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Written by José D. Roncal
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Saturday, 01 May 2010 00:00 |
Credit rating agencies are finally under fire by the Senate Permanent Subcommittee on Investigations for their active role in the Wall Street financial meltdown. This investigation has been a long time coming, but we've been telling you about the problem since last year. For instance, on June 1, 09, inBubbles and Regulations we wrote:
| | We trusted the rating agencies, but nobody told us that the very same guys that the agencies were supposed to be rating, were also paying the agency to rate them. |
And again in August 15, 09:Securitization: The Good, the Bad, the Ugly:
| | Even the rating agencies played a role in the ruse, making profits by over-rating investments they knew had a high probability for failure. (…) billions of dollars were funneled into these rating agencies. |
It's no secret that the companies that awarded the AAA credit ratings to sub-prime mortgage bonds were heavily influenced by Wall Street money and actually delayed a massive sub-prime downgrade until July 2007, which helped set off the financial crisis.
We now know that Wall Street bankers even shopped around for the most favorable opinion. During the senate investigations, rating agency insiders like Moody's executive Richard Michalek admitted that analysts learned that being too tough on a Wall Street stock would risk their own year-end bonus.
Others testified that agencies had traded their integrity for market share. They stopped just short of declaring it outright fraud. The integrity trade-off started as far back as 2004, when according to one email, an employee warned that the company would lose business if it didn't give high enough ratings to collateralized debt obligations; the investments that later emerged at the heart of the financial crisis.
Depending on the final outcome of the Senate hearings, plus the House-passed financial regulation bill, rating agencies could face the following:
• register with the SEC via a new Office of Credit Rating Agencies
• disclose their methodologies and track record on any changes to their initial ratings
• disclose conflicts of interest—how paid and any business relationships
• half the members of their boards can have no financial stake in credit ratings
• could be sued by investors for reckless failure to analyze an investment
• could lose their SEC registration for providing consistently inaccurate ratings
In view of the big role these agencies played in the catastrophic financial unraveling, these tighter regulations seem warranted, if in fact any of them are ever enforced.
Even though there are never any guarantees, a triple-A rating can make an investment look like a safe bet. ("bet" being the key word, here!) When you buy a security from a company that bought and paid for their high rating, who wins? Hint: it won't be you. That's exactly the point we make in our bookThe Big Gamble: Are You Investing or Speculating? If you're not sure how to answer that question, please read the book and learn that there is no such thing as an investment. It's all speculation. |
