Stick It To ‘Em

A start:

Last week, as the U.S. House debated the Wall Street reform package crafted largely by Frank, the Massachusetts Democrat quietly slipped regulations into the bill that would force the most significant overhaul of the credit rating industry to date.

The top raters–Standard & Poor’s, Moody’s and Fitch–seemed ripe for regulation ever since they awarded inflated grades to investments that ultimately unraveled the economy.

If the provisions in the bill, passed by the House last Friday, make it through the Senate, investors who lost billions of dollars on those top-rated financial products would likely find it easier to sue the raters for fraud. Also, by no longer mandating that mutual funds buy only top-rated investments, the bill has the potential to squeeze the raters out of their special status in the financial system.

I still think S&P, Moody’s, and Fitch need to go the way of Arthur Andersen.






80 replies
  1. 1
    ellaesther says:

    If only the HCR fiasco had left me with any hope that anything truly good can come out of two-party wrangling.

    This will not happen. Perhaps something that looks like a shadow of it, vaguely related around the edges, will happen, but a “bill that would force the most significant overhaul of the credit rating industry to date”?

    Not on this Congress’s watch!

  2. 2
    Zifnab says:

    I still think S&P, Moody’s, and Fitch need to go the way of Arthur Andersen.

    Honestly, I’m not clear on why this job was left to the private sector to begin with. They don’t have any sort of auditing powers. They don’t have any legal clout. Ultimately, they’re the financial equivalent of Consumer Reports.

    But while leaving it to the private sector was a bad idea, I think that having some kind of ratings agency on securities is a very good idea. People without a financial degree should be able to look through a catalog of bonds and pick out the good (A-AAA) from the bad (C or lower).

    You just need a lot more regulation to keep it from turning into a giant scam. I wouldn’t mind seeing the SEC take up the task. They already have to do this kind of shit anyway.

  3. 3
    russell says:

    If companies want to get paid, you need to create some value.

    If they’re not creating any value, there’s no particular reason for them to exist.

  4. 4

    Let’s hope it’s the beginning of a real trend.

  5. 5
    Dreggas says:

    Just got a nice notice from BofA regarding my credit card. It looks like congress got something right with the new CC regs. For example they can’t jack up my interest rate if I am a day or two late on payments and from what I’ve read there’s a lot of other good stuff in there.

    I know it’s a buzz-kill on the whole “Dems in congress can’t do anything good and Obama sucks because of it” meme but oh well. It was nice to see this get put in place.

  6. 6
    slag says:

    Is there anyone who doesn’t think these ratings systems are a farce? All the people I know who have had their companies rated see it pretty much as a shakedown. So, why do people continue to put stock in them? (sorry for the bad pun)

  7. 7
    Morbo says:

    @Zifnab:

    I wouldn’t mind seeing the SEC take up the task.

    No, please, no. (And that’s just the first result from googling “SEC madoff” on CR.)

  8. 8
    HoneyBearKelly says:

    The people doing the rating are getting paid by the people they are doing the ratings for.
    Somebody should have outlawed this a long time ago.

  9. 9
    Sue says:

    How much has the credit rating industry contributed to Joe Lieberman? That should give us an idea of how this will fare in the Senate.

  10. 10
    BobaFett says:

    Why did he have to quietly slip these in?

  11. 11
    Scott says:

    @ellaesther:

    What ella said. Ain’t no way it’s getting through this Congress.

  12. 12
    cfaller96 says:

    I can’t wait until Lieberman decides to strip this out and John either A) goes apeshit and then gets lectured and guilt-tripped and fearmongered like the healthcare critics are enduring right now; or B) ends up looking like a sucker on that issue as well.

  13. 13
    bago says:

    The SEC is right next to Union Station. I would leave letters from a concerned citizen if we weren’t anthraxed.

  14. 14
    beltane says:

    The House Dems have been pretty damn decent for what it’s worth. However, I’m sure the ratings agencies have already pre-purchased a large enough block of Senators to make this endeavor a doomed one.

  15. 15
    jwb says:

    @ellaesther: No, I don’t see how this gets through the Senate with any significant reforms intact either. If there’s little to lure the centrists to vote for HCR, there is even less to lure them to vote for regulating the financial sector.

