Ratings Services Get A Pass

The ratings services were one of the big culprits in the financial crisis. They were hired by the investment banks to rate all kinds of structured and asset based securities that they were underwriting. Not wanting to bite the hand that feeds them, many securities that did not deserve a AAA rating received them none the less. This included securities holding sub-prime mortgages. Since these securities were rated AAA, pensions, insurance companies, non-profits and banks worldwide were seduced into buying them. Why would they not want these securities that they deemed safe when they were yielding much more than other AAA rated securities? Wall Street banks and the ratings agencies made tons of money. Well you know the rest of the story, these securities blew up and institutions holding them were compromised. There can be no real reform of Wall Street without tighter regulations on the ratings agencies. I wonder why they escaped largely untouched. Hmm-Lou


Overhaul Leaves Rating Agencies Largely Untouched

Four stars, two thumbs up, a must read: Rave reviews like those might seem a bit suspect if they were paid for by the restaurateurs, movie makers and authors being reviewed.

But that is essentially how things work in the credit-rating industry, a central culprit of the financial crisis that, to its critics’ dismay, now seems to be escaping serious change.

In the overhaul of financial regulation proposed by the Obama administration on Wednesday, rating services — which, during the boom, stamped high ratings on many subprime securities — will avoid the radical changes their detractors have urged.

While the administration is proposing some modest changes, none addresses what many see as the central problem: Services like Moody’s and Standard & Poor’s are paid by the companies whose securities they are evaluating. It is as if Hollywood studios paid movie critics to review their would-be blockbusters.

Despite calls to shake up the ratings establishment, the industry’s “issuer-pay” system is deeply entrenched. And, while the services have taken some steps to mitigate conflicts, they reject the idea that they should have been more vigilant.

“This is not an effort to remake the industry,” Jerome Fons, a former managing director of credit policy at Moody’s, said of the administration’s proposals. “If we believe the system is broken, this doesn’t offer a fix.”

The rating services play a crucial role in the capital markets by rating everything from plain-vanilla corporate bonds to trickier “structured” investments. By law, banks must take ratings into account when investing in bonds. Big money managers often base investment guidelines on them.

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