7 ms·

I wonder; is it not increasingly obvious that rating agencies are fraudulent by nature/rent-seekers writ large?

by phillmv 15y ago

positr0n 15y ago
Why do you say that? I'm not saying you're wrong I'm just genuinely curious since I don't know much about the subject.
- orofino 15y ago
  As the article states and as we found in the recession, there can't possibly be this many AAA rated organizations. I'll give an example at the risk of my memory failing and there being a difference in which exact organization it was: Days before they went bust, GMAC bonds were still AAA rated.
  - VladRussian 15y ago
    i guess people either understand "grading on the curve" or not :) Anyway, seems to be a business opportunity to start issue ratings for AAA papers, as obviously there is a lot of junk AAA out there.
    - orofino 15y ago
      The documentary "Inside Job" covers why and how the "grading on a curve" happened. I'd recommend it if you're at all interested in this stuff.
  - prostoalex 15y ago
    Aren't most corporate bonds insured by a third party?
    - justincormack 15y ago
      No that is not generally the case.
  - justincormack 15y ago
    Also, just the amount of issuance will in itself increase the risk, as interest payments are higher.
    - orofino 15y ago
      I don't believe that this inherently true. The market generally revoles around risk, additional returns are possible when taking more risk. Higher rates of issuance just mean that there is more availability and possibly drive the prices down due to supply. Now, a lower rating would result in a hirer interest, as lower ratings means higher risk (at least in theory, but what this article actually shows is that this isn't the case).
      - justincormack 15y ago
        Higher issuance means that the company has higher leverage, which means higher risk. This should of course cut ratings, but might not.
  - gtani 15y ago
    I believe that until about 1995 there were fewer than 5 bond issuers subject to Chapter 11 proceedings (strategic bankruptcies) that were AAA at the time of the Chapter 11 filing: Texaco and, I think, Manville the asbestos maker. There was also one AAA muni bond that defaulted. There were several cases where issuers like Lilco (Long Island Lighting) were rapidly downgraded from AAA to junk.
tptacek 15y ago
Maybe, but BRK and the US Treasury are meaningfully AAA. There is clearly a class of AAA risk that means something, and a (far larger) lower tier of AAA risk that merely rides the coattails.
- ChuckMcM 15y ago
  Guess we'll know whether or not US Treasuries are meaningfully AAA in the next couple of weeks :-)
- phillmv 15y ago
  Right. I think that overall that's correct - for all intents and purposes it's effectively impossible for the US Treasury to run out of dollars. But the way the incentives for agencies are set up makes me think we're begging to be lied to. Mind you, despite all this you can have a serious news piece of "someone from Moody's" claiming that they might be forced to lower the US' rating http://www.bbc.co.uk/news/business-14142621 http://www.bbc.co.uk/news/business-14142621 - which frankly just sounds all kinds of ridiculous.
  - mdda 15y ago
    Why ridiculous? The treasury cannot, by law, issue more than a certain amount of debt. The politicians may change the law - but that's a vote that's yet to have been taken. Once upon a time, it would have been unthinkable for Japan to have had a lower credit rating than AAA. Also, the US owes money in currencies other than $, which the Treasury doesn't have the power to print.
    - deleted 15y ago
      [deleted]
- Someone 15y ago
  The US Treasury is not, by definition, AAA. It can print money at will, but it cannot guarantee that that money will have value.
gaius 15y ago
There's nothing rent-seeking about it; anyone can start a ratings agency. All Moody's et al have is what we would now call "mindshare" . It's no more rent seeking than say the Met Office having a monopoly on weather forecasting...
- pessimizer 15y ago
  It's more than mindshare, it's also the fact that the ratings given by NRSROs ( http://en.wikipedia.org/wiki/Nationally_Recognized_Statistical_Rating_Organization http://en.wikipedia.org/wiki/Nationally_Recognized_Statistic... ) are often written into statutes. There are many massive funds that are restricted by legislation from investing money somewhere that Moody's has rated at lower than X, X often being AAA.

