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I Come Not To Praise Rating Agencies, But To Bury Them
Via Peter Tchir of TF Market Advisors,
The rating agencies have lots of problems, but they are not to blame for the financial crisis. The regulators and investors are the ones who deserve the blame. The agencies have too much influence, but it’s been given to them by the regulators.
The latest round of anti-rating agency sentiment was sparked by “unfair” downgrades of banks or even move “unfair” downgrades of countries. Does it really make a difference what the agencies do? It shouldn’t. Nothing about that action changes anything about the state of the economies, or our debt loads, or our deficits. The agencies have no inside information when it comes to sovereign, and I suspect minimal when it comes to other entities. There is only one reason that ratings are market moving – because the regulators have made it so. If it wasn’t for regulations based on ratings, the power and influence of the rating agencies would drop immediately.
Regulators Give the Rating Agencies Irrational Power
Not only do the regulators provide the rating agencies with great influence, but they also do it in an irrational manner.
A quick look at Basel II shows that a AA- sovereign has 0 risk weighting, but at A+ it carries a 20% risk weighting. That jumps to 50% for BBB+. Is a AA- entity really that much lower risk than an A+. For corporates corresponding risk weightings are 20%, 50% and 100% respectively. In the real world risk does not jump like this. There are not discrete points where risk spikes up. So at the very least the framework should be gradual. It also creates an incentive for people to fight over single notches. Getting a A- rating is dramatically different than getting a BBB+ rating according to the regulators. Does anyone out there really believe that the agencies are so good that they are accurately distinguishing between A- and BBB+? I think they can barely tell A from BBB let alone single notches. In the grand scheme of things, it wouldn’t matter, except the regulators have placed this power in their hands.
It’s not just banking regulators that have taken this bizarre approach. The NAIC has a similar ratings based methodology complete with a big step function when ratings breach thresholds.
More sophisticated institutions can use their internal models rather than rating agency models for determining capital. It is done with the approval of the regulators. I can guarantee you that banks don’t choose to use their own models when it gives a higher capital requirement than using the rating agency based one.
Rating Agencies are Weak
Rating agencies are at the bottom of the Wall Street food chain. I could spend a long time trying to justify this claim, but we only have to look at things that matter to Wall Street to prove this. The Wall Street pecking order can easily be determined by looking at pay and job envy.
Q) Who pays more, investment banks or rating agencies? A) Investment banks.
Q) How many people at the rating agencies wish they had a job at one of the banks whose deal they are rating? A) Everyone, except for the one long timer who has convinced himself that the extra stress at a bank wouldn’t be worth the piles of extra money.
Q) How many people on the deal team wish they were working at a rating agency? A) None, except for the occasional first year associate who hasn’t yet figured out how good he or she has it.
Investors Need to Do Their Own work and Regulators Need to be Conservative
Clearly Europe is trying to get rid of rating agencies to be aggressive, but the situation has to change. For too long, laziness has driven regulatory policy. Too much emphasis has been put on ratings, and the safety at the high end has been dramatically exaggerated. One thing virtually every banking crisis has in common, is when a previously “safe” or AAA asset, that carried minimal capital charges deteriorates. The sub-prime mortgage market and European Sovereign debt are just two of the most recent examples.
We need a realistic regulatory framework like the one we discuss in regulatory-capital-size-and-how-you-use-it-both-matter.
Anyways, what the EU is doing is probably even worse than the existing framework, but the idea of diminishing the role of rating agencies is a good one.
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Wait a minute, are you saying that the rating agencies were not in the pocket of Big Wall Street Firms that were paying them? If so, I have some more crack right over here....
+1
Apparently, we can never, ever blame a private company for anything no matter how obvious.
Didn't you get the Free Marketeers memo? Here's the jist:
Private = Good
Public = Bad
Now just repeat.
So because one defends the free market, one is saying there are no bad companies? If so, you just proved you don't understand free market principles.
No such thing exists as 'free market principles' except in phantasmagoric scribblings of paid propagandists. Time to be a grown up.
http://theorwellprize.co.uk/wp-content/files_mf/hajoonchang.pdf
Free market means market running on Darwinism. It's as simple as that. It only guarantees the survival of the fittest (and the demise of the unfittest). Once you have government trying to manage Darwinism you are in for a mess.
