Ratings agency bosses to receive a verbal lashing (Moody's, S&P fraud?)

AFP ^ | 10/23/2008 | staff

[blueheron2]

WASHINGTON (AFP) — After errant bankers and humbled insurers, the turn came for ratings agency bosses to receive a verbal lashing from US lawmakers investigating the meltdown of the financial system clip At one point, a panel member produced a message from an employee of leading agency Standard & Poors in the structured finance division who complained that deals "could be structured by cows and we would rate it." clip

[blueheron2]

Rating companies rating anything that moves or doesn't move. I see lawsuits coming.

C-span hearings on now

[NonValueAdded]

Well, that they rate anything and everything isn't the problem, it is that they erroneously rate them. Thus We The People, demanding nothing but AAA-rated debt, end up with a portfolio of junk. Making you Poor is Standard operating procedure, I guess. Fits right in with Obama's plans for The Great Leveling™, doesn't it?

[Onerom99]

This is actually quite alarming..

Obama and Dem run congress will be an unmitigated disaster on the US economy.

[El Gato]

When will the Congressmen grill each other? They, along with Carter and Clinton who signed the legislation concerned, have more blame for the situation than Wall Street or the Banks.

[blueheron2]

I’m not hoding my breath. Someone on C-span testified there isn’t any rating you can trust. The rating companies are being paid the companies being rated. I can’t believe investors are not going to go after the rating companies.

[BnBlFlag]

“When will the Congressman grill each other”?
Never, unless it’s Dims grilling Pubbies. We’ve got the fox guarding the hen house. And the “Stupid Party”, like GW, is making like a punching bag.

[Attention Surplus Disorder]

I think you’ll find that the ratings agys have language in their service agreements that holds them harmless from damages suffered by folks who rely on their ratings. And if you are a fund mgr & got a rating on a tranche of debt you bought from Yahoo finance, you do NOT have a case for having performed any degree of due dilly. There’s no grounds for lawsuits here, even if you (as a fund mgr) subscribed on a paid basis to Moody’s, etc; for the real inside poop. I don’t even think they have a “Kodak” guarantee, limiting their liability to the price paid for the subscription! (I don’t know this for a fact, but I have on what I consider very good authoritah that there is all manner of “hold harmless” verbiage in the “use” agreements.)

They might be castigated and embarassed by Congress in a dog & pony show where the useless turds running this place yell at a bunch of other useless turds, but that’s about it. Oh yeah, they’ll propose 3-5 bills to tighten regulations on the ratings industry, you know, just in time to be functional, maybe one passes, then we’ll be in nirvana because everything will be fixed all better now the end.

[PajamaTruthMafia]

Thanks for the heads up. Is it just me or does it always seem like Sarbanes is heavily medicated? Freaky...

[BobS]

Is this because The New York Times has $1.1B in debt and has only $46M cash on hand? Junk bond city. That's the first thing the ratings agencies look at. Then they look at property.

They should re-evaluate the NYT property value right now to see if that debt can be covered.

[BobS]

So they want to loosen the accuracy rules of Moody's and S & P? And flood the market with worthless junk bonds? They screwed the pooch already with junk mortages world-wide.

They are going downhill fast.

[B4Ranch]

The part I find strange is had a rating agency chosen to give companies lower scores based on the fact that they traded derivatives, currently known as toxic assets, I am very confident that there would have been a Court ruling forbidding such practice until there had been an extensive study on the matter. By “extensive study” I am referring to a conclusion that was favorable.

[blueheron2]

One rep testified it wasn’t actionable because ratings were only opinion. However, it was also testified that they were knowingly giving false ratings to get business from the rated companies which would mean they were knowingly deceiving investors.

[Attention Surplus Disorder]

"So they want to loosen the accuracy rules of Moody's and S & P? And flood the market with worthless junk bonds?"

I am not sure what, if any, "rules" you're referring to. But there's nothing being spoken about here that hasn't already happened and hasn't already created widespread damage, both to holders and to the credibility of the ratings agys themselves.

There is only one rule and one sub-rule, at least prior to our "new paradigm" of government interference and infinite bailout. That rule is: Treasuries are risk free, and every other debt instrument bears some degree of risk, no matter how well insured. Period. Agreeing to a higher coupon is your tacit agreement to take on more risk. Period. An immutable law, and one that worked very well for quite a while.

What the Tsy is doing now, in a series of improvised, chaotic, and arbitrary belly-dancer-on-angel-dust gyrations, is to bring all manner of debt instruments to the identical risk-free level of Tsy debt. The "bailout"; the "backstop". It is artifice on the grandest of scales, a Potemkin village, totally synthetic, and ultimately impossible to maintain.