  16. 16
    Xenos says:

    @HoneyBearKelly: You could come up with a parastatal organization, funded by part of the desperately needed transaction tax, that could do the job. It would be at least a bit protected from Republican malfeasance that way.

  17. 17
    Dreggas says:

    @beltane:

    the house, IMO, is usually the best part of congress, they do the stuff the people want and, like the people, wind up being shat upon by the senate.

  18. 18
    DougJ says:

    I still think S&P, Moody’s, and Fitch need to go the way of Arthur Andersen.

    You mean rename themselves something stupid-sounding like “Accenture”?

  19. 19

    I have a naive question. Why do we need ratings agencies for bonds? We don’t have them for stocks. I mean you go out and buy stocks in the market. You research the companies, look at their SEC filings, check to make sure that James Cramer doesn’t recommend buying them and then if you think it’s a good investment you buy stock in them. We don’t buy stocks based upon a trio of three large unaccountable companies and some minor hangers on saying “Microsoft, Google and Apple are AAA+ rated companies, McDonald’s is AA-, GM is CCC.” etc.

    I don’t understand the rationale behind the whole ratings agency idea, but the way the rules are set up for becoming an NRSRO seem be rigged to keep new players out of the business and Moody’s, S&P and Fitch rolling along without any significant competition and the way the ratings are paid for has “perverse incentive” written all over it in three foot high fluorescent orange letters. Can someone enlighten me?

  20. 20
    Zifnab says:

    Ok, so maybe not the SEC. Or at least, maybe not this SEC. But someone that is reigned in by elected representatives.

    I’d rather have someone I can yell at be responsible for this mess. S&P and Moody’s are just nebulous corporate wing-wangs.

  21. 21

    I’d like to see this reform and a law that says that when a bond rated by a ratings agency turns out to be total crap that the people who signed off on the ratings get put naked into a pair of stocks with their legs spread wide open so that passersby can kick them in the junk. Some people might say that’s cruel and unusual punishment, and they’d be right, but if we started doing this on a regular basis it would no longer be cruel and unusual punishment, just cruel punishment and according to “Big Tony Scalia’s Big Book of Originalist Jurisprudence” that would make it A-OK.

  22. 22
    John Cole says:

    @cfaller96: Keep it up. It’s John versus the hippies here. That’s the real fight.

    Troll.

  23. 23
    ellaesther says:

    @John Cole: In any fight, I want you on my side. Down to and including with my kids.

  24. 24
    dr. bloor says:

    @DougJ:

    You mean rename themselves something stupid-sounding like “Accenture”?

    I can’t understand why they cut Tiger loose as one of their spokespersons. Who could possibly represent them better than someone who hops in the sack with anything that moves?

    As for the reform bill, I will be gobsmacked if it is ultimately anything more than a “Sense of the Senate” resolution stating that the rating agencies misbehaved and should never let it happen again.

  25. 25
    dr. bloor says:

    @John Cole:

    Keep it up. It’s John versus the hippies here. That’s the real fight

    You know, Tunch does look a lot like Ben Nelson.

    Just sayin’.

  26. 26

    @DougJ

    You mean rename themselves something stupid-sounding like “Accenture”?

    The most common side effects of Accenture are nausea, vomiting and homicidal rage directed at anyone on CNBC. In the rare event of an erection lasting more than 4 hours, seek immediate medical help to avoid long-term injury and psychiatric help because you’re a sick fuck. Do not taunt happy fun Accenture.

  27. 27
  28. 28
    Punchy says:

    Ben Nelson’s gunna filly this trash. After he demands that it becomes obligatory to throw aborted fetuses at the CEO of Moody’s.

  29. 29
    Martin says:

    @Wile E. Quixote:

    We don’t buy stocks based upon a trio of three large unaccountable companies and some minor hangers on saying “Microsoft, Google and Apple are AAA+ rated companies, McDonald’s is AA-, GM is CCC.” etc.

    The rationale is that bonds expire. They weren’t set up to be heavily traded, rather that you’d buy and hold it until it matured, so the rating measured how likely you were to receive full payment on the bond. This was important because there were no market prices – there was no supply/demand because they weren’t being traded at sufficient volume for a proper market to form.

