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Hrm -- I'd love to be enlightened! I didn't word it very well, but my questions are primarily: What oversight is there on the ratings agencies themselves? How

Hrm -- I'd love to be enlightened! I didn't word it very well, but my questions are primarily: What oversight is there on the ratings agencies themselves? How do we know the distribution of scores is the same today as 10 years ago (and proportionate to credit-worthiness)? Is there anything that prevents credit-ratings companies from under/over valuing the credit-worthiness for large swaths of the population? Is there historic data available to correlate "consumer credit score" to distressed notes -- and can that be done in a forward-looking manner, to exclude credit score 'fudging' as a factor, and to better be able to know that it's apples-to-apples comparison historically speaking. Otherwise, could it not simply be that borrowers previously known as higher-quality borrowers are simply being rated more poorly/cautiously, for instance? I'm not saying that is the case, but I've always felt that the incentives seemed strange. Are credit rating agencies paid (by lenders) based upon their prediction accuracy?

kasey_junk 7y ago
The lenders themselves spend a lot of effort on making sure that the credit ratings are good signals. When your business is extending credit (typically very low margin) you walk a very fine line between being overly permissive in lending and not lending enough. Minor movements of that line can be the difference between profitability and not. If a ratings agencies algorithm was shown to be changing to be too aggressive (either historically or against its peers) the lenders will dial back its importance in their own decisions. In the extreme to the point of not paying for it anymore. This internal competition does a pretty good job of making sure the algos represent the current state of the world. There is a question of about this system causing future systemic risk to be underpriced because no one is incentivized to investigate it fully and add it to their algorithm.

kasey_junk 7y ago

The lenders themselves spend a lot of effort on making sure that the credit ratings are good signals. When your business is extending credit (typically very low margin) you walk a very fine line between being overly permissive in lending and not lending enough. Minor movements of that line can be the difference between profitability and not. If a ratings agencies algorithm was shown to be changing to be too aggressive (either historically or against its peers) the lenders will dial back its importance in their own decisions. In the extreme to the point of not paying for it anymore. This internal competition does a pretty good job of making sure the algos represent the current state of the world. There is a question of about this system causing future systemic risk to be underpriced because no one is incentivized to investigate it fully and add it to their algorithm.