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  #31  
Old 05-21-2018, 05:40 PM
IANAE IANAE is offline
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Thanks for the additional info campbell. I am not an NBER subscriber so I am unable (and unwilling to pay) to see the full report.

A concern could be that the entire "cause and effect" premise - and conclusion - of the study is flawed by its not fully considering or modeling the effect on MBS/RMBS deals of the extraordinary state and federal stimulus in response to the liquidity, financial and economic crises ostensibly heralded by Bear and Lehman.

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  #32  
Old 08-20-2019, 06:48 AM
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https://www.fa-mag.com/news/the-bond...2.html#new_tab

Quote:
The Bond Raters Still Need To Be Fixed
AUGUST 14, 2019 • BARRY RITHOLTZ
Spoiler:
Standard & Poor’s, Moody’s and Fitch Ratings, the biggest credit-ratings companies, were major causative factors in the financial crisis. Even free-market acolyte Alan Greenspan admitted as much. Little has changed since then, other than that enough time has passed to allow investors to forget this fact.
I have been following this issue since 2007, so here is a brief history.

With the economy still sluggish after the dot-com crash and 9/11, the Federal Reserve slashed interest rates to 1%. Bond managers were under intense pressure to generate yield. This sent them on a mad scramble to find investment-grade debt with higher returns.


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This is where the credit raters come in. Moody’s and S&P (Fitch was a relatively small player) slapped investment grade ratings on securities backed by junk subprime loans because they were literally paid to do so by debt issuers. Issuers shopped for ratings -- if Moody’s refused to provide a desired grade, then S&P would (and vice versa). When it all went south, the debt raters made feeble attempts to claim their ratings were "opinions," or protected political speech under the First Amendment. These arguments failed, eventually leading to fines for their malfeasance. S&P paid $1.5 billion to settle with the U.S. and individual states; Moody’s paid a much smaller fine.

In the aftermath of the financial crisis, regulators concluded that the way to fix the problem of the raters' conflict-riddled, issuer-pays model was to introduce more competition. But this market-based solution seems to be no better; because the newcomers are hungry for business, their ratings tend to be even laxer. If anything, the solution has only made the conflicts of interest more apparent.

To fix this problem requires a radical rethink of the business model. Here are some things regulators should consider:

• Sell ratings to bond buyers, not bond issuers: The ratings companies date back to the panic of 1837. The defaults and bank failures that followed led to creation of new businesses to help rate the debt of merchants. During the 19th century, investors in railroads paid for information on the quality of the bonds they were buying, which is how S&P and Moody's got their start. In the 1970s, the raters began the practice of charging issuers for their services, displacing the subscriber-pays model. That the investor-pays model once prevailed suggests that under the right conditions and with the right incentives it could work again.

• Assign and rotate rating companies randomly: After the many accounting scandal of the early 2000s -- Cendant, Computer Associates, Enron, WorldCom, Tyco, Adelphia, AOL, Global Crossing, Halliburton and many more -- a number of reforms were made to the accounting industry. Included in the Sarbanes-Oxley Act was the establishment of the Public Company Accounting Oversight Board, or PCAOB. This established new standards for independence, created audit rules and mandated quality control. Perhaps most importantly, it required whoever the lead partner was on an audit to rotate off that project every five years, reducing the tendency of those who are supposed to work at arm's length from getting too cozy. The incentive to cheat was replaced with a high probability of getting caught. The result has been a dearth of the kind of accounting frauds that were so common in the late 1990s and 2000s.

• Eliminate the government stamp of approval: The credit raters were granted special government dispensations in 1975, setting them up as the official arbiters of corporate credit quality. This unique status created a moral hazard, with raters facing few consequences for their actions; it is also what enabled the structural problem in the first place. Compare this situation to the equity side: the dot-com implosion taught stock buyers not to rely on Wall Street analyst ratings, which exist (mostly) for the benefit of investment bankers, not investors.

The financial crisis should have taught the same lesson to bond investors. But there's still the imprimatur of government credibility to fall back on. If we eliminate that special status, the structural problem should disappear. At the very least, there should be some form of legal liability for misleading ratings.

