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The agencies' ratings are essentially protected by the First Amendment, as the rating represents the agency's opinion on whichever security offering. Fraud isn
by solatic 9y ago
The agencies' ratings are essentially protected by the First Amendment, as the rating represents the agency's opinion on whichever security offering.
Fraud isn't purchasing a house that's advertised as "clean" only to discover that there was asbestos in the basement. Fraud is advertising as such after a legal definition for the word "clean" has been established to include "asbestos-free" and yet the house has asbestos anyway.
There aren't any strict legal definitions for what "BB" and "BBB" and "A" and etc. mean, and that's why the ratings agencies could rate them as AAA, because the subjective expectation (as unfounded as it was) was for the housing market to keep booming forever, which was enough to slap a AAA rating without it being fraudulent.
(note I'm not trying to excuse or justify the ratings agencies behavior, only to explain)
- acornax 9y agoIt's a bit more complicated too - rather than the AAA ratings being completed unfounded, they often seemed to have justification (at least on the surface), as various kinds of CDOs were typically packaged with insurance baked in, to make them appear less risky to the ratings agencies' models. One big problem ended up being that a lot of those insurance payouts were theoretical, as the entity on the other end (often ultimately AIG) didn't have have the money to pay out when so many mortgages were defaulting. But, yeah. The agencies didn't really have much incentive to be skeptical of their models.