Tuesday, September 8, 2009

Credit ratings incentive-based. Surprised?

It has been pretty obvious that subjective credit ratings offer little real confidence, they simply lag behind markets. Now the plot has thickened, and appears more than simply utter incompetence.

Washington's Blog pointed out some interesting details,

Employees at Moody's Investors Service told executives that issuing dubious creditworthy ratings to mortgage-backed securities made it appear they were incompetent or "sold our soul to the devil for revenue,'' according to e-mails obtained by U.S. House investigators.

This instant message exchange between two unidentified Standard & Poor's officials about a mortgage-backed security deal ... :

Official #1: Btw (by the way) that deal is ridiculous.

Official #2: I know right...model def (definitely) does not capture half the risk.

Official #1: We should not be rating it.

Official #2: We rate every deal. It could be structured by cows and we would rate it.

Issuers will would pay more money for a good rating than a bad one, and issuers are very clear what kind of ratings they want. This is a straight-forward way to pay bribes without ever violating the law


Oh and as a bonus,
One of the untold scandals of this country is that our museums are stuffed with fake old masters because the people who authenticated paintings for the Mellons and Morgans of this world were paid a percentage of the price for the authentication.

Moral of the story- "Fair" games do not exist in real life.

0 Reflections: