Moody's ratings analyst talks: agency rotten to the core

[Jhhnn]

I think you're making excuses, LK, the same excuses that have been used all along.

1. The enormous growth of sub prime arms leading up to the crash was an obvious indicator of a false market valuation for housing & RMBS. Many of these loans went to people who didn't have a prayer of converting to a standard 30 year note, because they couldn't qualify for anything other than the introductory rate cornholio. When the original terms expired, they were going to be screwed if prices didn't continue leaping- the guys sitting at the table showing them where to sign & the banks backing up the loan company knew it full well, along with everybody in between. We both know it.

2. The actual ability to pay was completely ignored. Anybody with a pulse could get a loan in 2005 & 2006, often at extremely low rates on a short term ARM, better rates than fully qualified buyers got on 30 year notes. Mortgages were marketed like furniture loans, and on similar terms. Yeh, no interest for a full year, but if you haven't paid it off by then, you're taking the high hard one. People can afford that on a few $K, they'll recover, but not on horribly overpriced real estate, the biggest & most long lasting financial obligation they'll ever take on.

3. The big banks achieved capture wrt the ratings agencies early in the game, playing them against each other & having the methodologies handed to them on a platter. They could "tailor" securities to achieve any rating they wanted, even ones loaded with bunk.

4. This whole "Nobody Knew, Honest!" routine makes me want to puke. For everybody selling protection in the synthetic derivatives market, there was somebody buying it, somebody like Magnetar-

http://www.propublica.org/article/t...d-helped-keep-the-housing-bubble-going/single

You're basically claiming that the sharpest financial minds in the world were a bunch of complacent chumps who hit their heads when they fell off the turnip truck, & I'm not buying it.

 

[nonlnear]

I stumbled on a post by a quant headhunter that's worth a read. (link - scroll down to August 10.) Full text below.

Why the ratings agencies can't be fixed.

The RAs are run as businesses, where the issuer is usually the customer. That creates a conflict of interest on a scale big enough to damage the whole world economy, because that is what it did.

As a headhunter for people who do maths for banks I will share that it is very clear to me that the RAs hired a few good people to look good on their brochures, but actively chose most employees who didn't "make trouble", ie think about the ratings issued.

A "trouble maker" would have pointed out that the models they used were defective. I have seen some of the models used by RAs and they a tragically bad. When I, who am only a quant headhunter call your code "a sack of garbage" you are truly lost and without any shred of competence.

They pay so badly for analysts compared to banks that it is simply impossible that their staff could do the job that the RAs say are doing.
Yes there are some good people (who I'm trying to lift out), but the average is somewhere between scary and funny.
Thus they get the result they want and save money at the same time.

The EU is trying to create its own ratings agency. Apparently they genuinely believe that the problems in Greece, Ireland, Italy, Spain, etc would quietly just go away if the RAs gave them the all clear.

We all know that the ratings from an agency specifically set up to give good ratings to EU states will have less credibility than ummm err, some guy on Google+ who shares his views freely

That political corruption will extend to firms that have a "good relationship" with the EU, and firms (or even countries) that anger it will find their ratings hurt.

Also the EU is astonishingly corrupt, its own auditors for years have flatly refused to sign off its accounts.

The ability to create a new source of bribes is of course highly attractive to many in Brussels.

A US Federal RA would be even worse. Run by political appointees, subject to the need to generate pork for elected officials yet having to tell the truth is a discipline that is unrealistically tough.

So a private sector RA is not the answer.
Nor is one owned by a country or collection of countries.

We can't even have a "trusted" RA by choosing people of great personal integrity. A a pimp for bankers I know people who could be trusted to do that.
But you need hundreds of staff at a minimum, more likely thousands and just having a smart and honest leader is massively inadequate for that task.

Have I proved that this is not fixable ?

Hmm...

 

[Acanthus]

Related?

S&P president to step down.

http://finance.yahoo.com/news/Repor...tml?x=0&sec=topStories&pos=main&asset=&ccode=

 

[Jhhnn]

I stumbled on a post by a quant headhunter that's worth a read. (link - scroll down to August 10.) Full text below.

Hmm...

If the game is rigged in favor of the bankstas, then the answer is to change the game, not just throw our hands up in the air...

Fat chance with the advocates of "self regulated banking" occupying a blocking position in Congress, huh?

 

[nonlnear]

If the game is rigged in favor of the bankstas, then the answer is to change the game, not just throw our hands up in the air...

Fat chance with the advocates of "self regulated banking" occupying a blocking position in Congress, huh?

I am neither an advocate of throwing our hands up in the air, nor "self-regulated" anything. For competitive markets to function properly, there is a vital role for very strong regulators to play. Sadly the market participants have convinced a lot of people that what's good for them is good for the market. There is nobody on either side of the aisle who actively and consistently pushes for strong, competitive markets. Business lobbyists push for unregulated monopolies, and the progressives push for government managed monopolies.

