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This article has to be founded by some pro-banking group. The article completely misses the part where the ratings agencies were incapable of reviewing capitali

This article has to be founded by some pro-banking group. The article completely misses the part where the ratings agencies were incapable of reviewing capitalized mortgage pools to rate them appropriately. Regardless of the balance of prime to sub-prime, the inherent falsehoods within the ratings returned from Moody's, Standard & Poor, and Fitch are what made our financial system "untrustworthy" and that's what led to the financial crisis.

CryptoPunk 9y ago
Maybe ratings agencies would do their job and refuse to rate things they can't see into if they were actually competition in the ratings sector, instead of a monopoly by the three ratings agencies, enshrined into law with regulations. Much of the ratings sector is for all intents and purposes impossible for any outside firm to compete in, because of government regulations that are supposed to ensure high quality ratings. As it happens, the ratings agencies have some of the highest profit margins in the market, which is a classic sign of lack of competition, and rent-seeking.
- klenwell 9y ago
  Funny you suggest market competition. In The Big Short movie, it's competition that the ratings agency rep played Melissa Leo cites to explain their corrupt ratings: Georgia: If we don't give them the rating, they go to Moody's. Right down the street. If we don't work with them, they will go to our competitors. Not our fault. Simply the way the world works. Vinnie: Holy shit. Georgia: Yes, now you see. And I never said that. https://www.youtube.com/watch?v=mwdo17GT6sg&feature=youtu.be&t=3m18s https://www.youtube.com/watch?v=mwdo17GT6sg&feature=youtu.be...
  - CryptoPunk 9y ago
    At the micro level, that could very well be, but at the macro level, competition for reputation should create a business interest in not giving out inaccurate ratings. When the entire market is dominated by three agencies (two alone have 80% of the market), with the US government considering ratings given by them alone as sufficient for approval for certain listings, then regulatory management of the industry has effectively replaced reputational competition as the primary driver of quality.
    - ChicagoDave 9y ago
      I don't think you understand how this works in real life. I worked in the treasury department of a large bank 12 years ago and saw first hand... 1. mortgages are pooled, usually around 10,000 per pool. 2. the pool is divided up into tranches by the bank. This means that out of 10k loans, x% are supposedly AAA, y% are AA, and so on down to junk ratings (usually a small portion of the pool). 3. the bank has their treasury department "validate" the tranches, but this is really just "spot checking" and not fully investigating the details of every single mortgage and its associated paperwork 4. the bank sends the pool to the ratings agency 5. the ratings agency sends it back approved, never even spot checking whether the bank's review was accurate or not 6. the bank creates "securities" or "paper" based on the tranches 7. investment entities purchase the paper...this is usually municipal bonds and other organizations expecting the AAA rating to be a "guarantee" (though it's really a gamble) So ... in 2008 when the financial industry figured out that years of securities with false AAA ratings had been sold throughout the world, well, we know what happened... None of this has changed except they expect the banks to maintain enough cash to handle any wobbliness in the financial markets....but the core problems still exist and has nothing to do with prime or sub-prime mortgages.... It's about accurate and clear information and an industry that literally banks on the lack thereof...
- tome 9y ago
  > a monopoly by the three ratings agencies
  - CryptoPunk 9y ago
    *oligopoly

CryptoPunk 9y ago

Maybe ratings agencies would do their job and refuse to rate things they can't see into if they were actually competition in the ratings sector, instead of a monopoly by the three ratings agencies, enshrined into law with regulations. Much of the ratings sector is for all intents and purposes impossible for any outside firm to compete in, because of government regulations that are supposed to ensure high quality ratings. As it happens, the ratings agencies have some of the highest profit margins in the market, which is a classic sign of lack of competition, and rent-seeking.

klenwell 9y ago
Funny you suggest market competition. In The Big Short movie, it's competition that the ratings agency rep played Melissa Leo cites to explain their corrupt ratings: Georgia: If we don't give them the rating, they go to Moody's. Right down the street. If we don't work with them, they will go to our competitors. Not our fault. Simply the way the world works. Vinnie: Holy shit. Georgia: Yes, now you see. And I never said that. https://www.youtube.com/watch?v=mwdo17GT6sg&feature=youtu.be&t=3m18s https://www.youtube.com/watch?v=mwdo17GT6sg&feature=youtu.be...
- CryptoPunk 9y ago
  At the micro level, that could very well be, but at the macro level, competition for reputation should create a business interest in not giving out inaccurate ratings. When the entire market is dominated by three agencies (two alone have 80% of the market), with the US government considering ratings given by them alone as sufficient for approval for certain listings, then regulatory management of the industry has effectively replaced reputational competition as the primary driver of quality.
  - ChicagoDave 9y ago
    I don't think you understand how this works in real life. I worked in the treasury department of a large bank 12 years ago and saw first hand... 1. mortgages are pooled, usually around 10,000 per pool. 2. the pool is divided up into tranches by the bank. This means that out of 10k loans, x% are supposedly AAA, y% are AA, and so on down to junk ratings (usually a small portion of the pool). 3. the bank has their treasury department "validate" the tranches, but this is really just "spot checking" and not fully investigating the details of every single mortgage and its associated paperwork 4. the bank sends the pool to the ratings agency 5. the ratings agency sends it back approved, never even spot checking whether the bank's review was accurate or not 6. the bank creates "securities" or "paper" based on the tranches 7. investment entities purchase the paper...this is usually municipal bonds and other organizations expecting the AAA rating to be a "guarantee" (though it's really a gamble) So ... in 2008 when the financial industry figured out that years of securities with false AAA ratings had been sold throughout the world, well, we know what happened... None of this has changed except they expect the banks to maintain enough cash to handle any wobbliness in the financial markets....but the core problems still exist and has nothing to do with prime or sub-prime mortgages.... It's about accurate and clear information and an industry that literally banks on the lack thereof...
tome 9y ago
> a monopoly by the three ratings agencies
- CryptoPunk 9y ago
  *oligopoly