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News Criminality of bond rating agencies

  1. Jul 11, 2009 #1
    Can someone please tell me why the heads of the big Wall Street bond rating agencies haven't been charged yet? I don't even know if they're being investigated. We hear a lot about AIG and the banks, but not a lot about outfits like Moody's. I've called news organizations and I don't get good answers. Moody's is probably more responsible for the current economic debacle than any other single company. They rated toxic securitized assets as AAA, the highest possible rating. They knew these packages of mortgage debt were poisoned by risky mortgages, but turned a blind eye because they could be sold to banks and investors for big profits. If this isn't fraud, I don't know what is.
     
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  3. Jul 11, 2009 #2
    Blind eye? There was no blind eye, the risky mortgages were a part of the packages on purpose to please Fannie and Freddie, and the ratings simply reflected this. Is it the bond rater's fault that Fannie and Freddie insisted on packages containing risky mortgages? And the fact that packages without risky mortgages were harder to sell because Fannie and Freddie didn't want them? And they were the ultimate buyers for 80% of mortgages at one time?

    Should the bond raters have rated any package that Fannie and Freddie actually wanted (containing risky mortgages) poorly? Is it the job of the raters to undermine Fannie and Freddie's stated purpose of making it easier for people with bad credit or high debt to get mortgages by insisting on "bundling" them with good mortgages?
     
    Last edited by a moderator: Jul 11, 2009
  4. Jul 12, 2009 #3

    russ_watters

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    What is your basis for this claim?
     
  5. Jul 12, 2009 #4
    It's the business of Moody's, Standard and Poor and Fitch to establish the credit worthiness of securities issued by public and private entities. While AIG and the banks are hardly blameless, they've borne the brunt of pubic wrath and government scrutiny. They bought these securities because they were rated AAA. It's no secret that that risky mortgages were being written. This was public information in 2006. The packaged securities were deliberately created to resell the risky mortgages by bundling them with less risky debt. The institutions that ended up holding them thought they had AAA investments when in fact these ratings were bogus.
     
    Last edited: Jul 12, 2009
  6. Jul 12, 2009 #5
    It is the job of bond rating agencies make honest, professional and impartial assessments of credit worthiness. Millions of innocent workers have lost, are loosing and will continue to lose there jobs and livelihoods because these agencies didn't do their job, making huge profits in the process. And the Fannie and Freddy? They're partners in the crime. Making housing accessible to more people is a noble goal, but the simple fact is that corporate greed fueled this disaster. Certainly the people who were able to get risky loans didn't benefit. They've lost their homes.
     
    Last edited: Jul 12, 2009
  7. Jul 12, 2009 #6
    I certainly agree with you here. My point was that it would be difficult for the government to accuse a rating agency of criminal activity on the basis that they went along with the government entities (Fanny and Freddie). Like you said, they're partners in the crime. As far as greed goes, the demand for the bad mortgages was artificially created by government. It was their plan for banks to try to make a profit by issuing bad mortgages to sell to Fannie and Freddie.

    Some banks (including mine) refused to make these bad loans, and politicians accused them of wanting poor people to be homeless, etc. But these banks are still doing fine now, and aren't asking for any bailouts.

    The simple fact is that this problem was caused by government action via Fannie and Freddie. And every bank in the country should have told them to shove it, but they didn't. They caved to the demand for the bad mortgages created by government. But the root of the problem was Fannie and Freddie. They weren't just partners, they were the instigators and the driving force behind it.
     
  8. Jul 12, 2009 #7
    We have a new government now. The corruption of the Bush administration (Pitt at the SEC for one) is a whole other thread. F&F are government affiliated, but are organized and run like 'private' corporations. Their stock trades on NYSE. F&F at least are being investigated. The role of the bond rating agencies, however, is something else. They exist to rate bonds and other debt related securities. They're not bond traders. Their role is to provide information to guide investors. Without reliable rating agencies, the whole bond market (which is much bigger than the stock market) could collapse. If this happens, the entire world economy collapses. This is no exaggeration. It almost did in September, 2008. It's only being propped up by massive government expenditures which potentially endangers the credit worthiness of governments.
     
  9. Jul 12, 2009 #8

    russ_watters

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    What you haven't established is that Moody's intentionally misrated these securities. Perhaps the system was flawed? Improper ratings is not a new problem.
     
