Underrated: S&P, Moody's, Fitch ... and PIMCO

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  1

  asiafinancenews

  11/21/09 | Report as spam

  RE: Underrated: S&P, Moody's, Fitch ... and PIMCO

  Ed Leefeldt may wish to to educate himself further regarding the commission of deliberate fraud by S&P, Moody's and Fitch:
  
  http://www.globalsecuritieswatch.org/EU_Consultation%20_Public_Comment_(Short_Version).pdf
  
  

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  2

  lemmoth

  11/21/09 | Report as spam

  RE: Underrated: S&P, Moody's, Fitch ... and PIMCO

  Ok folks - time to tell Deloitte, PWC, E&Y amd KPMG that they need to get paid by the stockholders now and not by company management.
  
  After all, we can't have our external auditors paid by those whose financials they review, right????
  
  This conflict of interest canard is ridiculous. The larger financial problems are all abour psychology and market participants and bubbles and greed versus fear.
  
  In 2004-2007 greed won big time and everyone on the chain performed in a way that was in the least unprofessional - mortgage seekers, mortgage brokers, investment banks, investors, regulators.
  
  Rating agencies performed spectacularly well for the most part for 100 years (as did the auditors). They perform a great and independent service for investors by evaluating all types of debt instruments, with a forward looking view and with an independence to the volatile whims of markets.
  
  

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  3

  Ed Leefeldt

  11/23/09 | Report as spam

  RE: Underrated: S&P, Moody's, Fitch ... and PIMCO

  To Asiafinancenews: Thanks for the tip.
  
  To Lemmoth: I couldn't agree more.

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  4

  PB149

  11/24/09 | Report as spam

  RE: Underrated: S&P, Moody's, Fitch ... and PIMCO

  The comparison to accounting firms changing their business
  model is completely unfounded. Firms typically contract with
  ONE outside accounting agency to review their
  financials. Competing auditors would, at most, be able to vie
  for a competitor's client on an annual basis.
  
  Bond ratings are an entirely different animal. Companies
  issuing bonds can and do pay for ratings from SEVERAL
  agencies, not just one. It is common to have some corporate
  issues rated by S&P and others by Moody's or Fitch. For EACH
  new note/bond float, rating agencies compete to rate that
  particular issuance. Debt issuances happen on a fairly regular
  basis. At each point, the ratings contract could be assigned to
  any one of the contenders.
  
  Corporate issuers are looking for the best rating to secure the
  lowest possible interest rate on their issuance. For brokers or
  third-party debt repackagers, a high rating is
  CRITICAL to their offering. Why? Because their
  target buyers, mutual funds and institutional investment
  managers, have been given compliance rules, either from the
  client (e.g., the Ohio State Teachers Pension Fund) or the
  board of a mutual fund.
  
  Compliance rules can't be violated by the investment
  manager. A compliance rule might read something like:
  "Under no circumstances shall the portfolio hold any bond
  rated less than A- (or its equivalent) by a NRSRO.", [see
  below for NRSRO definition]. This would be a fairly common
  compliance guideline for risk averse investors.
  
  If a broker or third-party packages up a MBS (Mortgage
  Backed Security), if it isn't rated A- or better, it COULD NOT be
  sold to a big chunk of the institutional market. Naturally,
  these issuers were looking (shopping as some have said) for a
  desirable rating. And since the issuer was deciding who to
  pay....
  
  While there is plenty of blame to go around for our financial
  meltdown, the unavoidable fact is someone had to buy all of
  these hybrid MBS, CMOs, CDOs and other variants. Those
  buyers, largely institutional investment managers were able to
  purchase these securities BECAUSE the securities met
  compliance requirements. And when the ultimate investor saw
  these A rated instruments in their professionally managed
  portfolios, they were able to sleep at night because they
  RELIED on the debt ratings from Moody's, S&P, and Fitch.
  
  If some of these issues were rated for what they truly were,
  the purveyors of these securities would have had to find
  something else to sell. Without a high rating, the securities
  just wouldn't have met many compliance guidelines and would
  have been dismissed out of hand by investment managers.
  
  Bottom line - No ratings, no sale. No sale, no accident-
  waiting-to-happen. But of course there were ratings and a
  good ones at that.
  
  Though many journalists don't mention it, there are 10
  organizations the SEC permits to issue ratings for regulatory
  purposes, a/k/a NRSROs (Nationally Recognized Statistical
  Ratings Organizations). Typically, we hear only of S&P,
  Moody's, and Fitch.
  
  At least one NRSRO, Egan-Jones, uses a different model for
  issuing ratings - the Investor/Institutional investment manager
  PAYS Egan-Jones for the rating. In this business model,
  everyone is properly incentivized. No one has a bias or undue
  influence. It seems reasonable enough - until one considers
  the lucrative businesses built by S&P and Moody's.
  
  btw - Egan-Jones subscribers saw ratings falling for many
  companies far in advance of Moody's and S&P finally dropping
  their rating levels. See their website for more details.
  
  If one has the interest, there are a number of research papers
  available from academia with more information on this topic
  and plenty of data to support their findings.