we won’t have anyone to collect our outrageous late fees and usurious interest from.
Boo fucking hoo.
Like a baton or truncheon.
Bloodsuckers
(not speaking of which, I saw your kittehs, such cuties! Thanks for posting the pics.)
Hey, not to worry. They’re already making plans to screw the good customers
I remember the old days of annual fees in order to get some kind of revenue from the card user who paid it off each month. Guess the pay-in-full-every-month folks won’t be thinkin’ it’s such a sterling deal any more. Is that the sound of air escaping the credit card bubble I hear?
.” The $596-trillion market in unregulated derivatives, including $58 trillion in credit-default swaps, was being watched by one person. That’s when he wasn’t looking at the rest of the corporate world, of course…
http://business.timesonline.co…..038;page=2
This four page article from business.times online has plenty of evidence from independeny audits of the fraud that brought down the global economy, reduced retirement accounts and home equity by 40%.
Dosido:
Enron implemented securitization in a mojor way that their competitors picked up and it became corporate culture policy cook the books to shift debt to show profits and reap giant bunuses for the executives.
Jane Hamsher
Obama’s election did not make any effective changes in the way biz is done…just put a happy face on it. The Hill elections are financed by the corporsate oligarch the investors are supporting.