    Once you start trading these in any significant way, that rationale goes away – the market price for the bond now sets the rating, and at this point the rating agencies are putting a false measure on the bond. They have an incentive to juice the rating, but the market (assuming it’s properly regulated and all that – which is not a given) does not so long as it’s sufficiently active.

  30. 30

    @Zifnab

    Ok, so maybe not the SEC. Or at least, maybe not this SEC. But someone that is reigned in by elected representatives.
    __
    I’d rather have someone I can yell at be responsible for this mess. S&P and Moody’s are just nebulous corporate wing-wangs.

    The Nebulous Corporate Wing-Wangs opened for The Armchair Eberts at Bumbershoot last year. They were pretty good but I wish that they had played more stuff from their first album.

  31. 31
    danimal says:

    @dr. bloor:

    You know, Tunch does look a lot like Ben Nelson.

    That’s just way below the belt.

    Tunch didn’t buy his hair at a wigmaker’s estate sale.

  32. 32
    Martin says:

    I’d like to see this reform and a law that says that when a bond rated by a ratings agency turns out to be total crap that the people who signed off on the ratings get put naked into a pair of stocks with their legs spread wide open so that passersby can kick them in the junk.

    Actually, this is where professional licensure comes into play. Make the raters licensed by the SEC but self-regulated and subject to criminal malpractice. Any bond that blows up against its rating subjects the rater to malpractice on behalf of bond holders and they’ll have to prove in court that the rating was given in good faith.

    The whole industry will sort itself out inside of 12 months. The first round of ginormous lawsuits will see to that. Suddenly these guys will have advanced degrees and start climbing up every companies ass like WalMart does.

  33. 33
    D-Chance. says:

    Save the planet… quit holding climate control conferences.

    Delegates, journalists, activists and observers from almost 200 countries have gathered at the Dec 7-18 summit and their travel and work will create 46,200 tonnes of carbon dioxide, most of it from their flights.

    This would fill nearly 10,000 Olympic swimming pools, and is the same amount produced each year by 2,300 Americans or 660,000 Ethiopians…

  34. 34
    cfaller96 says:

    Oh John, don’t be naive. You know this is not going to happen. You know this is going to get stripped out…and then what are you going to do?

  35. 35
    Libby says:

    I still think S&P, Moody’s, and Fitch need to go the way of Arthur Andersen.

    I think they should all be frogmarched into the nearest high security prison for fraud, but that’s just me.

  36. 36
    Something Fabulous says:

    well, so long as we’re talking about Other Things going on in congress, howsabout this? I can’t have been the only one to see it on Wonkette:

    [ps: how do you savvy people turn a link into a word within your sentence? Such as: I wanted the word “this” to be clickable? Also.]

  37. 37
    chuck says:

    When it gets through the Senate, the ratings agencies will become deregulated, funded with tax dollars, and it will be illegal to pay for an abortion with any dollars from any corporation rated by these agencies.

  38. 38

    @Martin

    Once you start trading these in any significant way, that rationale goes away – the market price for the bond now sets the rating, and at this point the rating agencies are putting a false measure on the bond. They have an incentive to juice the rating, but the market (assuming it’s properly regulated and all that – which is not a given) does not so long as it’s sufficiently active.

    So are these traded on the market at such a volume that we could just dump the ratings agencies entirely? Or at least knock them off their perch?

    I also don’t understand the whole argument that what the ratings agencies do is protected by the first amendment. It seems like a case of selectively convenient first amendment absolutism. We don’t let people sell child pornography and no one has ever sued the government and said “Shutting down my kiddie porn business is an interference with my first amendment rights” nor do we let companies say things like “Drink Drano brand drain cleaner. It’s good for you”. Why the delicacy vis a vis the first amendment rights of the ratings agencies? What am I missing here?

  39. 39
    John Cole says:

    @cfaller96: I’m going to be pissed off, write something nasty about Ben Nelson or which ever conservadem stripped it, and then decide whether the bill is better than nothing, and it probably will be by a good margin, and then support it.