 

[Jhhnn]

progressives push for government managed monopolies.

That's more of the usual false attribution-

http://makemarketsbemarkets.org/report/MakeMarketsBeMarkets.pdf

 

[nonlnear]

That's more of the usual false attribution-

http://makemarketsbemarkets.org/report/MakeMarketsBeMarkets.pdf

I must be mistaken. Education, health care, energy, transportation. They aren't pushing for the expansion or retention of any large government projects in any of these sectors? My bad.

 

[Jhhnn]

I must be mistaken. Education, health care, energy, transportation. They aren't pushing for the expansion or retention of any large government projects in any of these sectors? My bad.

As if private enterprise has done much for us in those sectors, other than price gouging in healthcare & energy, a desire to get on the govt teat with school vouchers, not to mention a complete disinterest in transit, unless they're getting govt money, of course...

There is a rightful place for govt in all those areas, regardless of empty snide remarks to the contrary.

 

[nonlnear]

As if private enterprise has done much for us in those sectors, other than price gouging in healthcare & energy, a desire to get on the govt teat with school vouchers, not to mention a complete disinterest in transit, unless they're getting govt money, of course...

There is a rightful place for govt in all those areas, regardless of empty snide remarks to the contrary.

There has never been a competitive market for almost any of them, so it's no wonder that private enterprise is inefficient. When the only alternative to government monopoly (accessible to ordinary folk) is a badly structured subsidy it becomes a self-fulfilling prophesy to say that private enterprise is bad for those sectors.

Yes, I'll agree that there is a role for government in those sectors. By the standards of most people who have similar views to me, I'm an advocate of a very big government role in all of them. However it's completely disingenuous to say that markets are incapable of delivering those services well. The only markets that have been tried have been defective by design. I'll be the first to admit that some of the key defects were put there by so called free market advocates. I'm not laying blame at the feet of leftists here. I'm more disgusted by so called economic conservatives who actively promote policies which are contrary to their purported values.

 

[Craig234]

There has never been a competitive market for almost any of them, so it's no wonder that private enterprise is inefficient. When the only alternative to government monopoly (accessible to ordinary folk) is a badly structured subsidy it becomes a self-fulfilling prophesy to say that private enterprise is bad for those sectors.

Yes, I'll agree that there is a role for government in those sectors. By the standards of most people who have similar views to me, I'm an advocate of a very big government role in all of them. However it's completely disingenuous to say that markets are incapable of delivering those services well. The only markets that have been tried have been defective by design. I'll be the first to admit that some of the key defects were put there by so called free market advocates. I'm not laying blame at the feet of leftists here. I'm more disgusted by so called economic conservatives who actively promote policies which are contrary to their purported values.

The pretend 'sides' are left-wing commies who hate business and want to destroy it, against all private sector business.

The real 'sides' are closer to pro-business liberals who want to reign it in from extremes harming the public interest, against private interests who want to destroy regulation of them in the public interest to they can increase profits even more at great expense to the public, and use the false portrayal of the 'sides' above to do that.

This is how they advocate 'eliminate the EPA and let them profit by far more pollution' by pretending they're 'against big government red tape'.

 

[Jhhnn]

There has never been a competitive market for almost any of them, so it's no wonder that private enterprise is inefficient. When the only alternative to government monopoly (accessible to ordinary folk) is a badly structured subsidy it becomes a self-fulfilling prophesy to say that private enterprise is bad for those sectors.

Yes, I'll agree that there is a role for government in those sectors. By the standards of most people who have similar views to me, I'm an advocate of a very big government role in all of them. However it's completely disingenuous to say that markets are incapable of delivering those services well. The only markets that have been tried have been defective by design. I'll be the first to admit that some of the key defects were put there by so called free market advocates. I'm not laying blame at the feet of leftists here. I'm more disgusted by so called economic conservatives who actively promote policies which are contrary to their purported values.

Powerful economic conservatives will always attempt to do that, simply because they have no values beyond making money and manipulating the system to help them do it. Wealth beyond the imagination of middle class people isn't good enough for them- they want power to go with it. They'll try to thwart any efforts to the contrary, particularly any that demand real competition.
They will never cooperate willingly. Accept it.

In doing so, we have to realize that there are social imperatives involved in all this, which, coupled with the extreme disparities of income & wealth in this country, simply demands that govt do these things, using progressive taxation as the means.

Otherwise, this great social experiment of democracy will fail.

 

[Craig234]

I must be mistaken. Education, health care, energy, transportation. They aren't pushing for the expansion or retention of any large government projects in any of these sectors? My bad.

There are services that are int he public interest, which the government can deliver better than for-profit corporations. There are others better delivered by private business.

