Ratings Agencies' Role

Wednesday, June 02, 2010

Andrew Ross Sorkin, columnist and financial reporter for The New York Times, discusses the Financial Crisis Inquiry Commission's focus on ratings agencies in today's hearings, featuring Warren Buffet.



Andrew Ross Sorkin

Comments [13]

Jim Walker from New York City

Warren Buffet rightly says an asset is worth what someone is willing to pay for it. So here is a real example of how wrong the credit rating system is. Moody's has a top rating on Harrisburg, PA's incinerator bonds -which are now financial default. Its confusing to say the least how Moody’s and S&P have defaulted bonds top rated at AA3 and AAA? The bonds are insured but Harrisburg has real budget problems that dont jive with a top credit rating. If the bonds trade at $.25 on the dollar, then how can they still be AAA rated?

Curious to see what a real bond default notice looks like? Here is the Harrisburg default notice.

The Senate bill outlines a plan for the credit rating industry to be deregulated, perhaps best into a blended solution of legacy and non regulated ratings firms. In this way the market can innovate by encouraging bond buyers to conduct their own research or think creatively about outsourcing that job, instead of reflexively relying on S.& P., Moody’s and Fitch.

What does that mean? History clearly shows that markets have the intelligence to predict bad news thru market price based rating systems. To see Market Ratings for your muni bonds go to, a free analysis tools for muni bond investors.

Good Luck

Jim Walker

Jun. 04 2010 09:58 AM
Edward Dean Weinberger from Manhattan

I was the caller ("Ed from Manhattan") that had written a structuring spreadsheet for sub-prime mortgage backed securities, the derivatives that melted down the worst. As a result, I had to have a detailed knowledge of the rating agency models for these securities. I was, at the same time, teaching credit risk at what is now the Polytechnic Institute of New York University, so I was able to form an independent opinion of the quality of these models. There was no doubt in my mind that these calculations were merely an empty exercise, make-work that could be used as an excuse to charge a fee. Unfortunately, since I was not high on the food chain, I realized at the time that there was little that I could do about it.

Nor, after a bit of thought, did I think that there was all that much that needed to be done. I thought that, while these securities did not deserve the absolute best rating, they were probably still investment grade and therefore socially useful. The flaw in the models was also the flaw in my intuition: I did not realize the importance of a proper model of "default correlation", the increased likelihood that one mortgage would become delinquent, given that others already had.

In fact, default correlation was far higher than anybody realized, if only because everyone was betting on house prices continuing to appreciate. Either that would turn out to be true or it wouldn't; either way, the correlation is near 100%

Meanwhile, even while Moody's was collecting huge fees from rating my employer's securities with their inadequate model, they were in the process of developing another model that did a much more reasonable job of including default correlation. This tells to me that they KNEW that their methodology was inadequate, yet they were collecting huge fees from its use anyway.

Nor do I buy the "rating shopping" accusation. Usually, a deal was rated by more than one agency; if not, it was only because the rating was too expensive!

Jun. 02 2010 03:43 PM

There is also the feature length documentary "American Casino" —

Andrew Ross Sorkin is playing it safe. Interviews in all three of the docs I've mentioned make it clear that Moody's and S&P knew full well what they were doing.

They were part of a long con.

Jun. 02 2010 10:24 AM
Robert from NYU

He keeps saying "to be fair" ! WHY be fair? Why? Is the whole system fair? As I was taught years ago, "fair is for kids" we don't need him to be fair. He's making and giving these sleaze bags excuses. We've become the wimpy society, the forgiving victims. Baloney!! Let's put our collective foot down and stop the criminal and immoral behavior thrown at us day after day.

Jun. 02 2010 10:22 AM
norman from NYC

Why should anyone apologize for Saturday Night Live?

TV comedy -- The Daily Show -- has the best journalism anywhere today.

Jon Stewart is a tougher, better-prepared interviewer than Brian Lehrer.

Just compare their interviews of Betsy McCaughey.

Jun. 02 2010 10:22 AM
Stephen from Brooklyn

Regarding Senator Fraken's idea, for the record, that is how Early Intervention works in New York. A parent can call 311 and say, “I think my two year old needs speech therapy”, and the EI program (i.e. government) refers that parent to an agency (some profit, some not-for-profit).

So, it can be done.

Jun. 02 2010 10:22 AM

There were at least two Frontline documentaries that included extensive analysis of the role of the ratings agencies:

"The Warning"

and "Inside the Meltdown"

Jun. 02 2010 10:19 AM
DSal from NYC

Why should there be free market competition in the raitings industry? Do we have that for Automobile or consumer safety?

Jun. 02 2010 10:19 AM
Robert from NYC

Well then he supported the way these agencies did business of he invests based on the way they do business. That was not only a cop-out it was a left hook.

Jun. 02 2010 10:14 AM

Several PBS programs have examined the problem of the ratings agencies - NOW (cancelled by PBS), Bill Moyers Journal (ended with the retirement of Moyers), and Frontline (safe until Meacham arrives).

The ratings agencies sound like the Department of Buildings in New York -- except that it costs more than $500 for the inspector to give you a pass.

Buffett, meanwhile, has sounded as corrupt as he has ever sounded -- so much so that it casts doubt on everything he's done for the past 40 years.

Jun. 02 2010 10:12 AM
Robert from NYC

We do pay the judges salaries don't we? We pay taxes right? Isn't that how judges get paid!

Jun. 02 2010 10:10 AM

you sure do get what you pay for!
oil, banks, bridges, thanks to reagan nothing can be regulated less it costs a job,

infrastructure falling down.falling down.

Jun. 02 2010 09:55 AM

in 2002 the rating agencies were squarely blamed for incompetence, corruption and unprofessionalism. SEC held hearings ( ) Were they punished and/or changed?

Also, I had expected a flood of worldly "qualitative analysts" to set up a new industry to help contextualize and legitimize quants to the raters and themselves. Anything there?

Jun. 02 2010 09:07 AM

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