My Ignorance Amazes me but Still I Cannot Sleep
I think this business insider article by Henry Blodget is a genuine must read
A former senior analyst at Moody’s has gone public with his story of how one of the country’s most important rating agencies is corrupted to the core.
The analyst, William J. Harrington,
Sad to say (pathetic really) something was news to me
“Moody’s …. since going public in 2000.”
I didn’t know ( I have stressed my ignorance many times here but I had no idea how much ignorance I had to stress).
It sure didn’t take long.
Also how long did the longest lived publicly traded investment bank in the USA survive as an investment bank ? Did any make it over age 18 ?
Since some time in the mid 70s I had been very puzzled as to how private unregulated firms with such power could remain uncorrupt (in 2008 I started wondering how they had remained uncorrupt for so long).
“We told you so” — Bearle and Means.
update: at least I’m not naive enough to be surprised by this
MCO 27.04 -0.89 -3.19%
There are rating agencies that are not paid by the issuer, but by the investors. One, Egan-Jones, http://www.egan-jones.com/ seems to have a much better track record than the Big 3. Reportedly they called Enron, Worldcom, GM, and stayed away from subprime mortgage bonds, although I don’t know their failures.
The problem is that only large investors can afford to pay their fees, and if their ratings were to be made available to the market as a whole for free, it would destroy their business model.
Perhaps instead of the issuer paying the rating agency directly, the issuer could pay the exchange where the issue is traded a few equivalent to what they would have paid the rating agencies. The exchange would then hire the rating agencies, including more than just the Big 3 (Egan-Jones for example) to rate the bonds for the public. This would get rid of the conflict of interest problem.
But it won’t get rid of all problems. The MBS fiasco was probably not caused by conflict of interest. EVERYONE got that one wrong, because the data was irrefutable that you don’t lose money on mortgages.
In 2006 I was looking at very expensive houses, asking who would pay, that the increases are huge over the past few years??????
It was fed funds rates at less than 2% arbitraged into 30 year mortgages.
I could not see how that would come out anything but badly, and so they on wall st did MBS’s.
The fictions that you could mix real mortgages for over assessed underlying assets, with toilet paper for bad mortgages for over assessed underlying assets.
How come as dumb as you think we libruls are I figured this out 5 years ago.
And then the GSE’s began buying up bad mortgages in 2007.
Now the treasury has about $650B in MBS’ the US taxpayer (TARP) bought to bail wall st. And the fed has $1,000B MBS’s to bail out wall st.
The Irish gumint did the same thing as are Sapin and Itlay, with France getting into it too.
And all you hear is the welfare state this and taht.
Yes, it is the welfare of wall st that is bankrupting sovereign governments.
More proof that a small investor in fixed income (other than bank accounts) is a chump. One has to go with bond funds that both buy the ratings and do their own due dilligence on the bonds. Given that so many of the money managers failed in their due dilligence, as indeed the fund of fund folks did with Madoff, its not clear that many in the fixed income community are other than rip off artists.
Another solution to the ratings agency problem is a lottery to assign who rates what. Say that every issue needs two ratings and choose by lot among the 3, you have first off abolished the need for any marketing dept at the ratings agencies. Perhaps FINRA could run the lottery.
here i was thinking you might know something in your own field…
but “the data was irrefutable you don’t lose money on mortgages”
is, to put it nicely, an example of a style of “thinking” that i cannot comprehend.
you seem to be saying that past performance is a guarantee of future success.
and no one looked at the prices and asked themselves the obvious question that ilsm asked?
They had many decades of data that showed very few principal losses on home mortgages, because the value of homes continually rose. So they were just using the data to conclude that mortgages were very low risk. However, they did overlook a few very important factors, hence the debacle.
an example of a style of “thinking” that i cannot comprehend. you seem to be saying that past performance is a guarantee of future success.
You consistantly overestimate yourself. In order see an example of that type of thinking you need only to look in the mirror. Here is what you said in the last comment thread:
Those future taxpayers are not hurt by the deal, since they in their turn will collect MORE than they paid in……Unlike a Ponzi scheme, this can go on forever. And it is guaranteed by the United States of America…
(“my three year old has been growing at the rate of 12 inches per year. at this rate by the time he is twenty, he will be twenty feet tall. i better invest in a house with twenty foot ceilings.”)
i am afraid the difference is that the “return” on Social Security is written into the law. This is a little safer than buying overpriced mortgages because “the value of homes continually rose.” The one idea has a little arithmetic and law behind it. The “decades of data” was pure superstition that anyone who had an ounce of reasoning ability would have seen the fatal flaw in.T
The nature of superstitious thinking, or inadequate thinking in general, is that the simple mind notices a “feature” of one thing that is similar to a feature of some other thing and concludes that they are “the same,” and can be treated as if they are the same.
a more complex, or mature, mind notices that many things share some similar features but also have other very different features, some of which are important enough that you cannot safely treat two “similar” things as “the same thing.”
You are still at the primitive superstition stage of cognitive development. You may be trapped there by a desperate emotional commitment to some “idea” to which you believe your personal safety is attached.
It’s good to see that someone else has read Berle and Means. Their Modern Corporation and Private Property is as apropos as ever. Then, as now, the modern corporation continues its assault on private property.
The ratings the agencies produced were always worthless. They existed solely to justify various prejudices, for example, that government debts were somehow more risky than private corporate debts. It is like the way insurers used to deny divorced women automobile coverage or loans to ethnic minorities, regardless of income, collateral or other such factors. Maybe it’s time to have investor paid rankings, rather than borrower or lender paid rankings. Bring back the old Bank Note Reporter (which is now a hobbyist publication, but used to rank the value of privately issued dollar denominated notes).