Tuesday, March 4, 2008

Death to the Rating Agencies

"Standard & Poor's rewarded bond insurer MBIA Inc. for raising $2.6 billion in capital by affirming the company's triple-A financial-strength rating while keeping its outlook 'negative'. ... S&P also kept its triple-A rating on the other large bond insurer, Ambac Financial Group Inc. ... As part of its action, S&P took MBIA's rating off 'credit watch negative,' a state in which downgrade is an iminent threat over the next three months", WSJ, 26 February 2008.

"What happens when the feds license only a few companies to provide a service, and then require investors to buy that service? For the answer, take a look at the mess in today's bond market, where investors have been hanging on whether the main government-appointed credit-rating agencies--[S&P] and Moody's would downgrade bond insurers MBIA and Ambac. ... But why were the bond insurers facing downgrades in the first place? ... By now no one should care what the rating agencies [RAs] think, but the problem is that by law we have to care. Since 1975, the [SEC] has limited competition in the market for credit ratings by anointing only certain firms as 'Nationally Recognized Statistical Rating Organizations' (NRSROs). ... Over time, federal and state laws and regulations have explicitly required NRSRO-rated securities to be held by money market funds, insurers and others. This is turn has created the impression that these ratings are something more than merely financial opinions, which are often less informed than opinions you can read in a newspaper. ... Not surprisingly, the rating agencies are coming up with their own ideas for 'reform', none of which seem to include more competition. .. No doubt, S&P and Moody's would love Congress to add rules that raise the cost of entry for new competitors. If Congress takes the bait, it will repeat the mistakes of Sarbanes-Oxley", Editorial at the WSJ, 26 February 2008.

"In the latest sign that the clouds are starting to clear over an important part of the financial markets, Moody's Investor Service affirmed its top-notch credit ratings to MBIA Inc, the world's biggest bond insurer", WSJ, 27 February 2008.

It's time the RAs were sent to sleep. With the fish. Their carefully considered opinions are worthless. The CPA profession has its Big Four, the RAs, their Big Three (TBT). Anything TBT do should be viewed skeptically. Mike Shedlock (MS) has a nice post on this topic at http://www.globaleconomicanalysis.blogspot.com/ 26 February 2008 . MS makes it clear the RAs retention of AAAs for the monolines is absurd by comparing them to Pfizer, a real company. I have an idea for Moody's and S&P: lobby Congress to become subject to PCAOB oversight. The PCAOB can form a sister organization to create standards for the RAs then fill it with former rating agency employees and harass the non-NRSROs to show the PCAOB does something. We'll call it: Rating Organization Bullying Oversight Team, ROBOT. ROBOT can go on its "tick and tie" adventures and do nothing to protect the public from bad TBT ratings. If Mark Olson (MO), PCAOB head, doesn't like ROBOT, how about Rating Agency Craven Knavish Enforcement Thespians, or RACKET. How about it MO? You can have RACKET start by reviewing Egan-Jones. Whadda say?

6 comments:

Buzz Saw said...

Hello i.a.,

Nice post!

Funny, Moody's, Fitch, and S&P act as if they still have some credibility. Didn't they admit that they "don't do due diligence" or some such horse pucky? I know that I will never trust there word for anything.

Buzz Saw said...

Their word, ack!

Independent Accountant said...

Bizz Saw:
You are correct, at least one of TBT admitted this. Thanks.

Cate Long said...

Your scepticism of the raters is legitimate...

They over-rated structured products and under-rated munis...

Those two facts account for a lot of mispricing and misallocation of risk...

Here is the proposal which I've made to Members of Congress and the SEC to create true competition among raters...

"Equivalent Disclosure" for issuers...

http://docs.google.com/Doc?docid=ddwhpq5g_13hg34w9&hl=en

Good blog... Cate Long

Independent Accountant said...

Cate Long:
I read your comment and think your suggestion would improve matters somewhat. However, I see the failure of reform in the CPA business and believe a better route is to unleash the plaintiffs' bar on the miscreants. Thanks for your positive words.

Independent Accountant said...

Floyd Norris' blog at www.nytimes.com, discusses this topic on 9 March 2008 and has a post by Cate Long which explains her position in greater detail.