The ones that never seem to get fined for their catalytic
role in selling dog meat bank loan tranches as AAA
securitised debt. Without them, the idea goes, the crisis
would not have happened, not forgetting the lying
bastard bankers who paid for the ratings whitewash.
The crowd, realising we don't live in a democracy of
any value, wants blood.
Enjoy some metaphorical bloodletting:
checkit: Ritholz
Why
the Ratings Agencies Deserve the Death Penalty
By
Barry Ritholtz - February 6th, 2013, 7:25AM
The
very belated Federal civil suit against Standard & Poors is based on one
very specific deal, with an extremely egregious email trail. Looking at the
entirety of the crisis, the Credit Rating Agencies (the properly blamed CRA)
were major players. Standard & Poor’s and Moody’s as well as the much smaller
Fitch ratings agencies all appear to be culpable for similar frauds.
Here
is what I accuse them of doing:
1.
Business Model: They shifted their business model from an
investor-pays-for-research to an underwriter-pays-for-ratings. Normally, any
company is free to change their business model. But the major ratings are not
just any business — these firms were all “Nationally Recognized Statistical
Rating Organization” (NRSRO) — which the SEC allows other firms to rely on for
regulatory purposes.
2.
Ratings that were fraudulent: There is overwhelming proof that the ratings
agencies knew what they were cranking out misrepresented the quality of the
underlying bundles of paper. They did this because they were paid by the
underwriters to generate an investment grade rating. THAT WAS THE SOLE PURPOSE
OF THE RATING AGENCIES. Hence, why they were called the “great enablers of the
credit crisis” by the likes of Joseph Stiglitz and the FCIC.
3.
Ratings Based on Bad Assumptions: “Home prices never go down” is the silly
excuse we have heard over and over again — except for the many, many examples
that disprove this (Great Depression being the most prominent). That false
assumption / limited data set allowed the rating agencys’ models to reach an
investment grade, A rating. If they actually built in the possibility of lower
home prices, and you cannot get the same ratings out of subprime mortgage
securitizations. S&P may want to plead Stupidity, and I suspect the
prosecution will defer — but stupidity does not present a shield to civil
liability.
4.
Ratings that were not rated: The sheer volume of mortages moving through ther
system overwhelmed everyone. Reports of securitized bundles of mortgages —
unreviewed, unscrutinized, unanalyzed — yet nonetheless still managed to receive
a AAA rating.
There
are more examples, but let me simplify this for you: In an ultra low rate
environment, Fixed income managers were under tremendous pressure to find
yield. Their solution was to buy paper
that was rated investment grade by the major credit ratings agencies EVEN
THOUGH THEY KNEW OR SHOULD HAVE KNOWN IT WAS NOT. The agencies rated junk paper
as AAA not because they believed it, but because they were paid to do so.
Had
they not engaged in this sort of fraud, an enormous amount of securitizations
of junk paper COULD NOT HAVE HAPPENED. There was no market for non-investment
grade subprime paper. That many less
CMOs means that many less RMBS means that many less junk mortgages
underwritten.
I do
not want to excuse the bad purchase decisions made by the buyers of this junk —
they clearly violated one of the first rules of investments: Know what you own.
However, the complexity of these products required they use third party
analysts and agencies to facilitate the purchase decision. That is why the bad
pourchases is merely lousy investing but the payola-like ratings are actual
fraud.
It
started with the Greenspan Fed, but the next group in our Calvacade of Blame
are the rating agencies.
If
Arthur Anderson received the ultimate penalty for their part in the Enron and
other fraud, I see no reason why Moody’s and S&P don’t suffer the same fate
— plus criminal prosecution for senior management.
Its
time to re-establish the rule of law in this country.