    I know you think all us West Virginians are morons, but we have enough common sense to know that 100% of $500,000 is a helluva lot better than 0% of a million bucks, and I’m not going to sit around and convince myself that “we’ll get a better beill in the next Congress.”

  40. 40

    @Martin

    @Wile E. Quixote
    I’d like to see this reform and a law that says that when a bond rated by a ratings agency turns out to be total crap that the people who signed off on the ratings get put naked into a pair of stocks with their legs spread wide open so that passersby can kick them in the junk.

    Actually, this is where professional licensure comes into play. Make the raters licensed by the SEC but self-regulated and subject to criminal malpractice. Any bond that blows up against its rating subjects the rater to malpractice on behalf of bond holders and they’ll have to prove in court that the rating was given in good faith.
    __
    The whole industry will sort itself out inside of 12 months. The first round of ginormous lawsuits will see to that. Suddenly these guys will have advanced degrees and start climbing up every companies ass like WalMart does.

    That sounds good, but can we have the criminal malfeasance penalties, ginormous lawsuits *and* the junk kicking. Because as someone who’s been kicked in the junk a few times I have to say that it really makes you focus on the important things, like what you can do to avoid being kicked in the junk again.

  41. 41
    Roger Moore says:

    @DougJ:

    You mean rename themselves something stupid-sounding like “Accenture”?

    That was only Andersen Consulting. They were split from the rest of the company before Enron blew up, which is why they had to change names. The rest of the company is clinically dead, but being kept on life support so that its organs can be harvested.

  42. 42
    chuck says:

    @Wile E. Quixote:

    They can’t be bad people because they have lots of money. Bad people don’t have money. They don’t want the good people to have money. We can’t let bad people tell good people what to do with their money.

    That’s the way the government works. It’s not even really bribery, it’s just the worship of power.

  43. 43
    jeffreyw says:

    @Something Fabulous:

    select the word you want to be the link (highlight it), then copy the link to your clipboard. look at the button above the comment box-click the one that sez “link”-a box will popup, right click in that box and choose “paste”-click “OK”- then click subit

  44. 44
    DougJ says:

    That was only Andersen Consulting.

    Yeah, I know. Kind of spoils the joke.

  45. 45
    Scott says:

    I think they should all be frogmarched into the nearest high security prison for fraud, but that’s just me.

    I think they should all be frogmarched into an active volcano.

  46. 46

    @D Chance

    Save the planet… quit holding climate control conferences.
    __
    Delegates, journalists, activists and observers from almost 200 countries have gathered at the Dec 7-18 summit and their travel and work will create 46,200 tonnes of carbon dioxide, most of it from their flights.
    __
    This would fill nearly 10,000 Olympic swimming pools, and is the same amount produced each year by 2,300 Americans or 660,000 Ethiopians…

    Or we could take 2,300 Republicans out every year, shoot them in the back of the head and use them for chum and have all of the climate change conferences we wanted, as well as providing food for hungry fish. Anyone see a downside to my plan?

  47. 47
    Maude says:

    The Senators can’t go home and shout free market. Those days are over. It makes it hard to block financial reform.

  48. 48
    Roger Moore says:

    @Wile E. Quixote:

    Why do we need ratings agencies for bonds?

    Because bonds are even harder than stocks to evaluate. To evaluate a bond, you first have to do all of the same kind of due diligence you need to do when buying a stock, and then you need to look at all of the details about how exactly that bond is structured. Of course, it gets even trickier- and hence more profitable- when you’re talking about some deliberately opaque product like a structured debt product.

  49. 49
    jeffreyw says:

    @Wile E. Quixote:

    Anyone see a downside to my plan?

    Makes the fish taste bad?

  50. 50

    @Roger Moore

    Because bonds are even harder than stocks to evaluate. To evaluate a bond, you first have to do all of the same kind of due diligence you need to do when buying a stock, and then you need to look at all of the details about how exactly that bond is structured. Of course, it gets even trickier- and hence more profitable- when you’re talking about some deliberately opaque product like a structured debt product.

