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Richmond Fed Critiques The Rating Agencies
Of all organizations, the Richmond Fed was the last place one would expect a broad scope critique of rating agencies. Yet in a piece released today, this is precisely what the bank did, potentially paving the way for the next big whiplash as ever more politicians are already contemplating the next major scapegoat for when the market turns out to have been priced in just a little too much to perfection.
Alas, the problem with incentivisation, ratings shopping, and other less then virtuous approaches that the raters have been blamed for, have to start at the root of the problem, which, as is becoming prevalently clear, is Wall Street. The vicious triangle of Wall Street - Rating Agencies - SEC, has to be seen for the conflicted construct it is, and approached appropriately, if 3rd party "independent" raters can hope to salvage their business models, let alone their reputation.
An curious excerpt from the Richmond piece focuses on a topic near and dear to anyone who rebels against a tiered market:
Ratings are intended to be simply one tool of many for reducing asymmetric information, however. This logic was spelled out in the SEC’s initial regulations requiring institutions to rely on NRSROs. But the profitability and complexity of the securitization market in recent years induced investors to ignore this caution, a fact that issuers and rating agencies may have intentionally or unintentionally exploited.
It is precisely the concept of asymmetric information perpetuation that is the heart of Wall Street, as in its various forms, it allows those "connected" to, for lack of a better word, abuse those who are not. This asymmetry is prevalent and evident in every aspect of Wall Street (that has gotten public attention so far) - Flash, HFT, the "huddle", ratings, preferred clients, selective bid/ask spreads, and many other topics that the mainstream media has not (or dares not) touch upon, but which Zero Hedge has every intention of disclosing for public consumption.
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They don't understand it. Rating agencies "own" one of the most important standards in debt securities market. This ownership should not be private. It's not about alignment of incentives,it's about transferring the standard to a regulator.
I have the same issue with the Fed, it should not be partly private if it can control the most important standard: the currency.
I have to agree. Privatize the carmakers, the train service, the post office, and so on and so on. But it just might make sense to nationalize the rating agencies. There were an awful lot of culpable actors in this whole mess, but in my view, they hold a special place of oprorbrium.
Bravo! Now how about something titled "Reforming the Federal Reserve Bank (, Inc.)"
The fed can blow me.
It will.
Small PR campaign, nothings going to change. Cash is king, and bankers will continue to have god-like power until the Federal Reserve is abolished (which I don't seeing ever happening in my lifetime).
I do. Americans have rid this country of a central bank twice before.
When some old congressman who is a horrible public speaker has had a lifelong battle to get rid of the fed and gets cult like status with young people.... the tide is turning against them.
I hope I'm proven wrong.. I take it you're referring to Ron Paul? I love the guy, but his marketability is questionable, then again, that's probably a very good thing.
Bingo.
Cash is a neutered queen, a eunuch in a palace without any capacity for self action but does only as a servant for an iniquitous king.
Every kingdom falls from weakness and inside decrepitude. The USA is no longer strong; it is not well led, has abandoned its principles, and revels in pleasure seeking.
Therefore touch not the unclean thing, nor its similitude, flag, emblems, markers, or mechanisms of slavery.
Unless you like self slavery and its contagious leprosy.
Too late for any reforms. Corruption and conflict of interest is too deep.Time to strip those agencies from their rating effect on various product. You can't order them disband,but the goverment can abolish the sec,declare ratings of rating agencies null and void,and abolish any tax incentive(tax deferral and the likes)from retirement funds. I don't think there is a sec regulating Las Vegas,neither rating agencies for the casinos. People go there asuming there is no recourse whether they lose or win. they don't have that false sense of security that retirees have when investing with retiremnt funds,that after 20+years they are going to walk out with a couple of millions,only to find out that after 20 years,ceo's an fund managers walked out with millions,and they walked out with dimes and nickles. I must be dreaming(I personally don't have a penny invested with anybody,as I long time ago figured the crooks as to what they are.Croks in suit with ivy league mbas)
How about everyone only invests with funds working the London exchange? Sounds a lot more prudent/legal.
Tyler,
I think if you started a rating agency after the
bloodbath is over, you would be the most important
voice in that industry for a very long time.
