3/16/09

Why would fixed income managers and lenderswant to base investment decisions on debt quality assessmentsof ratings firms remunerated from sales?


Why, more than a year into the crisis


do regulators and investors continue to rely on ratings?


 


No one has been more wrong than [two ratings agencies]


 


Less than a year ago both gave high ratings


to 11 of the largest distressed financial institutions…


 


 


…They rated Lehman Brothers an A just a month before it collapsed


 


Until recently, the agencies maintained AAA ratings


on thousands of nearly worthless subprime-related securities


 


Jerome Fons and Frank Partnoy


Rated F for Failure


New York Times, March 16, 2009


Via The Big Picture


Why did so many who shouldn’t have


believe sub-prime mortgages could be repackaged into bonds


with similar credit risk characteristics as AAA US Treasuries?


 


These errors make us look either incompetent at credit analysis


 or like we sold our soul to the devil for revenue or a little bit of both


 


 A rating agency managing director


responding anonymously to an internal management survey


September 2007


 


Why would a ratings agency change relatively negative views to positive


on some mortgage backed securities


even though no new and significant information emerged?


 


Employee #1                                             By the way, that deal is ridiculous


 


 Employee #2    I know, that model definitely does not capture half the risk


 


  #1             We should not be rating it


 


                                                                   #2                         We rate every deal


 It could be structured by cows and we would rate it


 


Instant Message conversation between two rating agency employees


 


Why would the Securities and Exchange Commission


let banks base capital requirements on ratings derived by companies


dependent on the same firms for future revenue?

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