I have always been a bit surpised at how the rating agencies like Standard and Poor's, Moodys and Fitch have got away relatively unscathed from the credit crunch. They were making a fortune rating the Mortgage Backed Securities and Collateralized Debt Obligations that were at the heart of the crisis. I have often used the 4 Ms to characterise the Credit Crunch Crisis - securites were Misrated, Mispriced, Misunderstood and Missold. In particular, the question arises as to whether the ratings agencies that were stamping AAA, AA, A and BBB on what were ultimately shown to be much riskier BB, CCC and CC or worse securities made genuine errors, were incompetent or just put the rating the issuers wanted to get the fees rolling in. Certainly the crucial assumption that was in their models that house prices would continue to rise was foolish. In my book I quote Kai Gilkes who worked for ten years at the ratings agencies:
Everyone was pinning their hopes on house prices continuing to rise . . . When they stopped rising, pretty much everyone was caught on the wrong side, because the sensitivity to house prices was huge. And there was just no getting around it. Why didn’t rating agencies build in some cushion for this sensitivity to a houseprice-depreciation scenario? Because if they had, they would have never rated a single mortgage-backed CDO.
Between september 2004 and october 2007 Standard and Poor's applied credit ratings to some $2.8 Trillion of mortgage backed securities and $1.2 Trillion of CDOs. It may be they deliberately put generous ratings on the securities just to get the business and this is a possibility. Certainly the Department of Justice now seems to be keen to impose fines (as much as $5 billion !) see Bloomberg link on them and both Standard and Poor's and Moody's shares fell close to 14% and 11% respectively yesterday as news about a failure to settle with the DoJ broke see Bloomberg Story link. The following Bloomberg video is also worth a watch!
Everyone was pinning their hopes on house prices continuing to rise . . . When they stopped rising, pretty much everyone was caught on the wrong side, because the sensitivity to house prices was huge. And there was just no getting around it. Why didn’t rating agencies build in some cushion for this sensitivity to a houseprice-depreciation scenario? Because if they had, they would have never rated a single mortgage-backed CDO.
Between september 2004 and october 2007 Standard and Poor's applied credit ratings to some $2.8 Trillion of mortgage backed securities and $1.2 Trillion of CDOs. It may be they deliberately put generous ratings on the securities just to get the business and this is a possibility. Certainly the Department of Justice now seems to be keen to impose fines (as much as $5 billion !) see Bloomberg link on them and both Standard and Poor's and Moody's shares fell close to 14% and 11% respectively yesterday as news about a failure to settle with the DoJ broke see Bloomberg Story link. The following Bloomberg video is also worth a watch!
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