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

[shabby]

http://www.businessinsider.com/moodys-analyst-conflicts-corruption-and-greed-2011-8

The primary conflict of interest at Moody's is well known: The company is paid by the same "issuers" (banks and companies) whose securities it is supposed to objectively rate. This conflict pervades every aspect of Moody's operations, Harrington says. It incentivizes everyone at the company, including analysts, to give Moody's clients the ratings they want, lest the clients fire Moody's and take their business to other ratings agencies.

Thought this was common knowledge, but someone from the inside finally admitted it.

 

[freegeeks]

I think everyone knows that the big 3 rating agencies are pretty much worthless since the subprime mortgages debacle, the whole financial world fell apart because of securities rated AAA

 

[Phokus]

Remember: Conservatives want to get rid of the FDA and allow third party certification companies to take their place and compete with each other.

These types of businesses really don't work when the primary objective is to shop around and buy ratings.

 

[Jhhnn]

I think everyone knows that the big 3 rating agencies are pretty much worthless since the subprime mortgages debacle, the whole financial world fell apart because of securities rated AAA

True. Many of those securities should have received the rating of whale shit. Well, more giving money to Wall St so they could burn it to stay warm. The most amazing part is that one of them had the chutzpah to downgrade the US govt, and was actually believed by some.

The fact that Treasury yields fell through the floor following the announcement should tell us something...

 

[Craig234]

Democrats are pushing to remove the conflict of interest. For example:

http://www.realclearpolitics.com/ar...for_oversight_of_ratings_agencies_110912.html

Republicans? Of course they support the corruption and Wall Street's preference to be able to game the system more.

They'll pull the usual idiocy, call the regulation 'communism'.

 

[nonlnear]

While well intentioned, Franken's proposal would definitely not "sever the industry's gross conflicts of interest."

Rather than making the ratings agencies franchisees of Congress (with their oligopoly intact), we need mandatory full disclosure (in a third party searchable format) of every document and piece of data that goes into a bond rating.

Of course you are right that the GOP has far more solidarity when it comes to protecting the corruption of Wall Street, but the Democrats are not a lot better. There is a handful of well-intentioned progressives, but their ideology prevents them from seeing that mandated oligopolies are not much better than private ones. This is because they believe that government is an effective mechanism for opposing corruption, when (such as it is) it is clearly the opposite.

 

[Craig234]

While well intentioned, Franken's proposal would definitely not "sever the industry's gross conflicts of interest."

Rather than making the ratings agencies franchisees of Congress (with their oligopoly intact), we need mandatory full disclosure (in a third party searchable format) of every document and piece of data that goes into a bond rating.

Of course you are right that the GOP has far more solidarity when it comes to protecting the corruption of Wall Street, but the Democrats are not a lot better. There is a handful of well-intentioned progressives, but their ideology prevents them from seeing that mandated oligopolies are not much better than private ones. This is because they believe that government is an effective mechanism for opposing corruption, when (such as it is) it is clearly the opposite.

As I've said many times, the Dems are largely split between the progressive faction and the corporatist faction.

I think you are making your own mistake from ideology in your claim about the progressives.

Government when filled by people serving the public interest is protection against corruption.

For example, the first chairman of the SEC was Joe Kennedy - who did a great job at cleaning up corrupt practices on Wall Street - ones he had used when legal.

Today's SEC under Clinton through Obama at least is a joke of corruption.

Just yesterday Matt Taibbi was reporting on the SEC destroying all - thousands - of pre-investigations they did that did not lead to charges.

Another report noted a lot of the regulators are more allies of those they regulate than regulating them representing the public.

As I've said before, attacking government because corrupt government is elected is like saying there should be no police because some police are corrupt.

That's not the answer; the answer is to remove the corruption. We need good government. Without it, it doesn't matter whether the corruption is done under the pretense of democracy or not, get rid of government and the corrupt will far prefer that, not having to put on the show, and you will have no way to battle them.

Franken's proposal would address the conflict of interests and be a big improvement. What you're complaining about isn't clear.

The transparency you ask for is fine, but we need the conflict removed as well.

 

[nonlnear]

The transparency you ask for is fine, but we need the conflict removed as well.

Apart from the transparency, I'd like to see the mandate that all bonds be rated by one of the agencies removed. Releasing the data will allow third party ratings to evolve rather quickly. Take your standard data disclosure and plug it into Google, Wells Fargo, or USAA's insta-rater. The supposed value added by the big raters would disappear rather quickly.

Removing conflicts of interest by creating a government panel to manage a market is like hiring ex-Goldman Sachs executives to advise on monetary and banking policy, or like letting Monsanto steer USDA policy. It can not remove conflicts of interest, only move them - to Washington DC.

 

[Imp]

What was it? The S&P told their "clients" that they were downgrading the US of A before they sent the memo to the US government, before the government found the $2 trillion error? Something like that? Who would have guessed...

 

[Fern]

The issue of conflict of interest is not a new one, nor is it unique to these credit rating agencies.

