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Now there's an understatement. It's a completely fraudulent industry. EDIT: It's also one that's ripe for a good and proper YC-unicorn style disruption. Hit me

by Mizza 7y ago

Now there's an understatement. It's a completely fraudulent industry. EDIT: It's also one that's ripe for a good and proper YC-unicorn style disruption. Hit me up if interested.

H8crilA 7y ago
How do you know that?
- Mizza 7y ago
  ..weren't you there for the crash? https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the... The article even spells it out - they haven't changed their business model since. Bank needs a rating on a asset, but their incentive is to get a "better" rating, not a more honest one. There are multiple agencies, so banks shop around for the most favorable one. So, as soon as one agency loosens their ratings, they all follow suit. They sell good ratings. That's the industry. Quote after quote: The Financial Crisis Inquiry Commission (FCIC)[39] set up by the US Congress and President to investigate the causes of the crisis, and publisher of the Financial Crisis Inquiry Report (FCIR), concluded that the "failures" of the Big Three rating agencies were "essential cogs in the wheel of financial destruction" and "key enablers of the financial meltdown" U.S. Securities and Exchange Commission Commissioner Kathleen Casey complained the ratings of the large rating agencies were "catastrophically misleading", yet the agencies "enjoyed their most profitable years ever during the past decade" while doing so.[41] The Economist magazine opined that "it is beyond argument that ratings agencies did a horrendous job evaluating mortgage-tied securities before the financial crisis hit."[42] According to columnist Floyd Norris at least one rating agency—S&P—responded to the credit crisis by first tightening up its standards and sacrificing market share to restore its reputation,[83] after which it loosened standards again "to get more business",[84] tripling its market share in the first half of 2013.[85] This is because, according to Norris, for rating franchises to be worth anything, they must seem to be credible to investors. But once they overcome that minimal hurdle, they will get more business if they are less critical than their competitors.[84] and on and on and on.
  - lonelappde 7y ago
    Its the same model as People Love Us on Yelp, Who's Who in X, and your local magazine's annual local business awards
  - H8crilA 7y ago
    I see. How do you choose bonds for your investment portfolio?
  - _jal 7y ago
    I still think ratings agencies, if their ratings are to be required, should have money where their mouth is. There are a number of ways this could work; one is they issue a contract redeemable for the difference between their predicted performance of a given company and the actual performance. If they're as good at this as they think, they get another revenue stream. If not, the victims of their conflicts of interest have some insurance.
  - Cactus2018 7y ago
    >Bank needs a rating on a asset, but their incentive is to get a "better" rating, not a more honest one. There are multiple agencies, so banks shop around for the most favorable one. So, as soon as one agency loosens their ratings, they all follow suit. They sell good ratings. That's the industry. Memorable scene from The Big Short (2015) - "FrontPoint Partners confronts S&P" https://www.youtube.com/watch?v=mwdo17GT6sg https://www.youtube.com/watch?v=mwdo17GT6sg
- dylan604 7y ago
  because all problems anywhere can be solved by tech from a start up out of Silicon Valley. Where else are people making the world a better place with their disruption? </snark>
plankers 7y ago
I'm struggling to envision how a tech disruption could work in this market. The essential problem seems to be an incentive system that's misaligned with investor incentives and overall economic health. How could a single company or group of companies alter a broken incentive system? It seems the two most salient options are (1) consolidation of competitors to reduce the race-to-the-bottom competition or (2) stricter regulation to prevent the kind of ratings shopping that debt issuers currently engage in. While I can see how a tech disruptor could potentially put all the other ratings agencies out of business and achieve (1), this seems like a tall order. And my uneducated gut-reaction to that scenario is "decreased competition bad," although I'm open to being proved wrong on that, as this does seem to be a case where competition has caused the problem (from the article: "One author, Colorado State University Finance Professor Sean Flynn, says “competition among credit-rating firms has, if anything, reduced the quality of credit ratings.”")

by Mizza 7y ago

Now there's an understatement. It's a completely fraudulent industry. EDIT: It's also one that's ripe for a good and proper YC-unicorn style disruption. Hit me up if interested.

H8crilA 7y ago

How do you know that?

Mizza 7y ago
..weren't you there for the crash? https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the... The article even spells it out - they haven't changed their business model since. Bank needs a rating on a asset, but their incentive is to get a "better" rating, not a more honest one. There are multiple agencies, so banks shop around for the most favorable one. So, as soon as one agency loosens their ratings, they all follow suit. They sell good ratings. That's the industry. Quote after quote: The Financial Crisis Inquiry Commission (FCIC)[39] set up by the US Congress and President to investigate the causes of the crisis, and publisher of the Financial Crisis Inquiry Report (FCIR), concluded that the "failures" of the Big Three rating agencies were "essential cogs in the wheel of financial destruction" and "key enablers of the financial meltdown" U.S. Securities and Exchange Commission Commissioner Kathleen Casey complained the ratings of the large rating agencies were "catastrophically misleading", yet the agencies "enjoyed their most profitable years ever during the past decade" while doing so.[41] The Economist magazine opined that "it is beyond argument that ratings agencies did a horrendous job evaluating mortgage-tied securities before the financial crisis hit."[42] According to columnist Floyd Norris at least one rating agency—S&P—responded to the credit crisis by first tightening up its standards and sacrificing market share to restore its reputation,[83] after which it loosened standards again "to get more business",[84] tripling its market share in the first half of 2013.[85] This is because, according to Norris, for rating franchises to be worth anything, they must seem to be credible to investors. But once they overcome that minimal hurdle, they will get more business if they are less critical than their competitors.[84] and on and on and on.
- lonelappde 7y ago
  Its the same model as People Love Us on Yelp, Who's Who in X, and your local magazine's annual local business awards
- H8crilA 7y ago
  I see. How do you choose bonds for your investment portfolio?
- _jal 7y ago
  I still think ratings agencies, if their ratings are to be required, should have money where their mouth is. There are a number of ways this could work; one is they issue a contract redeemable for the difference between their predicted performance of a given company and the actual performance. If they're as good at this as they think, they get another revenue stream. If not, the victims of their conflicts of interest have some insurance.
- Cactus2018 7y ago
  >Bank needs a rating on a asset, but their incentive is to get a "better" rating, not a more honest one. There are multiple agencies, so banks shop around for the most favorable one. So, as soon as one agency loosens their ratings, they all follow suit. They sell good ratings. That's the industry. Memorable scene from The Big Short (2015) - "FrontPoint Partners confronts S&P" https://www.youtube.com/watch?v=mwdo17GT6sg https://www.youtube.com/watch?v=mwdo17GT6sg
dylan604 7y ago
because all problems anywhere can be solved by tech from a start up out of Silicon Valley. Where else are people making the world a better place with their disruption? </snark>

plankers 7y ago

I'm struggling to envision how a tech disruption could work in this market. The essential problem seems to be an incentive system that's misaligned with investor incentives and overall economic health. How could a single company or group of companies alter a broken incentive system? It seems the two most salient options are (1) consolidation of competitors to reduce the race-to-the-bottom competition or (2) stricter regulation to prevent the kind of ratings shopping that debt issuers currently engage in. While I can see how a tech disruptor could potentially put all the other ratings agencies out of business and achieve (1), this seems like a tall order. And my uneducated gut-reaction to that scenario is "decreased competition bad," although I'm open to being proved wrong on that, as this does seem to be a case where competition has caused the problem (from the article: "One author, Colorado State University Finance Professor Sean Flynn, says “competition among credit-rating firms has, if anything, reduced the quality of credit ratings.”")