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A standing ovation for the NYT Op-Ed piece "Rated F for Failure"



March 16, 2009 – Comments (2) | RELATED TICKERS: MCO


Anyone who has read my blog before knows that I absolutely hate the ratings agency oligopoly.  If these morons and liars weren't the worst offenders in this whole financial mess that we currently find ourselves in, they are right up there AND they haven't been punished nearly as severely as they should have been.  The government should fine the living ship out of them, break up their virtual monopoly, and change how things are rated so that the people who are buying them pay for the ratings...not the companies that are trying to pawn their junk off on others.  I will remain short Moody's (MCO) in CAPS out of general principle until the next ice age.

The OP-Ed piece in today's New York Times on this subject by Jerome S. Fons and Frank Partnoy deserves a standing ovation(link: Rated F for Failure).  Here are a few fantastic quotes:

"Why, more than a year into the crisis, do regulators and investors continue to rely on ratings? No one has been more wrong than Moody’s and S.&P. Less than a year ago both gave high ratings to 11 of the largest distressed financial institutions. They put the insurance giant A.I.G. in the AA category. They rated Lehman Brothers an A just a month before it collapsed. Until recently, the agencies maintained AAA ratings on thousands of nearly worthless subprime-related securities."


"The system is rife with conflicts of interest. The ratings agencies get a fortune from corporations to evaluate their bonds and naturally don’t want to bite the hand that feeds them. Nor do they want to admit a mistake or antagonize investors who might have to sell after a downgrade."


"The only way out of the trap is to reduce reliance on ratings. First, regulators should undo the regulation web they began creating during the 1930s. The Securities and Exchange Commission has called for eliminating reliance on ratings, but that proposal has stalled in the face of intense lobbying.

For their part, investors should stop putting ratings-related language into financial contracts. The terms of credit default swaps and other derivatives should be free of ratings-based triggers. Banking supervisors should insist that loan contracts not refer to ratings. Fund sponsors, pension plan administrators and insurance regulators should remove ratings-based criteria.

The financial markets can function without letter ratings. Instead of relying on arbitrary letters, regulators and investors should consider all of the information available about an investment, including market prices.

Finally, regulators and investors should return to the tool they used to assess credit risk before they began delegating responsibility to the credit rating agencies. That tool is called judgment."


I personally pay very little attention to what the official ratings agencies rate the bonds that I am interested in purchasing, and you should too.


2 Comments – Post Your Own

#1) On March 16, 2009 at 12:24 PM, 119862913 wrote:

 Used for extreme cancer pain in terminally ill patients. Comes in the form of a "lolly pop."

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#2) On March 16, 2009 at 4:49 PM, outoffocus (23.72) wrote:

What is the clearest evidence that the rating agencies are a fraud?: The US government AAA rating...

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