What is it with you people? Truly you cannot be that dumb.
You're referring to sociobiology which is a distortion and corruption of what Darwin wrote about regarding 'natural selection' which, keep in mind, is theory not reality.
That was from The Mismeasure of Man.
http://www.amazon.com/The-Mismeasure-Man-Stephen-Gould/dp/B0043NGJHI/ref...
No, when one defends bad companies as innocent one makes a mockery of the free market
Fitch, S&P, Moody's etal are handmaidens to the fraud.
Agencies? Perhaps in truest sense, serving as agents for specfic entities. Not like they are independent or even socially integrated to serve within governmental commission or function under a monitoring bureaucracy.
When and where has a rating ever been a good guideline? How many insurers that failed or were consolidated/bought-out were downgraded by "industry watchdog" AM Best prior to their disaster?
Rather like the Second K-Mart Bankruptcy, which was a fraud upon the stockholders. When the Enron Collapse took down Arthur Andersen, princes of Big-8 Accounting, there was no more hiding the death of integrity in the realm of assurance to shareholders. When David Walker resigned as CEO of the Government Accounting Office the last shred of doubt was removed.
The collapse upon us/US was perpetrated by those who gained control of the fiat money. They stole the world with paper intrinsically worth nothing... The Perfect Caper! Destroy the world first by Derivative, Loot All That Could Be Stolen; then unleash the dogs of war! To be sure it will go nuclear. Didn't think they bought all that shit to never use it didja?
Markets that are viable have been conducted in private for many years now. Paper is paper and real is real; never again will they meet.
Is this the same "free" market where private companies get public bailouts? Tell these people to go fuck themselves.
Ratings agencies in our current fiscal, regulatory & monetary environment are like like weather gauges on a 20' motorless fishing boat 100 feet from Fukushima during the earthquake.
During nuclear explsion on the sea bed. Fixed it for ya...
You mean we have inadequate regulation when it comes to bribery, collusion, and fraud in the ratings business? Who would've figured?
"Anyways, what the EU is doing is probably even worse than the existing framework..."
Well, yes. That blanket statement applies to anything and everything that the EU authorities have ever done or attempted to do.
Replacing fraud and corruption with even more fraud and corruption?
Sounds perfect. Great plan.
Just close your eyes and drive...
Bridge abutment face plant dead ahead. This won't hurt at all.
Just let me know when we get close...right?
A little to the left. No, wait.......a little to the right.
OK, you're in the clear. Full speed ahead and damn the naysayers.
Ya'll don't peek now. Just trust me.
Why are the other passengers screaming...?
Those are just squeals of joy and excitement, that's all.
Nuttin' more..
Steady as she goes big boy. You're almost there. Hold............HOLD..........H O L D!
S&P rates your driving AAA++++
http://www.youtube.com/watch?v=dNnaXq5PglE&list=FLeGAOM7ibPwtPLGNel9UVBA&index=37&feature=plpp_video
They just did this in Florida: lowered the bar for passing scores re scholastic testing because too many kids were failing.
That's okay, they can always get a job in some rating agency.
useless actuaries of the kleptocracy
The ratings agencies work for the banks, they are a tool. Sell, then downgrade, never downgrade, then sell. They are part of a criminal shakedown of the public. They are also used to coerce public bailout policy.
With US Treasuries, when they downgrade is the time to buy
If you want to consistently lose money listen to the squid and moody's.
I'm surprised that his entry made it here. Yours, along with most of the critical posts above this one, is all that really needs to be written. The criminal syndicate that is finance has created an apparatus to both perpetuate as well as hide fraud. The ratings agencies are simply a part of that apparatus.
Don't underestimate the degree to which the voting public has done this to themselves. They want a world that can't exist. One in which they can treat a bank as a totally safe commodity product where you pick one based on the fact you get a free set of Ginsu knives, not on whether you might get your money back. They then expect government to see to it that they are safe. That paradigm creates a complex web of government, regulators and banks that is ripe for corruption.
Should it be any surprise that if you want to be able to blindly put money in a bank and treat it like it is 100% safe, someone if going to fleece you out of as much of that money as possible?
You aren't thinking like a banker. The whole point of the structure is so that a lip-service downgrade carries no additional costs in terms of corporate bond risk. It gives ratings agencies a whole spectrum of options to say they did something even though they really didn't change the landscape.