The problem I see here seems to be one of a lack of consequences for the credit rating agencies if they get it wrong. If you're a CPA firm auditing a company's financials and you get it wrong, you pay a huge penalty. You may even be forced out of business (e.g., Arthur Andersen and Enron).

Now what consequences have the rating agencies suffered as a result of their errors in rating mortgage backed securities?

IMO, it's not that the possibility for conflict of interest exists, it's that there is no mechanism to make them suffer if they engage in it.

Fern

 

[Fern]

What was it? The S&P told their "clients" that they were downgrading the US of A before they sent the memo to the US government, before the government found the $2 trillion error? Something like that? Who would have guessed...

I believe S&P's position is that the $2 trillion is immaterial. Considering that the estimate involved the cumulative national debt forecast out over a period of years I tend to agree with them. The US govt published a chart showing the difference before and after taking the error into account. It didn't look substantial to me, and doesn't really affect the trajectory of our debt over the years.

Fern

 

[the DRIZZLE]

Democrats are pushing to remove the conflict of interest. For example:

http://www.realclearpolitics.com/ar...for_oversight_of_ratings_agencies_110912.html

Republicans? Of course they support the corruption and Wall Street's preference to be able to game the system more.

They'll pull the usual idiocy, call the regulation 'communism'.

The Dems should be ashamed of the themselves for retaliating against S&P because they didn't like their view of the direction the country is headed in. You should be embarrassed for repeating it with a straight face.

 

[Phokus]

The issue of conflict of interest is not a new one, nor is it unique to these credit rating agencies.

The problem I see here seems to be one of a lack of consequences for the credit rating agencies if they get it wrong. If you're a CPA firm auditing a company's financials and you get it wrong, you pay a huge penalty. You may even be forced out of business (e.g., Arthur Andersen and Enron).

Now what consequences have the rating agencies suffered as a result of their errors in rating mortgage backed securities?

IMO, it's not that the possibility for conflict of interest exists, it's that there is no mechanism to make them suffer if they engage in it.

Fern

It's because for CPA's, it's more black and white and they have to follow very strict guidelines with GAAP... with the ratings agencies, there's no standardized formulas or anything, they can say, 'oh well, i guess our assumptions into creating these models didn't work out' and it's an accepted excuse.

 

[the DRIZZLE]

It's because for CPA's, it's more black and white and they have to follow very strict guidelines with GAAP... with the ratings agencies, there's no standardized formulas or anything, they can say, 'oh well, i guess our assumptions into creating these models didn't work out' and it's an accepted excuse.

Yup accounting is just applying the rules. There's much more judgement involved in financial analysis. IMO that also makes it a lot more interesting.

 

[Phokus]

Yup accounting is just applying the rules. There's much more judgement involved in financial analysis. IMO that also makes it a lot more interesting.

And even with those black and white rules in accounting, there are STILL scandals going on.

 

[Fern]

It's because for CPA's, it's more black and white and they have to follow very strict guidelines with GAAP... with the ratings agencies, there's no standardized formulas or anything, they can say, 'oh well, i guess our assumptions into creating these models didn't work out' and it's an accepted excuse.

Yup accounting is just applying the rules. There's much more judgement involved in financial analysis. IMO that also makes it a lot more interesting.

And even with those black and white rules in accounting, there are STILL scandals going on.

C'mon guys, accounting is not "black and white". It requires a great deal of judgement and assumptions.

Anytime some company goes bankrupt and if, for whatever reason, the auditors did not foresee it and warn about it they get the crap sued out of them.

Heck, Arthur Andersen got creamed in the Enron debacle, it went to the Supreme Court and they were found to have made NO errors etc.

I don't see why when a highly rated bond goes into default the ratings agencies don't get the same treatment.

You guys are making out as though those rating are such huge guesses/assumptions that they shouldn't be held accountable. If it's too much assumptions and guess work to hold them accountable then the damn things shouldn't be relied upon in the first place. If as unreliable as you say, they have no real value and serve no real purpose.

Fern

 

[the DRIZZLE]

C'mon guys, accounting is not "black and white". It requires a great deal of judgement and assumptions.

Anytime some company goes bankrupt and if, for whatever reason, the auditors did not foresee it and warn about it they get the crap sued out of them.

Heck, Arthur Andersen got creamed in the Enron debacle, it went to the Supreme Court and they were found to have made NO errors etc.

I don't see why when a highly rated bond goes into default the ratings agencies don't get the same treatment.

You guys are making out as though those rating are such huge guesses/assumptions that they shouldn't be held accountable. If it's too much assumptions and guess work to hold them accountable then the damn things shouldn't be relied upon in the first place. If as unreliable as you say, they have no real value and serve no real purpose.

Fern

There is certainly judgement in accounting, just more in credit analysis and even more in financial analysis. It's a matter of degree. You are right to a point that it's somewhat unfair that auditors are held to a higher standard than credit analysts. I would argue that it has to do with the fact that investors can look at a security and come to their own conclusions about its risk, where as even a sophisticated investor basically has no means to verify a firms accounting.

 

[Jhhnn]

The Dems should be ashamed of the themselves for retaliating against S&P because they didn't like their view of the direction the country is headed in. You should be embarrassed for repeating it with a straight face.