  10. Jul 12, 2009 #9

    Corporate greed stemmed from easy money from the FED and the implicit government 'guarantee' that everyone thought Fannie and Freddy and much of the large investment houses have/had. This is a government problem and continues to be one as we continue to bail out companies that are not fit to be in anything but bankruptcy. People love it on the way up, but we trade a large boom (bubble) for a long and drawn out painful recession/depression that everyone seems to think something has to be 'done' about it. Let the market work it out and we wouldn't have been in this mess, and it could have been averted long, long ago.
     
  11. Jul 12, 2009 #10
    It's certainly not for me, or any private citizen to know the intentions of professionals and corporate executives. We can judge the results of their activity based on publicly available information. There's no dearth of such information. It's for our legal and judicial system to decide what their intentions were. I'm asking if anyone knows if such process is going forward. There are any number of news reports including a PBS documentary about what exactly happened at Moody's. If you or loved one were injured or died from a misbranded drug, is it for you to determine the intentions of the drug company?
     
    Last edited: Jul 12, 2009
  12. Jul 12, 2009 #11
    That doesn't change the fact that there was a broad based systematic effort to help sell risky assets by bundling them with good assets, and then giving those assets unwarranted AAA ratings. I agree that corporate greed fueled the dynamics of this debacle.
     
    Last edited: Jul 12, 2009
  13. Jul 12, 2009 #12

    mheslep

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    Fraud is an intentional deception made for personal gain. What gain in particular do you believe Moody's or the other nationally recognized statistical rating organizations (NRSRO) made regarding mortgages? And while asking for ambiguous and unclear criminal charges, why not ask for the criminal charges against http://www.sec.gov/answers/nrsro.htm"
     
    Last edited by a moderator: Apr 24, 2017
  14. Jul 12, 2009 #13

    mheslep

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    Those are two different things: bundling and rating. The raters did not own any of the assets.
     
  15. Jul 12, 2009 #14

    mheslep

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    That's a government supported media outlet giving its take on how everybody but the government caused the credit crisis.
     
  16. Jul 12, 2009 #15
    Moody's ex-executives have already stated that they were pressured to set up a way of evaluating these securities, which they knew were tainted, so as to give them AAA ratings. As a result, Moody's took a lot new business from Standard and Poor's and Fitch. I really don't think there's much debate about this. A lot of details are known. Moody's made a lot of money from this. I already said the government during this period, 2005-2007 in particular, is a part of the problem.
     
    Last edited: Jul 12, 2009
  17. Jul 12, 2009 #16
    Right. PBS was a tool of the Bush Administration. Besides, how does this make the government look good given the abject failure of the SEC? You could also blame Congress, but most of them really don't really understand finance.
     
    Last edited: Jul 12, 2009
  18. Jul 12, 2009 #17

    mheslep

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    Then lets see some.
    The NRSRO laws were setup decades ago.
     
  19. Jul 12, 2009 #18
    No private corporation wanted to buy bad mortgages on purpose, except to sell to F&F. They're not run like private corps, they have a government mission.

    As far as a new government, the politicians that supported the idea of F&F creating demand for bad mortgages have more power now. Why do you think it's not being properly investigated?
     
  20. Jul 12, 2009 #19
    The mortgage ratings situation went much deeper than F&F. It involved billions of dollars in profits for the ratings agencies for helping to design the structured finance deals such as the CDO's



    Emphasis mine.

    http://www.realclearmarkets.com/articles/2009/03/drinking_the_rating_agencies_k.html
     
  21. Jul 12, 2009 #20

    Astronuc

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    It might be difficult to prove criminal intent. It might be easier to demonstrate negligence.

    It was known in 2007 through 3Q2008 that there were significant problems with the subprime mortgage industry and the plethora of derivatives based on securitized mortgage bundles.

    Subprime Mortgage Derivatives Extend Drop on Moody's Reviews (Feb 22, 2007)
    http://www.bloomberg.com/apps/news?pid=20601087&sid=avTR8S7Yr5Kw&refer=home [Broken]

    Ratings agencies 'put system at risk,' CEO says (Oct 22, 2008)
    Testimony shows watchdogs were 'Kool-Aid drinking' lapdogs
    http://www.marketwatch.com/story/ratings-agencies-put-system-at-risk-ceo-says

    An interesting overview with references
    Rating Agencies: Moody’s, S&P, and Fitch (REVISED VERSION)
    http://www.ritholtz.com/blog/2009/02/rating-agencies-moodys-sp-and-fitch-revised-version/


    Triple-A Failure (April 27, 2008)
    http://www.nytimes.com/2008/04/27/magazine/27Credit-t.html
     
    Last edited by a moderator: May 4, 2017
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