SEC Report on Credit Ratings Highlights Conflict of Interest Inherent in Issuer-Pays Model

By: Wednesday December 19, 2012 1:38 pm

The Securities and Exchange Commission released a report on the method for how credit rating agencies get their business, something mandated by the Dodd-Frank financial reform law. And just as expected, it showed a serious conflict of interest in the current business model, where rating agencies are paid by the issuer of securities, and have to compete for their business, adding all sorts of distortions into the kinds of ratings they give. A better model, envisioned by Dodd-Frank at first but then put into this study, would allow an oversight board to dole out to qualified ratings agencies the securities that would get rated, removing the conflict of interest entirely.

 

Australian Court: Standard and Poor’s Liable for Bad Ratings on Securities

By: Monday November 5, 2012 3:19 pm

This will get approximately no attention today, but a federal court in Australia ruled that Standard and Poor’s, the credit rating agency, lied to investors when they awarded their highest, triple-A rating to derivative securities that lost their value within two years of purchase. The court ruled for a series of local councils in Australia, which accused S&P of botching the credit ratings and duping them into purchasing the securities.

Moody’s Follows Other Rating Agencies Into Incoherence About Fiscal Cliff

By: Tuesday September 11, 2012 12:50 pm

Good to know that the credit rating agencies have learned approximately nothing since last year. Then, they initiated a downgrade of the United States, determining that their debt would be a riskier instrument after the debacle of the debt limit deal. Investors responded by pouring money into US Treasuries and dropping the yields at one point to under 1.5% (it’s at around 1.676% today). The markets, then, thoroughly ignored the warnings of the rating agencies, and by extension discredited them. They saw US treasuries as a safe instrument rather than a downgraded one.

So what does Moody’s come out and say today? That the US credit rating depends on fiscal cliff talks:

The Worst Idea in the World: Securitizing Rental Revenue

By: Sunday August 26, 2012 1:00 pm

The last financial crisis can be blamed in large part on runaway securitization. Wall Street giants sliced and diced mortgage loans into bonds that they sold around the world. They claimed that they diversified the mortgage pools so that even a few defaults would not undermine the value of the securities, and they offered tranches of the bonds at a decent yield. As global demand increased for the securities, Wall Street pressured originators to close more and more loans, regardless of creditworthiness. This caused a bubble in prices. Moreover, financial innovators took the lower-tranche loans and cut them up into once-removed securities, making bets on bets on the housing market that were allegedly “safe”. We all know how this ended, and how the securitization bubble took a crash in housing prices and made it exponentially worse.

So now we’re poised to do that all over again.

Dimon Doesn’t Know If JPM Broke the Law in Fail Whale Trade

By: Saturday May 12, 2012 11:00 am

If you can find another CEO answer a point-blank question about whether or not their company broke the law with, essentially, “I don’t know, the regulators should come in and find out,” you win a cookie.

Corruption or Incompetence; the Economic Effects Seem the Same

By: Wednesday November 30, 2011 5:12 pm

One of the on-going arguments across the blogosphere and even the entire world is whether the economic problems of the last ten years are more related to incompetence or basic corruption. I must say, just the last week has offered plenty of evidence for both views. For example, we had this article from Bloomberg yesterday (Tuesday, November 29) about how then Treasury Secretary Hank Paulson met with his hedge fund buddies and gave them the first class insider information on his plans to place Fannie Mae and Freddie Mac into “conservatorship.”

The Republican 99:1 Ratio on Deficit Reduction

By: Wednesday November 2, 2011 2:50 pm

Leaks from the Super Committee show how Democrats and Republicans are proposing to meet their debt reduction goals. The Republicans propose a minimum of tax increases versus spending cuts, and even those increases are misleading, since they’re using different baselines.

Shocker: The More You Pay a Rating Agency, the More They Do Your Bidding!

By: Monday October 31, 2011 6:30 pm

Sit down for this one. Because you’re just not going to believe it. It seems that the more credit rating agencies are paid by corporations and banks to rate their debt, the more favorable ratings they hand out! This goes against everything I know about the untainted, incorruptible hand of the free market, and comes very close to shaking my faith in the credibility of the rating agencies.

Other Rating Agencies Implicated in DoJ Mortgage Bond Probe

By: Sunday August 21, 2011 7:00 pm

It turns out that the Justice Department is not only concerned with Standard and Poor’s but the entire credit rating agency industry, it appears. The reported investigation into the ratings of mortgage backed securities during the housing bubble is centered on S&P, but not limited to them.

US Debt Downgrades as Revenge for Dodd-Frank?

By: Wednesday August 10, 2011 7:02 pm

The Senate Banking Committee claims to be gathering information on S&P, but as Manns says this is an industry-wide phenomenon. Long ago, the government gave the rating agencies a good deal of power, and now they’re using it to protect their core business. I’d love to see Congress defy the rating agencies and reduce their role in bond deals (through mandating AAA securities in them), but I don’t see it happening.

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