    Given that then would a solution like Martin’s work where we have the raters licensed by the SEC but self-regulated and subject to criminal malpractice so that if a bond blows up the raters can be sued for malpractice and have to prove in court that they gave the rating in good faith (and get kicked in the junk if they don’t)?

  51. 51
    Dreggas says:

    @Wile E. Quixote:

    shit splatters?

  52. 52
    freelancer says:

    @Something Fabulous:

    1: Find the link you want people to go to in another window. Copy it.

    2: Highlight the word you want to become the link in the BJ comment box.

    3: Click the blue “link” button above the comment box.

  53. 53

    @John Cole

    I know you think all us West Virginians are morons, but we have enough common sense to know that 100% of $500,000 is a helluva lot better than 0% of a million bucks, and I’m not going to sit around and convince myself that “we’ll get a better beill in the next Congress.”

    Nahhh, I don’t think that West Virginian’s are morons, but Dorklahoman’s, fuck them! Any state that puts Inhofe and Coburn into the Senate has something wrong with it. And have you ever been to Dorklahoma? I have, it’s flat, boring and hot in the summers and flat, boring and cold in the winters. At least West Virginia has terrain. It’s pathetic terrain by Western standards but miles ahead of Dorklahoma, a state I hate almost as much as Delaware.

  54. 54
    D-Chance. says:

    Quote of the day: If there’s any consistent message to be drawn from Copenhagen, it’s that no one has any idea what’s going on.

  55. 55

    Why do we want the Southeastern Conference rating bonds? They do poorly enough with football teams.

    t-minus until 9 a.m. and teh Smudge can be picked up.

  56. 56
    Roger Moore says:

    @Wile E. Quixote:

    Or we could take 2,300 Republicans out every year, shoot them in the back of the head and use them for chum and have all of the climate change conferences we wanted, as well as providing food for hungry fish. Anyone see a downside to my plan?

    Somehow, I suspect that the Republicans will counter with a plan where we blow up 660,000 Ethiopians every year. They might even support more climate change conferences if there’s random killing of poor, defenseless brown people involved.

  57. 57
    Stefan says:

    ellaesther: In any fight, I want you on my side. Down to and including with my kids.

    Why would you want you and John to fight your children….?

  58. 58

    @Wile E. Quixote:

    It’s pathetic terrain by Western standards but miles ahead of Dorklahoma, a state I hate almost as much as Delaware.

    I dispute that patheticity. W. Va. has some awesome terrain. Some great mountains, rivers, etc.

    Oklahoma, not so much. I’ll give you that.

  59. 59
    Comrade Kevin says:

    @Wile E. Quixote: LOL, priceless!

  60. 60
    Stefan says:

    Or we could take 2,300 Republicans out every year, shoot them in the back of the head and use them for chum and have all of the climate change conferences we wanted, as well as providing food for hungry fish. Anyone see a downside to my plan?

    It’s not 4,600 Republicans?

  61. 61

    @Libby: Gee…you’re a kind person. I can think of much more severe punishment for these..these…Hell, I told myself I wouldn’t curse on this site anymore…these FUCKERS! I’m sorry..I lost my head and now I can’t find it. I’ll just go fuck off, now.

  62. 62
    Dreggas says:

    @Roger Moore:

    if only we hadn’t fed so many of them during the 80’s there wouldn’t be 660,000 of them polluting our atmosphere.

  63. 63

    @Stefan

    @Wile E. Quixote
    Or we could take 2,300 Republicans out every year, shoot them in the back of the head and use them for chum and have all of the climate change conferences we wanted, as well as providing food for hungry fish. Anyone see a downside to my plan?

    It’s not 4,600 Republicans?

    Can I meet you half way? 6,900 Republicans.

  64. 64

    @arguingwithsignposts

    I dispute that patheticity. W. Va. has some awesome terrain. Some great mountains, rivers, etc.
    __
    Oklahoma, not so much. I’ll give you that.

    When it comes to mountains I’m a west coast terrain snob and don’t find them interesting unless they have glaciers on them or explode every once in a while.

  65. 65

    @arguingwithsignposts

    Why do we want the Southeastern Conference rating bonds? They do poorly enough with football teams.

