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For Moody's or any other agency, do they have any real insight on credit worthiness? I would have just assumed that if you're another big financial institution

by awongh 1y ago

For Moody's or any other agency, do they have any real insight on credit worthiness? I would have just assumed that if you're another big financial institution you're doing your own research. Is it that orgs below a certain size need these people to help tell them what's going on? I would have also assumed anyone who holds an important amount of US treasuries does their own research and doesn't need to listen to any of these agencies? What actual value do they provide? (esp. in light of the housing crisis proving they weren't providing any value at all?)

SOLAR_FIELDS 1y ago
Indeed, these were the same people that were reporting A+ on junk bonds back then, weren't they? Why are they even still around? https://www.theguardian.com/business/2017/jan/14/moodys-864m-penalty-for-ratings-in-run-up-to-2008-financial-crisis https://www.theguardian.com/business/2017/jan/14/moodys-864m...
- buckle8017 1y ago
  They are indeed, Moody's ratings are Junk Ratings.
- aprilthird2021 1y ago
  There's a huge trend here, and in general comment sections online, where if you made a mistake, even a catastrophic one, then as an organization you are useless. Moody's has been in this game a long time, I'm sure they're not perfect, but also being wrong once doesn't mean you're always wrong. Doesn't anyone here think the US recent economic instability merits a reduction in credit rating? We have a massive amount of debt (we borrowed to pay something like $800 billion in interest on our debt last year) and are essentially betting on our rocketship economy to offset our enormous debt in the future. The latest economic turmoil does cast a bit of doubt on that ability to pay off this huge debt later on no? I mean, isn't that a reasonable conclusion, regardless of whether you hate Moody's or think they are stupid?
  - awongh 1y ago
    I mean everyone has opinions, but isn't it actually verifiable that in aggregate Moody's gives accurate ratings (not just for US treasuries)? If not, why would anyone use them?
    - lotsofpulp 1y ago
      “Cover your ass” as a service. For example, when all those taxpayer funded defined benefit pensions invested in risky subprime mortgages, they can throw their hands up and say “but the credit rating agencies said they were well rated”. Of course, they were kind of right because a federal government bailout was waiting in the wings.
- astral_drama 1y ago
  Moody’s isn’t taking a radical position. They’re adjusting to a consensus position rather than being an outlier. It’s no secret the USA fiscal path is unsustainable, the Fed has said the same.
- JumpCrisscross 1y ago
  > these were the same people that were reporting A+ on junk bonds back then, weren't they? Fun fact: those AAA securities paid out. We have obvious endogeneity issues with the bailouts. But the evidence is strong that even absent the bailouts, those senior tranches would pay out. The problem was that most AAA securities are both highly solvent and high liquid. But these proved solvent but illiquid. That caused issues when their owners tried to dump them. But Moody’s rated solvency, not liquidity.
  - pinkmuffinere 1y ago
    Wow this is a fun fact, and you seem to have a lot of knowledge in this space! Where could I learn more about this?
    - JumpCrisscross 1y ago
