Monday, September 7, 2009

Credit Rating Agencies Took "Bribes" for Higher Ratings

I regard this post from Washington's Blog as one of the most depressing of this month. How could this happen and how could financially supervisory agencies in the USA let these rating agencies get away with this?

Is this the drug of too much money? Was everybody living in Nirvana?

The consequences of mismanagement by rating agencies in the US will be enormous: companies which do not deserve AAA+ ratings and got assistance from financial institutions should never have received this assistance.

The opposite is also true for (perhaps now bankrupt) companies which never received a good rating but were initially financially sound.

If this was allowed to go on for 20+ years than there is no hope for the financial world of the USA.

I read recently that the basis for the financial crisis is the uncompetitiveness of the US: well, even blue chip companies might be "junk", but are only kept alive by ratings...and junk companies could well be market leaders if rated correctly. We'll never know.

And it is now easy to predict that the USA will disintegrate because of a lack of trust, as follows: dollar index decline > lower living standards > increase in unemployment > stagflation > riots > elections > search for the strong man who can make a plan work > multi-trillion stimulus > dollar decline > etc......

The Higher The Rating; The Higher the Price

Washington's Blog

You may have heard how the big ratings agencies - Moody's, S&P and Fitch - "sold their soul" by rating toxic assets and mismanaged companies much more highly than they should have been rated.

But as the following discussion shows, the ratings agencies effectively took bribes for higher ratings, just like people who knowingly authenticate forged art so that they will earn a higher fee:

[Finance professor Ed] Kane: One has to remember that these are profit-making institutions. Issuers will would pay more money for a good rating than a bad one, and issuers are very clear what kind of ratings they want. This is a straight-forward way to pay bribes without ever violating the law, it appears, and the credit rating organizations do not take formal responsibility for their incompetence or negligence.

[Prolific financial journalist, Brookings Institution scholar, and the author of more than 30 books on financial market issues Martin] Mayer: One of the untold scandals of this country is that our museums are stuffed with fake old masters because the people who authenticated paintings for the Mellons and Morgans of this world were paid a percentage of the price for the authentication. If they said it was no good, they got a few hundred bucks. If they said it was great, they got $100,000. Same story in the credit-rating organizations.

[Former Federal Reserve attorney and economist Walker] Todd: Right. They also drop the ball. I've been around failing banks and financial crises since 1974, and the rating agencies have dropped the ball almost every time. They were always at best late to the party.

Mayer: John Heimann [former comptroller of the currency] used to say that the function of the ratings agency is to go on the battlefield after the battle is over and shoot the wounded.

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