Rating agencies were very well compensated for their tramp stamp on industry skanks.
If one agency refused to stamp AAA they threatened to go to the next one and pay them the huge Tramp Stamp fee. In the process they made loads of money, but tarnished the global trust in rated securities from the US.
RobotTrader needs to do another trampstamp anthology, related to the markets or not. These women need attention also... or so I've been told. :)
BBC's Business Report on Radio 4 had a segment this morning that started with the arrest of Sergey and went on to describe the "frontrunning" of block trades by robot trading programmes by Goldman Sachs and others. While the US media may be too timid of its masters to cover the story, the BBC is showing what state-owned, socialist media can do to serve the public.
I could rate every bond in america for a nickel in two seconds flat. If it isn't gubbermint backed it's CCC crap, if it is I give it BBB.
http://www.reuters.com/article/ousiv/idUSTRE5817EK20090903
Class action status for plaintiffs against agencies and banks...
Nationalizing rating agencies will make them worse - think post office caliber. You really want to bet your money on that. Changing compensation structure will not necessarily fix anything. And shouldn't it take about a decade for rating agencies to restore their credibility??
The solution lies in deleting all requirements in government regs requiring the use of rating agencies. Without a government mandate, they might improve the capabilities and ratings. And / or investors might actually have to do some credit analysis.
Here is my solution to the Rating Agency problem:
Outlaw them - forever.
The problem is the sell side is paying the public ratings agencies for the "tramp stamp." Some shops for the buy side provide ratings for their clients for a fee to provide independent advice and DD. Someone needs to figure out a business model that shares that independent research/DD with the public (retail investors). I'd gladly pay a reasonable fee for same.
If this was to occur, the sell side firms would wither away over time as their brand/reputations have been more than trashed. S&P, Moodys, Fitch, SEC = pure BS. Caveat Emptor...
Does it not make one feel great to wake up in the am....
Knowing the the SEC, the Rating Agencies, and the "Gamed" exchanges ....
Are STILL THERE....????
..................................
The question is.....
WHY ARE THEY STILL AROUND ....????
After the statute of limitations runs out someone in power will remark that the ratings agencies the banks and all the regulators should have been investigated and jailed.
Assymetry in the sense use by the Richmond Fed, refers to assymetric outcomes for returns. Corporate debt either pays on due dates, or the company defaults, that is the asymetry. Not the asymetry of players within the market. The Ratings Agencies attempt to quantify this asymetry in terms of the probability of default per rating band and venture a convenient rating bucket. I see the comments seem to hve missed this point, but there are so many targets out there, you can generally hit the enemy with a scattergun!
Hey there all here to protect us:
Madoff Claimed He Was On "Short List" For SEC Chair
The just-released executive summary (pdf) of the SEC inspector general's report on the Madoff affair notes that, according to one examiner, Madoff would often "drop the names of high-up people in the SEC" while being interviewed by SEC examiners. The summary continues:
Madoff told them that Christopher Cox was going to be the next Chairman of the SEC a few weeks prior to Cox being officially named. He also told them that Madoff himself "was on the short list" to be the next Chairman of the SEC.
Either regulate CRAs as a governmental function or take the 130= references to credit ratings out of the Banking and Securities laws. There is no middle ground.
the fdic is seeking comments now as to how to handle the matter of increase capital requirements due to this change.
There is simply no way to diverge from issuer-pays; the reform will be a transition toward seeing rating agencies as selling group members, not "independent" advisors. I think much of the blame should be put on the nomenclature of the scales themselves--their opacity allows the individual analysts and their rating committees to hide behind arbitrary symbols. Instead, ratings incorporated by regulation should be mandated to be numerical with the standard two dimensions--probability of default and loss given default. This is essentially what investors want and it greatly circumscribes the agencies' ability to "rate" something when they should be rating it.
Having been inside the rating process for a large hospital system, I can tell you the rating agencies gave our senior management a sobering critique of our financial situation in advance of a downgrade. It was a serious wake up call.
The real issue is understanding the purpose of the rating agencies and what the ratings represent, as of a point in time.
I think there is too much cynicism and not acceptance of the ratings process for what it is. Step up if you have a better option.
-Uncly Uncle