      https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3159552 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3159552 It was honestly a shocking finding at the time. But loss ratios (2.3%) were just within historic norms for what someone buying something rated AAA would expect [1], and to my knowledge, the losses presented as restructurings not outright defaults as is commonly imagined in popular retelling of the financial crisis. [1] https://www.federalreserve.gov/publications/april-2021-dodd-frank-act-supervisory-stress-test-methodology-modeled-loss-rates.htm https://www.federalreserve.gov/publications/april-2021-dodd-...
      - pinkmuffinere 1y ago
        Wow this is truly amazing. Unfortunately I suspect this will never become common knowledge, the conventional narrative just "feels" so correct. Thanks for the link!
nine_zeros 1y ago
> What actual value do they provide? (esp. in light of the housing crisis proving they weren't providing any value at all?) A significant amount of retail and institutional investment still use these ratings as a guiding indicator. Not everyone does due diligence. If you have ever worked for a corporation, you know that they love cutting corners. And one corner they'd happily cut is time on due diligence - even if it causes a crash later on. It is not a problem for this quarter.
- kortilla 1y ago
  Who though? Institutional would never defer to just these agencies
  - mint2 1y ago
    There’s actually a ton of places that rely on those ratings - like insurance companies need at least a certain rating in order to write in certain states.
- awongh 1y ago
  Another way to ask the question is how wrong would they have to get it before people stopped relying on them? The interesting aspect to me is that they are not a government department- they make these ratings as part of a profitable business model. It's not like they keep chugging along no matter what. It just seemed like that during the housing crisis the businesses seen to be putting their "ok" stamp on everything would have been the first to go down.
- akoboldfrying 1y ago
  >Not everyone does due diligence. I don't think it makes sense for every single person or company considering investing in Company XYZ to do their own, separate due diligence on XYZ. The information they each would uncover is the same. It's a lot more efficient to pay a ratings agency to rate XYZ once. The tricky part is getting the incentives right so that the ratings the ratings agency produces are accurate. (There already is a reputational risk incentive pushing towards doing this the right way, but as we saw in 2008, there are other incentives pushing the other way, and they might often be stronger.)
djoldman 1y ago
They are grandfathered in as an oligopoly because by law many large funds are prohibited from investing in securities below a certain credit rating. Additionally, if you are on the other end (the one getting the rating), you pay the credit agencies for a rating so that buyers of debt will buy it. It's basically required that you have a rating if you want to issue debt. It's a racket in some ways with a ton of bad incentives and inefficiency. Kind of like a lot of things.
JumpCrisscross 1y ago
> do they have any real insight on credit worthiness? Yes. You can look at default rates by initial and proximate rating and see clear information. > in light of the housing crisis proving they weren't providing any value at all? Name me one AAA-rated security that defaulted. They were downgraded. They lost paper value. But to my knowledge, they didn’t default. (Those who held them did well [1].) [1] https://www.nber.org/digest/aug18/evaluating-role-credit-ratings-2008-crisis https://www.nber.org/digest/aug18/evaluating-role-credit-rat...
everybodyknows 1y ago
> anyone who holds an important amount of US treasuries does their own research Public pension funds are notoriously incompetent at such analysis.