    Which brings up the question, could we replace the Moody’s et al with the BCS? Given the kind of shit Moody’s was slapping AAA ratings on over these last few years I hardly see how the BCS could do worse when it comes to picking winners.

  66. 66
    Roger Moore says:

    @Stefan:

    It’s not 4,600 Republicans?

    I think the original 2300 should be plenty, just so long as you’re allowed to choose them rather than picking them at random. We could pass a lot of valuable legislation by bumping off just 40 of them.

  67. 67

    @Wile E. Quixote: Now, you’re getting to the crux of the matter. Make this kind of behavior vital as to whether you keep breathing and these assholes will think twice about fucking the public.

  68. 68
    Martin says:

    @Roger Moore:

    That’s more complicated than working out everything from marketshare growth, gross margins, and whatever accounting chicanery a company will do? No, bonds aren’t more complicated. They’re less subject to random influences and are more deterministic, but the question on the bond is the same as the question on the stock – what are you trying to accomplish from it?

    If it’s an asset to be bought and sold, the fundamentals of the underlying bits don’t matter at all – you’ll just go back to the market when the value goes up and sell it. That’s how we generally treat stocks – as little trinkets to be traded. From this perspective, fuck the rating, just do the squiggly line analysis.

    Now, if you are holding the bond for the duration, that’s different, but it’s different for stocks as well – then you need to care if the profits will show up, if they are positioning in the market well, not to mention other issues like dividends and the like. It used to be that this was the entire bond market – everyone was long. Now, not as much.

    I can see a case to be made for a rating at the time of issuance to help make the bond less opaque, but after that I doubt the rating agencies can do a better job than the market at determining the quality of the bond to be paid against the strength of the issuing agency.

    But I’m not sure that erecting a system to mask the problems of opaque financial products is such a good idea in the first place. Turning a product that is increasingly deliberately difficult to measure into a 3 letter score is just bad news. If the banks want to turn out these impossible products, let them die when investors can’t make heads or tails of them. It doesn’t appear the credit agencies could themselves. Why delude ourselves into believing that the letters mean anything in that case?

    I can’t tell you how much shitty analysis I see out of top financial guys on the stock side. Just flat-out wrong, misleading crap. And I’m not talking about Cramer who is miles worse than any of them. The bond raters are no better. They don’t know what the fuck they are doing because they have no vested interest in getting it right. How many bond raters got fired in the backwash of this mess? Exactly my point.

    The bonds only get fairly assessed when someone is going to dump real money into them and has to do the work to figure out their quality. We need a system that will force that effort to take place. There are different ways of doing it, but that’s the bottom line. Right now, I’ll trust my fund manager over Moody’s.

    Let’s just look at the securitization problem that we just had. Banks held all of these bonds. The value of the bonds on the open market plummeted because nobody trusted them, and on their accounting statements they had to be written down to FMV which caused them to break their capital/debt ratio, so they had to sell bonds to raise cash, which just dropped the value faster, forcing more write-downs, etc. We showed up with $700B to unwind the whole mess. The ratings weren’t worth shit. For that matter, the market price wasn’t either. The problem was that nobody really was doing the hard work to figure out the value of the bond, to properly assess the value of the bond, and to be able to report that meaningfully. Most of the problem was that the bond was so fucking complex that it wasn’t worth it for anyone to do the assessment. Take away the crutch of the rating agencies, and my guess is that everyone gets scared shitless of these overly complex securities (as they should have been from the outset) and they become simpler and easier to value.

    That $700B lesson has yet to be learned.

  69. 69
    Martin says:

    @Wile E. Quixote:

    I’ve always argued that musicals don’t deserve 2 senators. And why not 2 senators from West Side Story? Sure they’d fight constantly, but I’m guessing they’d be pretty reliable Dem votes.

  70. 70
    Blue Raven says:

    @Scott:

    I think they should all be frogmarched into an active volcano.

    I think the goddess Pele would destroy the island if she were made to put up with that kind of sacrifice.

  71. 71

    @Wile E. Quixote:

    i don’t think the BCS could do *worse*, but that’s not saying much.

