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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 rat

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...

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...