• Create stronger capital reserve standards: This is a big part of the problem: Higher credit ratings give banks and other financial companies cover for holding less capital. If more specific capital requirements were mandated, the need for AAA ratings would change dramatically; ratings would be explicitly structured for the benefit of bond buyers, and not the needs of the borrowers. Today, the ratings serve as a way for issuers to engineer their way to lower borrowing costs.

As the Financial Crisis Inquiry Commission concluded in its autopsy of the crisis: “The three credit-rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval.”

The ratings companies were broken in 2008; they are still broken today because post-crisis reforms didn't address the root problems. Don’t be surprised if it turns out that the credit raters provided some of the kindling the next time the financial system goes up in flames.
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  #33  
Old 05-27-2020, 11:34 AM
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https://www.ai-cio.com/news/credit-r...paign=CIOAlert
Quote:
Credit Raters Get Slammed Once Again as Too Lenient
S&P and Moody’s take it heavy in an SEC hearing. A run-up to a replay of their 2008-09 vilification?
Spoiler:
The big credit rating agencies came under fire at a Washington hearing Thursday, in what may be a curtain raiser for a new assault on how they do business. All very reminiscent of the flak they got due to the financial crisis a dozen years ago.

Appearing before a panel of the Securities and Exchange Commission (SEC), critics lambasted the agencies—primarily the biggest, Moody’s Investor Service and Standard and Poor’s—for being too lenient on the companies and other debt issuers that they rate.

The raters were guilty of “overvaluation” of many debt issuers in the previous crisis and they still are, said Marc Joffe, senior policy analyst at the Reason Foundation, the libertarian think tank.

The agencies took a public pasting in the wake of the 2008-09 crisis because of their thumbs-up grades for investment vehicles laden with toxic mortgages, which ended up going bust and losing investors a lot.

As a consequence, regulators and Congress compelled them to make greater disclosure of their methods and also allowed more federally sanctioned competitors. The result, though, is that none of these fledgling rivals has come close to threatening the big two, or their smaller peer, Fitch Ratings.

Now, as a harsh recession (thus far unofficially declared) gathers force, a rash of business failures is expected. Leading up to today’s coronavirus-induced economic downturn, there has been Wall Street grumbling that the agencies allowed too many highly indebted companies to remain in investment grade. Lately, and detractors would say belatedly, several have been downgraded to junk status, with a lot more to come.

Joffe complained that two commercial mortgage-backed securities, which package bonds backed by real estate loans, have been highly rated—and now are shuttered, due to the pandemic lockdown, which makes their futures questionable. One such investment pool is attached to Destiny USA, the mega-mall in Syracuse, New York, and the other to the MGM Grand and Mandalay Bay casinos in Las Vegas. Neither company could be reached for comment.

Joseph Grundfest, a Stanford law professor, told the SEC committee that the “duopoly” of S&P and Moody’s needed better competition. His suggestion: a new agency, sponsored by institutional investors who are the buyers of rated debt. “Otherwise,” he said, “we’re just fiddling around the edges.”

Van Hessen, chief strategist at upstart Kroll Bond Rating Agency, said too many bond buyers depend on the large agencies’ letter ratings (AAA from S&P, for instance, is top of the line), when they should be looking at other factors, such as odds of default. Kroll, which was founded in 2010, touts its own letter grades as giving greater weight to default risk.

Defending S&P, its head of global ratings services said that since the ’08-’09 crisis, the major agency has been subject to much more regulation. “That has been a transformation,” Yann Le Pallec said. S&P was vigilant at preventing conflicts of interest, he added, such as by banning analysts from sales pitches.

“We agree that people shouldn’t just rely on us” when assessing buying bonds, he said.

It’s doubtful that the SEC, under the more lenient rule of Chairman Jay Clayton, is about to start cracking down on the big raters anytime soon. Still, if a rash of failures of well-rated issuers happens, the widespread lambasting of the agencies could well recur.


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