  72. 72

    @Martin

    I’ve always argued that musicals don’t deserve 2 senators. And why not 2 senators from West Side Story? Sure they’d fight constantly, but I’m guessing they’d be pretty reliable Dem votes.

    And not only would they be reliable Democratic votes but the fights would be beautifully choreographed.

  73. 73
    les says:

    @Wile E. Quixote:

    It’s an example of good intentions gone bad. rating game (I’m operating from spotty memory here) came out of post-depression reforms; public and semi-public funds (state pension funds, e.g.) are limited by law in what they can invest in. Unfortunately, the raters weren’t publicly funded, and the descent to hell began. As dereg generally became the thing, raters just catered to the money source–the issuers and bundlers. If you want a chilling experience, find the Bill Moyers Journal episode on the rating agencies. Listening to the asshole who started and ran the biggest rating dept. on mortgage backed securities and such explain, with no apparent regret, how they had no fucking idea how to rate the shit and just made it up as they went along to ensure AAA is amazing.

  74. 74

    Well, John Cole, to get this past the Senate you need to put a bunch of taxpayer dollars into the Rating Agencies so they can do business as usual with a couple easily avoided caveates and no enforcement agency – then call it reform. You do need to make sure that those who will least benefit are forced to put some money in, I suggest maybe the currently uninsured who’d never buy a bond because their inaction in the market let this happen. You need to make sure the drivers of failure have sufficient funds to fight this later on.

    Oh yeah, call it reform and kick those who say it sucks.

    Next up, climate, jobs……………….2010……….2012……

  75. 75
    ellaesther says:

    @Stefan: They are very, very smart, and I occasionally need smart back-up! (You know, for those moments when my husband/their father is also at a loss…!).

  76. 76
    Roger Moore says:

    @Martin:
    In order to know if a bond is going to be good, you have to evaluate the expected health of the company over the maturity of the bond. How else can you know if it’s going to pay off at the end? That’s essentially the same kind of calculation you need to do to decide if the stock is worth buying.

    The problem, as I understand it, is that banks want to use bonds and bond-like structured securities to meet their reserve requirements. That’s allowed under Basel 2, but the requirement is now a floating value that depends in part on the quality of the investments that make up the reserve. So you might need- to make up some numbers- 8% reserve if you’re holding cash, 9% if you’re holding AAA bonds, and 12% if you’re holding AA bonds. That makes bond ratings, and hence the ratings agencies, incredibly important to the way the banks do business.

    I think that the long term solution is to stop letting banks hold securities as a reserve based on their ratings. Instead, banks should only be allowed to hold securities at their current value on an open exchange. That would break the hold of the ratings agencies and give the financial system a strong incentive to create transparent financial products that can reasonably be publicly traded.

  77. 77
    Barry says:

    John Cole: “I still think S&P, Moody’s, and Fitch need to go the way of Arthur Andersen.”

    I’d love to see that, and would volunteer to carry out the senences on the top guys if justice were ever to be done, but…………………………………………………………………………..
    ………………………………………………………………………………..
    ………………………………………………………………………………..
    ever hear of this thing called the US Senate?

    Protector of evildoers everywhere?

    Proud maggots being bribed for fighting on behalf of untrust, injustice and the American Way?

  78. 78
    Something Fabulous says:

    @jeffreyw: Ooh, jeffreyw, Thanks! Going to try <a href=”http:// http://wonkette.com/tag/pt-eh-.....or-people/“… again

  79. 79
    Something Fabulous says:

    @freelancer: thanks! hope it worked!~

  80. 80
    grumpy realist says:

    Speaking as someone who almost got hired by Moody’s to put together CDOs, here’s my two cents:

    Everyone was putting together these packages based on probabilities calculated from historical rates of default. Problem was, those historical rates of default didn’t hold up. First, because the bank people stopped worrying about the actual risk of the mortgages they were churning out, because they knew they could securitize all of them and sell them off to someone else. Result: a lot of junk mortgages got written which got turned into even junkier bonds, but nobody was willing to admit that. Second, a lot of new types of mortgages were created which didn’t really have sufficient risk history. (The pool of people who used to use Alt-A mortgages was much smaller–and have a much different financial profile than the poor boobs who have used Alt-A recently in this last mess.)

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