The tragedy of the ratings.

Robert Waldmann

Waxes poetic about the lost credibility of the AAA rating. For possible comic value I share my reflections.

What went wrong with the ratings agencies ?

I think the central problem is that the ratings agencies long provided a service of immense value to society, and were paid a tiny fraction of that value to do so. The loss of credibility of the ratings is one of the causes of a terrible recession. This loss is more likely to cost the world trillions in lost output than mere hundreds of billions. Sure seems that the credibility of the ratings agencies was worth, at least, hundreds of billions to the world economy. That dwarfs the market capitalization of the ratings agencies.

We lost that because we collectively decided to take it from them rather than paying them what their credible ratings were worth. For decades they provided messages of one to three letters which were collectively worth hundreds of billions per year. They were paid their costs plus a normal profit margin, just as if it wasn’t a miracle that so much value could be created with so little effort.

Their credibility was immensely valuable but not to them.

Then they were tempted by innovative financial instruments and also got tired of getting only a tiny fraction of the social value of their services. So they sold their credibility for a few billions. The problem is credibility gets damaged in the deal. The credibility they sold was worth tens of billions to the financial innovators who bought it. They converted it into cash, but they have paid themselves much of that in bonuses and blown the rest buying into their own spin. Now it’s gone. If I knew what it came from in the the first place, I would have an idea as to how to recreate it, but I never figured that out.