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Amen Barry Ritholtz, Amen

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April 27, 2011 – Comments (2)

“If ever there was an organization more corrupt, incompetent, and less capable of issuing an intelligent analysis on debt than S&P, I am unaware of them. Why do I write this? A huge part of the reason the US is in its awful financial position is due to the fine work of S&P. Consider what Nobel Laureate Joseph Stiglitz, economics professor at Columbia University observed:

‘I view the ratings agencies as one of the key culprits. They were the party that performed that alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies.’

Hence, the ‘negative outlook’ of US debt has come aboutbecause the inability of Standard & Poor’s to have performed their jobs rating mortgage backed securities. Ultimately, this enabled the entire crisis, financial collapse, enormous budget deficit and now political (debate) over the debt ceiling. Of course there is a negative future outlook. It’s in large part the work product of S&P and Moody’s. Why we even have Nationally Recognized Statistical Rating Organizations any longer following their payola driven corruption, their gross incompetency, and their inability to discharge their basic duties is beyond my understanding.”

2 Comments – Post Your Own

#1) On April 27, 2011 at 10:26 PM, sajahmeoli (65.91) wrote:

One is reminded of the old saw that "power corrupts." The ratings agencies have traditionally held remarkable power and have not been held to account for how that power has been excercised.

Is it at all practical to desire that these agencies would either remarkably change their approaches to rating or that they would be replaced by other organizations which could provide us with honest assessments? I suppose some digging on my part is in order, but I confess that I do not even know the genesis of S&P's (or Moody's) role as a rating agency. Were they elected or appointed? :)

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#2) On April 28, 2011 at 1:34 PM, leohaas (32.35) wrote:

The solution is simple.

In the current world, the issuer of debt pays Moody's to obtain a rating on that debt. And if said issuer does not like the rating it gets from Moody's, it will not pay them and go to a competitor. Consequently, raters always rate debt the way the issuer expects it to be rated.

When raters first started their businesses, potential buyers of debt paid the raters for their opinons. Guess whose side the raters were on when that was the case...

So raters need to return to a business model in which the potential buyers of debt pay for the rating, rather than the issuers. Until that happens, paying attention to ratings is a waste of time.

PS.  That probably means the regulations around required ratings must go!

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