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Most things in this world are about making money. Credit reporting system works pretty well and it is evident by the fact that we have seen mortgage bubble bur

by tn13 10y ago

Most things in this world are about making money. Credit reporting system works pretty well and it is evident by the fact that we have seen mortgage bubble burst (where government forced banks to ignore credit ratings) and student loan bubble building up (ditto as housing loans). The marginal gain in making it more accurate is not very much so I am pretty sure banks will not put efforts in that direction. Also, banks don't care if 1 in 10000 get screwed up because of their mistake because there is plenty of more fish in the pond. But that is how the world works.

lreeves 10y ago
Can you elaborate on your point about government force? My understanding was that Moodys and S&P aggregated poorly rated mortgages and then gave arbitrarily high ratings as a whole. This of course created perverse incentives to sell mortgages to people with bad or no credit ratings whatsoever, as long as they could be repackaged and sold upwards.
sverige 10y ago
The error rate is far higher than 1 in 10000. More like 1 in 4, and 1 in 20 with serious errors. The credit rating idea was born out of the Southern morality culture. "Are they good people? Let's put a number on it and sell it!" The flip side of that is that they can't possibly be wrong unless you prove it, and even then, they're so butt hurt that you called them out on it that they'll take their time fixing it, if ever. The idea is that they're right, you're wrong, and they have powerful friends who protect them from being sued for slander.
sidlls 10y ago
> Credit reporting system works pretty well Citation needed. > (where government forced banks to ignore credit ratings) This is simply not true. The mortgage bubble burst when big investment and gambling/speculation institutions could no longer cover the shorts against mortgage bond derivatives and the incentive for packaging questionable mortgages into the underlyings disappeared. These mortgages weren't all (or even mostly) to poor people with no ability to pay, and the government didn't force anybody to do anything. These same banks paid ratings agencies to ignore the bad mortgages in these securities specifically so they could increase the volume of mortgage bond sales. So your example is actually one that shows that ratings agencies' products are not necessarily accurate (some might call them fraudulent, even).
jfoutz 10y ago
I've read a fair amount about the 2007 bubble, but i don't recall anything about this, > where government forced banks to ignore credit ratings I was under the impression that subprime was keenly aware of credit ratings, subprime is defined as failure to meet the Fannie May and Freddie Mac standards. The CRA excluded race and gender as loan criteria, leaving credit rating as the goto. There's lots about banks like countrywide ignoring credit rating, but i can't find anything where the government required ignoring the credit rating. Could you help me out with a link?

by tn13 10y ago

lreeves 10y ago

Can you elaborate on your point about government force? My understanding was that Moodys and S&P aggregated poorly rated mortgages and then gave arbitrarily high ratings as a whole. This of course created perverse incentives to sell mortgages to people with bad or no credit ratings whatsoever, as long as they could be repackaged and sold upwards.

sverige 10y ago

The error rate is far higher than 1 in 10000. More like 1 in 4, and 1 in 20 with serious errors. The credit rating idea was born out of the Southern morality culture. "Are they good people? Let's put a number on it and sell it!" The flip side of that is that they can't possibly be wrong unless you prove it, and even then, they're so butt hurt that you called them out on it that they'll take their time fixing it, if ever. The idea is that they're right, you're wrong, and they have powerful friends who protect them from being sued for slander.

sidlls 10y ago

> Credit reporting system works pretty well Citation needed. > (where government forced banks to ignore credit ratings) This is simply not true. The mortgage bubble burst when big investment and gambling/speculation institutions could no longer cover the shorts against mortgage bond derivatives and the incentive for packaging questionable mortgages into the underlyings disappeared. These mortgages weren't all (or even mostly) to poor people with no ability to pay, and the government didn't force anybody to do anything. These same banks paid ratings agencies to ignore the bad mortgages in these securities specifically so they could increase the volume of mortgage bond sales. So your example is actually one that shows that ratings agencies' products are not necessarily accurate (some might call them fraudulent, even).

jfoutz 10y ago

I've read a fair amount about the 2007 bubble, but i don't recall anything about this, > where government forced banks to ignore credit ratings I was under the impression that subprime was keenly aware of credit ratings, subprime is defined as failure to meet the Fannie May and Freddie Mac standards. The CRA excluded race and gender as loan criteria, leaving credit rating as the goto. There's lots about banks like countrywide ignoring credit rating, but i can't find anything where the government required ignoring the credit rating. Could you help me out with a link?