How well is the private sector going to serve a ghetto with no money for schools? Compare the costs of equivalent medical care between government-run systems and the US's private insurance system with its private profits and policies *most concerned, as required by law, with increasing those profits* and all the inefficiencies of so many companies' paperwork, and talk about which is more efficient at delivering healthcare. The government can play a very useful role in energy and transportation.

How well is the private sector going to provide transportation services to that same ghetto with no money? Should all major highways be built as toll roads for profit?

Frankly, you are confused about the issues with 'monopoly' in the private sector here when you talk about government. You make good comments about monopoly in the private sector in other posts, but the government 'monopoly' is not the same issue as a private 'monopoly'.

There are possible issues; for example, what is the Post Office had 'government monopoly power' to ban all package delivery companies, not just mail? That would likely not be in the public interest - and it doesn't happen. However, the fact you can send a letter for 44 cents to any address in the country, while private companies are incented to serve the highly profitable concentrated areas and either charge a fortune or not serve the far out rural people at all - government works ok there, and of course it's not even really government, as much as the post office has been made a separate operating agency; helping lead to its budget challenges needing higher rates.

But how many complaints have there been that are valid about mailing a first class letter, or the cost?

As times change and people are mailing a lot less, that's a different issue.

It makes no sense for us to keep helping a few healthcare insurance companies get rich by wasting many billions; we should go to more efficient single-payer.

 

[nonlnear]

The pretend 'sides' are left-wing commies who hate business and want to destroy it, against all private sector business.

Not so much destroy it as put it in a cage and let it only play on a tiny piece of the yard. The rest of the land is for the gubmint cattle.

The real 'sides' are closer to pro-business liberals who want to reign it in from extremes harming the public interest,

Granted there are some such gems, but they are as marginalized as Ron Paul. And there really are some raving anti-business types in the mix too.

against private interests who want to destroy regulation of them in the public interest to they can increase profits even more at great expense to the public, and use the false portrayal of the 'sides' above to do that.

Yes, the corporate backers of the inner circle of the GOP and Democratic Party are exactly that.

This is how they advocate 'eliminate the EPA and let them profit by far more pollution' by pretending they're 'against big government red tape'.

While I may not be a huge fan of every move by the EPA, I'm far from an advocate of its destruction. I think the EPA is an agency that is vital to keeping this country a place worth living in.

 

[nonlnear]

There are services that are int he public interest, which the government can deliver better than for-profit corporations. There are others better delivered by private business.

Frankly, you are confused about the issues with 'monopoly' in the private sector here when you talk about government. You make good comments about monopoly in the private sector in other posts, but the government 'monopoly' is not the same issue as a private 'monopoly'.

You are right that government monopoly is different. There is a time and a place for government monopoly. However the American political machine is too broken to deliver properly functioning government services. From the federal to the city/county level we have taxes being bid down for companies that have political clout, and everybody else is forced to subsidize these favorites. This is endemic to both parties, and yes, even (sometimes especially) your beloved progressives. I will give them credit though: they aren't hypocritical about it. They say they are going to pick winners and they do what they say. That's slightly better than the GOP who pretend to have open processes and still pick their cronies to get the best pieces of the pie. At least the Dems occasionally say up front that they're just going to pick their friends. I appreciate the honesty.

I'd rather not dig into a bunch of other specific policy areas in a thread ostensibly about rating agencies. If you want to go to PMs I'm happy to oblige.

 

[Michael]

Fern - AA's Enron issue was that they were too entwined with the company. They were offering too much accounting and other advice and the client was too important to them for them to maintain proper professional independence. Technically, the SPE's could have been accounted for the way they were, but Enron was lying about the ownership structure. They also took way too many liberties with mark-to-market accounting to make their numbers. This was a pattern for quite a while, any auditor doing their job should have caught it before it blew up.

Worldcom was far worse, they essentially capitalized over $1B of expenses into assets and AA missed it.

Michael

 

[Fern]

^Thanks Michael.

----------------------

Surprised no comments in this thread regarding the president of S&P getting canned.

Fern

 

[Oric]

Just compare CDS (default risk pricing) of countries with their Moody's S&P ratings, they are totally unrelated ! Many of the failing old rich countries still have very good rating scores while the new rising stars fail to get good notes thus struggle to get foreign investments. This shows that rating agencies are politically motivated to give false ratings.

 

[Oric]

2011/08/09
Greece:1700,Ireland:750,Portugal:850,Spain:350,Ita ly:340,Belgum:240
France:?,NL:71,Germany:78,Sweden:53,UK:78,US:78,Ru ssia:182,
Argentina:770,Brazil:160,Japan:92,Hungary:415,Aust ria:107,
Venezuela:1140,Bulgaria:275,China:102,Turkey:180,U S-bank:190,
Ukraine:540


The lower Cds price, the lower rpercieved risk of default of the country, note that Turkey's rating (an example) is Ba2 which is still in non invest category (better than us banks), the top bad grades are still in AAA or AA+ rating range (spain, italy etc)