Don't hate the player, hate the system. What garbage rationalization.
The rating agencies (for the most part) are an integral part of the supporting cast of the Ponzi. When they become a hindrance they are marginalized. When they are an asset they are pumped as right thinking.
This is why Egan-Jones must be silenced. They are not "right thinking" ball players.
Correct, nothing changes until there are real consequences for bad behavior at all levels. With the criminals in control of your representation (legislative) and judicial branches. It could be a while.
It is a shock that Eagan has made it as long as they have, and have not been deemed a terrorist organization and committing "Conspiracy Against the US" like that coin minter Von NotHous last year.
Pete, always good for a new innocuous way of touting the party line.
Yes, that EU sure is at fault for MBS. Oh that's right, that was the rating agencies. No matter, keep peddling your garbage to the confused and frightened while I continue to smile.
They're getting close now Pete. Soon your day in the sun will be here. Keep the hope alive!
So you answered your own question, muppet.
How great it would be for sovereigns to rate themselves and their banks.
Spanish Banks AAA. Why of course! Fuckin' Lol
I don't think we can trust them, nor tempt them, to rate themselves. No sir it wouldn't be right.
We should let them rate each other.
That would keep them honest. Yup. That's the ticket!
( /sarc )
I thought this was written by mdb
the only question is : are they invaluable toxic waste worthy of analysis in a future age to feed the knowledge pool of homo sapien evolution; should they be buried six foot under? or six thousand foot under? The advantage of deep burial is that in twenty thousand years they could be examined like mummies and their dna checked out for signs which would indicate their singular traits; of those who had the financial bug in the bygone Armageddon age. Precious trace of human deregulation, the Reaganomics strain like the Andromeda strain.
We owe this to posterity after the new ice age has covered our residual debris of deadened civilization in deep freeze, to balance by nature's own unfailing genius the hot hell of global warming cum Armageddon times a-coming.
MCO up 1.55%
I always thought "Independent laboratory testing" was a good thing...
Ratings agencies may not be to blame in total for this depression, but they have played their guilty part.
If a man falls asleep his watch on the wall, hes as reponsible as the enemy for each dead soldier.
Failing to accurately warn investors about the decay and rot they knew existed, which is there job, has literally killed people these last few years. They may not be guilty of causation perhaps, but these companies are as bad as the other facilitators. If I were king for a day the heads of these conpanies would be hung, along with many other criminals in need of karmic rebalancing.
"Failing to accurately warn investors about the decay and rot they knew existed, which is there job..."
Call my cynical if you want CC, but it must be clear by now that their "stated" job and their "real" job are at odds with each other.
In my opinion their "job" is to channel the dumb money asleep-at-the-wheel herd down the cattle chute to their slaughter.
They still have blood on their hands, and maybe I will too some day soon; who knows.
Ive said it more than once but these "untouchable" criminals live in suburban neighborhoods not far from each of us and drive the same roads as us....
There is a way to go before all false hope is flushed from the system and true anger bubbles to the surface. But I have little doubt that the bubbles will eventually begin.
The boil over is what I fear the most. Many people with no connection to the Ponzi will be swept up in the coming stampede for Ponzi enabling blood.
Good to see you around CC. :)
Now.
It is going to happen sooner or sooner?
The levels of ugly.
Hmmmm.
Cheers,
Pens,
C'mon people, get your thinking cap on. The probable reason for self rating here is to make the bad paper legally purchaseable to
the pension funds. They cant buy junk paper, but they can buy AAA paper. They will route all the private pension incomes into the ponzi
to keep it afloat. If there are losses then the people eat it rather than the foreign governments and institutions. God help us.
But the point is that they were buying right up until someone labelled it junk. If the whole gig is a confidence trick, why have someone commanding you as to how confident you should be? Everyone was AAA all the way until the shit hit the fan; if they had of did their jobs on the way up we wouldn’t be here. Now, on the way down, when everybody is clear how shaky things have become they wade in with their arbitrary bullshit, creating a negative feedback loop at the worst possible times. Its useless, the regulatory frameworks and hence also the rating agencies. They both go hand in hand, and both have failed miserably.
