NoVa Lurker wrote:In sum, the rating agencies are for-profit companies, selected by the very entities that they are rating.
No idea about the merits of the lawsuit, but it boggles my mind why anyone would ever trust credit ratings. It is scary that so many institutions still feature credit ratings in their investment guidelines that essentially allow them to invest without limits, and without any specific diligence, in AAA-rated securities.
Here's an idea - for every opinion written, a bond should be posted. Should any fraudulent findings come into play, the bond gets paid out. Of course, the premiums will diminish their profit-making abilities. But it would diminish the self-interest aspect. It should be structured as something similar to a lawyer being disbarred, but the wholesale liquidation of a public company would be politically infeasible. Now, something on the order of ArthurAndersen might be feasible, essentially these firms should be licensed, a indictment by the governing party would be forfeiture of said license and send a swift message to others. Not that Arthur Andersen failing seemed to have corrected that, but it would be a significant step in the right direction.
Rick Ferri wrote:Here is the issue. I want my securities to carry the highest rating possible. So, I show the street the securities and ask for bids. First to S&P, then Moody's, Fitches, etc. The winner of my business is the firm that gives my CDO the highest rating. Since CDOs are all the rage, all the rating agencies compete vigorously for the business. And that's how junk sub-prime CDOs become AAA rated securities.
Grt2bOutdoors wrote:They are salesmen paid a commission for writing an opinion where the information is fed to them from the one they are be asked to opine on. Too much self-interest. Have you noticed they seem to only proclaim the issuer dead long after it has become apparent to everyone but them?
I feel like some of these issues of self-dealing could be ameliorated if the ratings companies had to be paid at least partly using the very securites they were evaluating that they would then be required to hold until maturity. The going rate is $150,000 for rating one of these weird CDOs? Fine, your commission is $100,000 cash and a quantity of CDOs with a net present value of $50,000. Your ratings company evaluated 5,000 of these issuances? Then you get to sit on $250,000,000 of AAA/AA+ rated excrement.
The ratings companies will still compete with each other to (artificially) give issuers the best ratings they can up to a certain point
(they're not going to cut their own throats, after all). And there will be an opposite pressure to (artificially) depress the ratings as much as they can in order to get a bigger payout. These two countervailing forces will cancel out (because we're playing pretend here) and voila! Honest ratings.