
Ratings Agencies Still Coming Up Short, Years After Crisis - cinquemb
http://www.nytimes.com/2016/01/10/business/ratings-agencies-still-coming-up-short-years-after-crisis.html?_r=0
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themartorana
I am still flabbergasted that after rating junk swaps as high as possible and
being paramount in both misleading investors worldwide and bringing the world
to economic crisis that is _still_ being felt, that Moody's and S&P not only
continue to exist, but investors _still_ look to them for ratings!!

"Flabbergasted" is the only word.

Also blah blah no one in prison.

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throwaway_exer
By law, many institutions must buy rated paper.

So Moody's and S&P are like Ziploc bags at TSA lines - required by law.

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themartorana
Well there's some sweet regulatory capture.

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drawkbox
There needs to be many more ratings agencies. The two big ones need
competitors.

If there are enough of them then when synthetic CDOs do have bad batches that
at least one will want to lead the way in downgrading. It would be much harder
to pay off say 10-20 ratings agencies.

There has to be some self-interest among ratings agencies to one up another,
by upgrades or downgrades because of better knowledge. I think the lack of
competition for ratings is part of the problem that caused 2008. Maybe even
ratings based on community as well as authoritative sources, right now they
are all authoritative and mostly blackboxes in terms of processes to achieve
ratings. The concentration in centralized power in ratings agencies is a bad
thing and history says it will bite.

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TeMPOraL
Maybe we need some rating agency rating agencies. And some more that will rate
those too. If we can go up enough meta-levels, maybe it'll all become so
confusing that it'll be impossible to effectively game.

(I get weird ideas when I'm tired.)

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existencebox
I don't think this is a weird idea. In fact, I really like this idea. It seems
like a rating agency could be given a "score" based on the historical accuracy
of their measurements, since although ongoing books are business secrets I
would imagine you could get SOME proxy at least for examining the veracity of
the ratings in hindsight. It could be done with very little overhead, and
would be a first step in some small sort of accountability, at least, if only
an accountability to the data.

Could anyone with an actual familiarity with this domain say if something like
this exists, or if there's sufficient audit data for it to exist?

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WildUtah
If someone, including rating agencies, knew something useful about bonds that
were not already priced into the market, then that someone could easily be a
trillionaire just by buying and selling. Rating agencies are not populated by
trillionaire analysts. Therefore, rating agencies and their ratings are not
supplying any useful information.

So why do rating agencies exist? Three of them -- the profitable ones you hear
about -- have licenses from the federal government. Those licenses entitle
their ratings to a presumption of validity in front of bank regulators and
under pension and investment rules. Yes, institutions that the government
backs are entitled to invest or blocked from investing your money, whether you
like it or not, based on what the rating agencies say.

So they're quasi government bodies with the power to defraud you through the
banks and pensions you are mandated to use and to grant government bailout
guarantees you will pay for in your taxes. In return, they make lots of
guaranteed cash and empower the banking system to skim more and more pension
funds and investment fees from you.

The sad bit is that this actually works better than lots of other systems for
regulating banking and pensions that have been tried.

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JonoBB
Rating agencies are more or less out-sourced research houses - performing work
that would be too costly for others to do by themselves. It an "economies of
scale" type thing and someone would have do this research. So, to say that
"their ratings are not supplying any useful information" is absurd. There is
an extremely high correlation between default rates and ratings.

Admittedly some of the fees for ratings are absolutely ridiculous. When you're
doing a structured finance deal for $X billion, then 25 basis points is
neither here nor there, but in $ value terms is a crap load of money. Rating
agencies are cash cows, and that may be part of the problem.

I worked for a rating agency for a couple of years.

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digital_ins
A whole lot of comments here assume that the rating agencies are doing this
because they're totally driven by greed. I think what people neglect to
mention is understand is that rating agencies are overwhelmed by complex
securities partly because they're made up of B-players.

In b-school, it's very common to see all the finance A-players gravitate
towards PE, banks, HF and prop shops. Then the student sub-layer below them go
to boutique versions of the aforementioned entities and it's usually Group B.

Believe it or not, this has a harsh impact on the culture there. Ask anyone
you know who works at a lower level bank about how pointlessly harsh the
culture is. My hypothesis is that: being made up of B and sub-B professionals,
rating agencies just don't have the in-house intellectual capacity to do the
levels of diligence they'd be expected to do to prevent the A-players in banks
from cheating the market

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nl
Read "The Big Short" to see exactly how true this is.

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cm2187
If we were holding journalists, economists, meteorologists (or climate change
specialists) accountable for their forecasts, we would need to build many new
prisons. People need to be realistic about the capacity of rating agencies to
predict credit defaults. All they can do is express a judgement on the credit
worthiness of something from the outside.

What I found working with them is that the new regulations are rather making
the process more error prone. Rating agencies are now paranoid about any
communication with financial institutions and you just can't pick up the phone
and call them. It leads to them going away, making their own assumptions and
interpretations and making it very easy for them to make a mistake that cannot
be spotted by the people who understand the numbers.

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tobltobs
Forecasts? Why you are talking about forecasts?

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cm2187
When Moody's says a particular investment has a "AA" rating, it means it has a
certain probability to make a loss over its lifetime. It is effectively a
forecast of expected losses.

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Spooky23
This sounds like a problem where transparency is the solution.

Post the formula for grading and let the public draw their own conclusions.

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jfoutz
The ratings agencies get access to the books under nda. It's tough to tell if
they're doing their jobs. Probably safest to assume they're not.

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decisiveness
So if the S.E.C. can't punish these agencies forcefully enough to seriously
damage their margins, this may never change as they'll have little incentive
to shape up.

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rms_returns
Stocks are actually way too complex things for the average person to
understand, otherwise there would have been no need for Moody's or S&P
ratings, just the Amazon/Ebay ratings would have done the job!

However, the "average intellectual" person is evolving and getting tech savvy
at an unprecedented rate globally. I am willing to bet that a stock rating
system similar to ratings on Amazon/Ebay is not that far in future.

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saryant
This has nothing to do with stocks. The role the ratings agencies played in
2008 was about bonds.

I also think it's unlikely that bonds see an Amazon-style ratings system when
the market for a lot of these specialized products is three pension funds in
Dusseldorf. We're talking almost entirely about institutional investors.

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osullivj
For any bond with reasonable trading volumes the ratings are irrelevant,
because you can just look at the spread over the relevant benchmark - UST,
Bund, JBG, Gilt etc. The market tells you how risky it is; think back to 2010
and the way Greek-German govie spread ballooned out. The problem is with
illiquid bonds. Some credits don't trade frequently, so a last trade price may
be days or weeks old.

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nickff
This article and similar debates seem to be taking place under the assumption
that investors actually trust the credit rating agency ratings, a notion which
I see very little evidence of. Even before the financial crisis, most
investors were creating funds and investment strategies without regard to the
ratings given by the government-backed ratings agencies (GBRA); the GBRAs have
basically only been a rubber stamp required to determine reserve requirements
and other regulatory issues. For example, if investment banks had really cared
about GBRA ratings, they would get ratings before packaging together loans,
not after.

If I am right, then GBRAs are not to blame for the financial crisis, except
for the fact that they may have given the public and the regulators false
confidence in the credit-worthiness of borrowers. This view really says that
the GBRA are worthless overhead, which only serve to help the government
pretend that regulators know what is going on and are protecting the citizens.

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brandnewlow
Uninformed question for the more informed on here: What would a "startup
rating agency" look like?

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saryant
The problem is the incentive, not the agency itself.

Unless you find a solution for that you'll end up just as useless as the
existing agencies.