I wonder; is it not increasingly obvious that rating agencies are fraudulent by nature/rent-seekers writ large?

by phillmv 15y ago

I wonder; is it not increasingly obvious that rating agencies are fraudulent by nature/rent-seekers writ large?

positr0n 15y ago

Why do you say that? I'm not saying you're wrong I'm just genuinely curious since I don't know much about the subject.

orofino 15y ago
As the article states and as we found in the recession, there can't possibly be this many AAA rated organizations. I'll give an example at the risk of my memory failing and there being a difference in which exact organization it was: Days before they went bust, GMAC bonds were still AAA rated.
- VladRussian 15y ago
  i guess people either understand "grading on the curve" or not :) Anyway, seems to be a business opportunity to start issue ratings for AAA papers, as obviously there is a lot of junk AAA out there.
  - orofino 15y ago
    The documentary "Inside Job" covers why and how the "grading on a curve" happened. I'd recommend it if you're at all interested in this stuff.
- prostoalex 15y ago
  Aren't most corporate bonds insured by a third party?
  - justincormack 15y ago
    No that is not generally the case.
- justincormack 15y ago
  Also, just the amount of issuance will in itself increase the risk, as interest payments are higher.
  - orofino 15y ago
    I don't believe that this inherently true. The market generally revoles around risk, additional returns are possible when taking more risk. Higher rates of issuance just mean that there is more availability and possibly drive the prices down due to supply. Now, a lower rating would result in a hirer interest, as lower ratings means higher risk (at least in theory, but what this article actually shows is that this isn't the case).
    - justincormack 15y ago
      Higher issuance means that the company has higher leverage, which means higher risk. This should of course cut ratings, but might not.
- gtani 15y ago
  I believe that until about 1995 there were fewer than 5 bond issuers subject to Chapter 11 proceedings (strategic bankruptcies) that were AAA at the time of the Chapter 11 filing: Texaco and, I think, Manville the asbestos maker. There was also one AAA muni bond that defaulted. There were several cases where issuers like Lilco (Long Island Lighting) were rapidly downgraded from AAA to junk.

tptacek 15y ago

Maybe, but BRK and the US Treasury are meaningfully AAA. There is clearly a class of AAA risk that means something, and a (far larger) lower tier of AAA risk that merely rides the coattails.

ChuckMcM 15y ago
Guess we'll know whether or not US Treasuries are meaningfully AAA in the next couple of weeks :-)
phillmv 15y ago
Right. I think that overall that's correct - for all intents and purposes it's effectively impossible for the US Treasury to run out of dollars. But the way the incentives for agencies are set up makes me think we're begging to be lied to. Mind you, despite all this you can have a serious news piece of "someone from Moody's" claiming that they might be forced to lower the US' rating http://www.bbc.co.uk/news/business-14142621 http://www.bbc.co.uk/news/business-14142621 - which frankly just sounds all kinds of ridiculous.
- mdda 15y ago
  Why ridiculous? The treasury cannot, by law, issue more than a certain amount of debt. The politicians may change the law - but that's a vote that's yet to have been taken. Once upon a time, it would have been unthinkable for Japan to have had a lower credit rating than AAA. Also, the US owes money in currencies other than $, which the Treasury doesn't have the power to print.
  - deleted 15y ago
    [deleted]
Someone 15y ago
The US Treasury is not, by definition, AAA. It can print money at will, but it cannot guarantee that that money will have value.

gaius 15y ago

There's nothing rent-seeking about it; anyone can start a ratings agency. All Moody's et al have is what we would now call "mindshare" . It's no more rent seeking than say the Met Office having a monopoly on weather forecasting...

pessimizer 15y ago
It's more than mindshare, it's also the fact that the ratings given by NRSROs ( http://en.wikipedia.org/wiki/Nationally_Recognized_Statistical_Rating_Organization http://en.wikipedia.org/wiki/Nationally_Recognized_Statistic... ) are often written into statutes. There are many massive funds that are restricted by legislation from investing money somewhere that Moody's has rated at lower than X, X often being AAA.