by awongh 1y ago

SOLAR_FIELDS 1y ago

Indeed, these were the same people that were reporting A+ on junk bonds back then, weren't they? Why are they even still around? https://www.theguardian.com/business/2017/jan/14/moodys-864m-penalty-for-ratings-in-run-up-to-2008-financial-crisis https://www.theguardian.com/business/2017/jan/14/moodys-864m...

buckle8017 1y ago
They are indeed, Moody's ratings are Junk Ratings.
aprilthird2021 1y ago
There's a huge trend here, and in general comment sections online, where if you made a mistake, even a catastrophic one, then as an organization you are useless. Moody's has been in this game a long time, I'm sure they're not perfect, but also being wrong once doesn't mean you're always wrong. Doesn't anyone here think the US recent economic instability merits a reduction in credit rating? We have a massive amount of debt (we borrowed to pay something like $800 billion in interest on our debt last year) and are essentially betting on our rocketship economy to offset our enormous debt in the future. The latest economic turmoil does cast a bit of doubt on that ability to pay off this huge debt later on no? I mean, isn't that a reasonable conclusion, regardless of whether you hate Moody's or think they are stupid?
- awongh 1y ago
  I mean everyone has opinions, but isn't it actually verifiable that in aggregate Moody's gives accurate ratings (not just for US treasuries)? If not, why would anyone use them?
  - lotsofpulp 1y ago
    “Cover your ass” as a service. For example, when all those taxpayer funded defined benefit pensions invested in risky subprime mortgages, they can throw their hands up and say “but the credit rating agencies said they were well rated”. Of course, they were kind of right because a federal government bailout was waiting in the wings.
astral_drama 1y ago
Moody’s isn’t taking a radical position. They’re adjusting to a consensus position rather than being an outlier. It’s no secret the USA fiscal path is unsustainable, the Fed has said the same.
JumpCrisscross 1y ago
> these were the same people that were reporting A+ on junk bonds back then, weren't they? Fun fact: those AAA securities paid out. We have obvious endogeneity issues with the bailouts. But the evidence is strong that even absent the bailouts, those senior tranches would pay out. The problem was that most AAA securities are both highly solvent and high liquid. But these proved solvent but illiquid. That caused issues when their owners tried to dump them. But Moody’s rated solvency, not liquidity.
- pinkmuffinere 1y ago
  Wow this is a fun fact, and you seem to have a lot of knowledge in this space! Where could I learn more about this?
  - JumpCrisscross 1y ago
    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3159552 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3159552 It was honestly a shocking finding at the time. But loss ratios (2.3%) were just within historic norms for what someone buying something rated AAA would expect [1], and to my knowledge, the losses presented as restructurings not outright defaults as is commonly imagined in popular retelling of the financial crisis. [1] https://www.federalreserve.gov/publications/april-2021-dodd-frank-act-supervisory-stress-test-methodology-modeled-loss-rates.htm https://www.federalreserve.gov/publications/april-2021-dodd-...
    - pinkmuffinere 1y ago
      Wow this is truly amazing. Unfortunately I suspect this will never become common knowledge, the conventional narrative just "feels" so correct. Thanks for the link!

nine_zeros 1y ago

> What actual value do they provide? (esp. in light of the housing crisis proving they weren't providing any value at all?) A significant amount of retail and institutional investment still use these ratings as a guiding indicator. Not everyone does due diligence. If you have ever worked for a corporation, you know that they love cutting corners. And one corner they'd happily cut is time on due diligence - even if it causes a crash later on. It is not a problem for this quarter.

kortilla 1y ago
Who though? Institutional would never defer to just these agencies
- mint2 1y ago
  There’s actually a ton of places that rely on those ratings - like insurance companies need at least a certain rating in order to write in certain states.
awongh 1y ago
Another way to ask the question is how wrong would they have to get it before people stopped relying on them? The interesting aspect to me is that they are not a government department- they make these ratings as part of a profitable business model. It's not like they keep chugging along no matter what. It just seemed like that during the housing crisis the businesses seen to be putting their "ok" stamp on everything would have been the first to go down.
akoboldfrying 1y ago
>Not everyone does due diligence. I don't think it makes sense for every single person or company considering investing in Company XYZ to do their own, separate due diligence on XYZ. The information they each would uncover is the same. It's a lot more efficient to pay a ratings agency to rate XYZ once. The tricky part is getting the incentives right so that the ratings the ratings agency produces are accurate. (There already is a reputational risk incentive pushing towards doing this the right way, but as we saw in 2008, there are other incentives pushing the other way, and they might often be stronger.)

djoldman 1y ago

They are grandfathered in as an oligopoly because by law many large funds are prohibited from investing in securities below a certain credit rating. Additionally, if you are on the other end (the one getting the rating), you pay the credit agencies for a rating so that buyers of debt will buy it. It's basically required that you have a rating if you want to issue debt. It's a racket in some ways with a ton of bad incentives and inefficiency. Kind of like a lot of things.

JumpCrisscross 1y ago

> do they have any real insight on credit worthiness? Yes. You can look at default rates by initial and proximate rating and see clear information. > in light of the housing crisis proving they weren't providing any value at all? Name me one AAA-rated security that defaulted. They were downgraded. They lost paper value. But to my knowledge, they didn’t default. (Those who held them did well [1].) [1] https://www.nber.org/digest/aug18/evaluating-role-credit-ratings-2008-crisis https://www.nber.org/digest/aug18/evaluating-role-credit-rat...

everybodyknows 1y ago

> anyone who holds an important amount of US treasuries does their own research Public pension funds are notoriously incompetent at such analysis.