Unfortunately, and this looks to be the next stage, and I say this with all the alarm I can and it looks to be somewhat imminent: if and when the day comes when it becomes clear that bringing these debt instruments "into" or "under the wing of" either the Federal Reserve or Tsy in an effort to upgrade their perceived creditworthiness to the same level as Tsys IS BEYOND THE FISCAL CAPABILITY of the Fed or Tsy without either the unbridled printing of railcars worth of fiat dollars or the explicit default of Tsys themselves.......AT THAT MOMENT, Tsys will assume the value of the bad debt: EXACTLY the opposite of what Paulsen/Bernanke intended, and we will see a deflationary collapse in our financial system. That is the threat. The "threat of the threat" is a big part of what is afflicting the stock market right now. (I also think the stock market is revulsed by the threat of an Obama presidency & veto-proof Dem Congress, is subject to enormous deleveraging and forced selling on the part of huge hedge funds, and is further reacting to THE BIGGEST EVER collapse in commodity prices, a full-on 1929 no-jive crash) What scares the daylights out of me is that the credit dislocation implicit by this will be without a shred of doubt the most disruptive worldwide non-war event anyone alive has ever seen. I am absolutely serious. Talking about markets closing for a week, reopening 2500 DJ points down, interest rates doubling overnight....I mean the gates of hell.

[Attention Surplus Disorder]

“..had a rating agency chosen to give companies lower scores based on the fact that they traded derivatives, currently known as toxic assets, I am very confident that there would have been a Court ruling forbidding such practice”.

Disagree, I don’t think it works that way, in fact I’m darn sure it doesn’t. In your specific example, a downgrade based upon an entity trading or holding derivatives is absolutely warranted by any standard of reasoning or practice.

As I understand it: If you are the issuer of a debt instrument, you HIRE (eg; pay a fee to) a Moody’s or Fitch or S&P to “rate” the creditworthiness of your offering, which is your effort to bolster the value of your offering by bolting a third-party so-called independent opinion to the prospectus for your offering. Not much different than paying for an appraisal on a piece of real estate you wish to take a mortgage on, whether to buy or to refi.

MBI and ABK were and are huge guarantors of all manner of tranches of debt; mortgage, consumer, municipal. Their insurance policies would be grafted onto debt offerings, bolstering the perceived values of those offerings by offering default insurance. Not one whit different than grafting a homeowner’s PMI policy onto his less-than-20% down-payment mortgage to improve the secondary market’s perception of the danger of default. When (I think it was) Moody’s downgraded MBI because of its ever-increasing exposure to exploding debt defaults far beyond its ability to pay claims, MBI had a hissy fit, and angrily just stopped paying for Moody’s ratings and went on their merry way. MBI didn’t sue Moody’s for libel or anything like that. Did the market care? No, short attention span theater.

[Attention Surplus Disorder]

“However, it was also testified that they were knowingly giving false ratings to get business from the rated companies which would mean they were knowingly deceiving investors.”

I am of that view. On a macro scale, not one bit different than a “creative” home appraiser who always seems to “make the numbers” so that the mortgage originator will hire him again and again for the next gigs.

[B4Ranch]

>Moody’s downgraded MBI because of its ever-increasing exposure to exploding debt defaults far beyond its ability to pay claims,<

Downgraded from a AA to an A. There certainly wasn’t any C or D rated banksing firms trading derivatives. Is there even such a thing? I don’t think I have seen anything less than an A in the companies I checked on.

[Attention Surplus Disorder]

Oh yeah, there are low-end ratings all over the place, and they trade at coupons that reflect their risk of default. See, some of these tranches were downgraded FIFTEEN and SEVENTEEN grades at a whack (!) when the contents of the sausages became clear.

You can get as arcane and detailed in perusing this field as you want. If you go to www.markit.com (which is a very complex site to use....in fact I can’t seem to find right now exactly what I wanted to show you) but is the industry nexus for pricing derivatives and CDX/CMO/CDS and all manner of bizarreness, you can delve as deep as you wish.

But you can see there there are BBB rated tranches of debt that are trading THIRTY FIVE HUNDRED BASIS POINTS (OMG!) above LIBOR; which is effectuated by a combo of coupon and STEEP face discount. http://www.markit.com/information/products/category/indices/cdx.html

Yeah, some of the debt tranches offered by MBI/ABK and rated by Moody’s fell from say “AA” to “C” overnight, which is a lot of grades! More importantly; the very idea that sombody as snooty as Moody’s could one day rate something “pretty darn lip-smacking good” and next day rate it “fetid pile of maggot-ridden rodent entrails” immediately calls into question WTH the ratings agys allegedly rate and what good they are other than bloodsucking fees out of debtors at the behest of underwriters who are indeed the folks who put “lipstick on a pig” to use a contempo saying.

[B4Ranch]

This is certainly worth a repeat!

>Yeah, some of the debt tranches offered by MBI/ABK and rated by Moody’s fell from say “AA” to “C” overnight, which is a lot of grades! More importantly; the very idea that sombody as snooty as Moody’s could one day rate something “pretty darn lip-smacking good” and next day rate it “fetid pile of maggot-ridden rodent entrails” immediately calls into question WTH the ratings agys allegedly rate and what good they are other than bloodsucking fees out of debtors at the behest of underwriters who are indeed the folks who put “lipstick on a pig” to use a contempo saying.<