Oh; I thought about it, but destroying peoples pensions still sounds like a horrible idea. It's especially bad because most of the peole have no choice about where their money is stashed.
First they stopped reporting M3, then they removed the ratings agencies. How long will it be til they re-hypothecate me?
The 14th amendment says they already have.
pods
When the whole system gets reset will there be a rating system or a jail cell for them all? Right now they have a rating system so that fraud can be perpetrated. But I would also say that Sean Egan looks to me like he is doing it the right way and should not be lumped in with the rest. What you're asking is can the current system be saved and clearly the answer right now is no.
Ratings agencies who are a dollar late and a day short are bad.
Ratings agencies who hire anybody affiliated with banks are bad.
Ratings agencies who hire anybody affiliated with Wall Street are bad.
Ratings agencies who hire relatives of any of the above are bad.
Governments cutting rating agencies loose and rating themselves is bad.
Companies cutting rating agencies loose and rating themselves is bad.
People who cannot do their own homework are bad.
Umm...where does that leave us then?
where it leaves us is where we should always have been - never invest in anything you don't fully understand
I remember waking up 20 years ago to the realization of how much of the economy rests on what is essentially religious faith, and not just in ratings agencies, but in all the sordid players in the financial markets and the government.
At the time, I could not believe that people would en masse trust their life savings to these kind of schemes. Now I can believe it, and not because the blind faith is any more securely grounded, but because I have learned how easy it is to manipulate people with fear, appeals to greed, and promises of impossible security.
Agreed. But you'll never get a large segment of the population there, they are simply not equipped or interested in managing their own investments. The latter I have no patience for, the former need to find people they trust who do know better who can advise them. Problem with posting like this is they engender a lot of venting of spleens, which I am not opposed to and engage in myself, but some realistic suggestions for improvement can be lacking. In this case I do not think the progressive capital requirements is a panacea, regulation is regulation and in and of itself is not a cure and often can mask other legal but shady activities. Full transparency with severe penalties for violations seem better than bloated and incompetent oversight.
If a person is not capable of evaluating an investment for whatever reason (intellect, time, opaqueness, etc.) then he should stick to something he can understand, like a savings account at a credit union, or physical metals, or some other uncomplicated method of storing wealth.
The fundamental problem with most Credit Rating Agencies is that they're being paid by their customers for their ratings.
This leads to "a long-standing culture of "intimidation and harassment" to persuade its analysts to ensure ratings match those wanted by the company's clients. " - William Harrington, a former senior president at Moody's
i take these revelation are but a post-mortem statement, that being said from whence... a hesitantly scripted memoir of human frailty?
YOU CAN'T HANDLE THE TRUTH!!!
If we're not going to rate companies and banks, Why rate Credit Cards?
If your currency is fouled, nothing is worth anything. All valuations denominated by the fouled currency are effectively arbitrary.
No matter how many regulations you create they will never compensate for lack of consequences. Consequences force people to do their own analysis and be conservative in their approach. Regulations allow people to pretend consquences do not exist because it's not their responsibility to protect their money, it is the regulators responsibility.
Whatever happened to " due diligence "?
Surely outsourcing due diligence is a contradiction in itself?
Let's repurpose rating agencies and have them set IPO valuations instead
Worst post I've ever read, period! You round-out your thesis on a malignant misnomer of sophistic-objectivity... which my friend is pure unadulterated gibberish! A political hack wanna-be are you?
"The rating agencies have lots of problems, but they are not to blame for the financial crisis."
fuck you as always, peter....the enduring financial crisis has no single guilty party - it was created by a coalition of the willing....the contribution of the ratings agencies was to put extra wet lipstick on an extra ugly pig...
if it weren't for the vicar of the lord making a pompous ass of himself today, you would be today's reigning fucktard...
I remember few years ago I was trying to convince my then boss at some big bank to conduct our own analysis while extending a quarter billion line of credit instead of relying on rating agencies. That conversation did not go too well.....
One thing I have never been able to understand is the concept of any entity having ZERO risk.
Ratings agencies got paid to give out ratings. How else do you think various "tranches" of mortgage payments on hopelessly overvalued houses that the mortgage holders had no prayer of ever paying off got AAA ratings? For the right fee Moody's would call my dog's shit wrapped in tinfoil AAA platinum.