Oh, please. Franken's proposal would affect the other 2 agencies with equal force, the ones that didn't downgrade US debt.

Failure to recognize that marks you as a hack.

 

[LegendKiller]

I think everyone knows that the big 3 rating agencies are pretty much worthless since the subprime mortgages debacle, the whole financial world fell apart because of securities rated AAA

How many bonds have the rating agencies rated in the last 50 years? What % of those went bad against their ratings? Even in the last 10 years, apply the same.

In fact, how many bonds or asset classes do you know where there were endemic losses of AAA bonds, other than RMBS or CDOs?

 

[glenn1]

While well intentioned, Franken's proposal would definitely not "sever the industry's gross conflicts of interest."

Rather than making the ratings agencies franchisees of Congress (with their oligopoly intact), we need mandatory full disclosure (in a third party searchable format) of every document and piece of data that goes into a bond rating.

Of course you are right that the GOP has far more solidarity when it comes to protecting the corruption of Wall Street, but the Democrats are not a lot better. There is a handful of well-intentioned progressives, but their ideology prevents them from seeing that mandated oligopolies are not much better than private ones. This is because they believe that government is an effective mechanism for opposing corruption, when (such as it is) it is clearly the opposite.

Unfortunately it doesn't work that way. In many cases, companies or money managers are either required to use ratings from Nationally Recognized Statistical Rating Organizations (NRSRO, a.k.a. Moody's, Fitch, S&P, etc) for various reasons and can't simply use open-source documents to perform their own due diligence. Financial entities such as money managers are effectively required to hold instruments highly rated by an NRSRO in order to meet net capital requirements, etc and might be subject to legal consequences if they did not.

As always, the same Congress that is proposing this new "fix" was a major contributor to the problem in the first place. They wanted to ensure the financial safety of financial entities like money managers and insurance companies without creating a backstop like the FDIC. But instead of creating clear rules on how to achieve this, they took an easy out and decided to let the NRSROs do the work for them. Now Congress doesn't like the results, and they're trying to blame the ratings agencies for their own negligence.

 

[Jhhnn]

As always, the same Congress that is proposing this new "fix" was a major contributor to the problem in the first place. They wanted to ensure the financial safety of financial entities like money managers and insurance companies without creating a backstop like the FDIC. But instead of creating clear rules on how to achieve this, they took an easy out and decided to let the NRSROs do the work for them. Now Congress doesn't like the results, and they're trying to blame the ratings agencies for their own negligence.

Which in no way releaes the NRSRO's from their responsibilities. If anything, it makes their malfeasance worse. Granted a highly lucrative position of trust in an Oligopolistic structure, they got greedy, willfully turned a blind eye on the worst excesses of MBS originators.

In ancient China, they'd have suffered the death of a thousand cuts. In Elizabethan England, they'd have been half hanged, castrated, disemboweled, drawn & quartered, with chunks sent for display in the 4 corners of the realm, and their heads placed on pikes outside the tower of London.

Our guys got bonuses.

 

[nonlnear]

Unfortunately it doesn't work that way. In many cases, companies or money managers are either required to use ratings from Nationally Recognized Statistical Rating Organizations (NRSRO, a.k.a. Moody's, Fitch, S&P, etc) for various reasons and can't simply use open-source documents to perform their own due diligence.

Right. I'm saying that needs to change. I'm saying the price of selling a rated bond ought to be a lot more financial disclosure than has ever been imagined by any financial regulator thus far.

 

[rchiu]

Heh yeah it's common knowledge those agency have conflict of interest. But name one agency that is 100% neutral and 100% right all the time. And by the way these agencies are private companies and not public companies. If you don't trust their service, by all means, don't buy their service.

In addition, if you have problem with those ratings, feel free to play against the security they rate and if you are right, you have plenty of opportunities to make $$.

 

[Darwin333]

How many bonds have the rating agencies rated in the last 50 years? What % of those went bad against their ratings? Even in the last 10 years, apply the same.

In fact, how many bonds or asset classes do you know where there were endemic losses of AAA bonds, other than RMBS or CDOs?

How many of those bad ratings would you yourself at the time in question have rated the same way?

 

[LegendKiller]

How many of those bad ratings would you yourself at the time in question have rated the same way?

I thought something was wrong with the mortgage industry in 2004, both personally and professionally. I saw the writing on the wall.

However, I also worked at 3 different financial institutions and I saw how people weren't as "efficient" as efficient markets hypothesis would lead you to believe.

The single biggest issue is that the people who bought the houses, originated the mortgages, bought the mortgages, packaged the mortgages, rated the mortgages and bought the bonds didn't build in changing credit metrics or conservatism under leverage. It's easy to do that in a bubble. This ranges from the different mortgages used and the inability to change default expectations of the "new" mortgage technology, to increasing default expectations when leverage increases in the market.

The market fucked up, everybody is to blame.

I've seen how all of their other rating methodologies have held up in the credit downturn. Almost every other asset class held up very well. Sure, it could have been worse, but in almost all cases, AAA investors didn't take principal losses.