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ML
1840 Posts |
 Posted - 04/11/2008 : 08:39:04 AM
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Bond ratings agencies no better than anyone else in this mortgage mess!
todays WSJ:
As Housing Boomed, Moody's Opened Up
April 11, 2008
By Aaron Lucchetti
Bond-rating agency Moody’s Investors Service used to be an ivory tower of finance. Analysts were discouraged from having a drink with a client. Phone calls from bankers went unanswered if they rang during intense, almost academic debates about credit ratings.
A decade ago, as the housing market was just beginning to take off, Moody’s was a small player in analyzing complex securities based on home mortgages. Then, Moody’s joined Wall Street and many investors in partaking of the punch bowl.
A firm once known for a bookish culture began to focus on the market share that affected its own revenue and profit. The rating firm became willing, on occasion, to switch analysts if clients complained. An executive overseeing mortgage ratings went skydiving with a client. By the height of the mortgage-securities frenzy in 2006, Moody’s had pulled even with its largest competitor, rating nine out of every 10 dollars raised in these instruments. It gave many of the bonds its coveted triple-A rating.
Profits at the 99-year-old firm, which John Moody started to rate railroad bonds, rose 375% in six years. The share price quintupled.
Now, Moody’s and the other two major rating firms, the Standard & Poor’s unit of McGraw-Hill Cos. and the Fitch Ratings unit of Fimalac SA, are under fire for putting top ratings on securities that ultimately collapsed in value. Investors, many of whom relied on ratings to signal which securities were safe to buy, have lost more than $100 billion in market value. The credibility of the ratings system is in tatters as new downgrades of mortgage securities come almost weekly. Investigators from Congress, the Securities and Exchange Commission and several state attorneys general are examining the rating firms’ practices.
Moody’s acknowledges it sometimes got things wrong in judging mortgage bonds, but says these were honest mistakes and not the result of efforts to garner market share. It says it has maintained its rigor and objectivity in a rating process that is still adversarial toward big investment banks.
-con't
http://online.wsj.com/article/SB120787287341306591.html?mod=hpp_us_pageone
Interview Excerpts: Moody's Executives
Ratings Agency's Clarkson, McDaniel:
'We Make Assumptions With Losses'
April 11, 2008
Moody's Investors Service President Brian Clarkson and Moody's Corp. CEO Ray McDaniel talked with Wall Street Journal reporters and editors about Moody's ratings process and the recent meltdown of subprime mortgages and securities based on them. Below are edited excerpts.
http://online.wsj.com/article/SB120783282351804761.html?mod=PageOne_1
Now all the criminals in their coats and their ties
Are free to drink martinis and watch the sun rise
-BD |
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ML
1840 Posts |
Posted - 04/11/2008 : 09:27:50 AM
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Interview Excerpts: Moody's Executives
Ratings Agency's Clarkson, McDaniel:
'We Make Assumptions With Losses'
April 11, 2008
Moody's Investors Service President Brian Clarkson and Moody's Corp. CEO Ray McDaniel talked with Wall Street Journal reporters and editors about Moody's ratings process and the recent meltdown of subprime mortgages and securities based on them. Below are edited excerpts.
* * *
Mr. Clarkson on whether Moody's acted fast enough before dramatically downgrading subprime bonds in 2007:
The only times we don't get accused of being too slow is when people accuse us of being too fast. What happens is we make assumptions with losses [on each bond deal], what we think is going to happen. Take subprime mortgages, for example, we know these are bad loans, by their nature. We assume there will be high delinquencies to begin with. What happened is that it shot though where we thought it was actually going to go. We monitor every rating we have each and every month. Every month, we get performance data. Until we actually got enough information in, we didn't take action. If we would have [downgraded] sooner than that, we'd have been accused of causing the problem.
Mr. Clarkson on how Moody's analysts weigh the goals of rating more deals and issuing accurate ratings:
There is an incentive for the company to do well in the marketplace, to have opinions out there. But in rating committee, you see people trying to point out every flaw they can possibly find. It's pretty spirited debate. It's: "Let's not look at how high we can rate it, let's look at where should we rate it." There's a lot of conversation that goes on around that, with respect to, "What are the real risks here?"
Mr. Clarkson on Wall Street's preference to shop around for the highest rating:
There is a lot of rating shopping that goes on. There just is. People shop deals all the time. They're looking for the highest rating. Sometimes we rate the deal. Sometimes somebody else does. What the market doesn't know is who's seen it. We virtually see 100% of the transactions. There are times we take steps away with respect to transactions, but you usually don't hear about it because we can't do unsolicited ratings.
Mr. McDaniel on regulators' concern that ratings firms allowed themselves to be pressured by investment companies that wanted higher ratings:
Everybody always seeks to pressure us. Anyone with a position in the credit markets will hope that the credit-rating agencies agree with its opinion. It's a conflict of interest question. We can't avoid conflicts of interest. We have to manage them. We're going to have to demonstrate that we manage them properly. This is most obviously to the SEC, but undoubtedly to other governmental authorities as well. And as far as Moody's is concerned, I'm convinced that kind of scrutiny is going to result in a conclusion that says we do have good management practices to avoid having these inherent conflicts of interest influence the independence of the ratings.
Mr. McDaniel on how Moody's measures the performance of its ratings:
When we're criticized, it is almost never for having been too conservative. And yet, if we're going to do our jobs properly and contribute to efficiency in the fixed-income markets, we've got to make that call on both sides and put the non-defaulters at the top of the scale. You can't just rate everything conservatively and say, "Good, we're done."
Mr. Clarkson on what went wrong in the mortgage industry:
We think there needs to be significant changes in the way these deals are being done in order for us to get comfortable. There has to be a lot more third-party oversight; somebody has to verify what's actually in them; you have to have strong representations and warranties.
Mr. Clarkson on whether Moody's could have spotted the problems with fraudulent mortgages earlier:
We knew that there was fraud. We may have thought it was X; [it turns out] it was X to the 10th power. We knew the risks were increasing, so we increased the protection. It was completely dwarfed. We were preparing for a rainstorm and it was a tsunami. We saw the increased risk, but we didn't see what appears to be an 18-month period where anything went. I hate going through this because it sounds defensive, but the fact is that there were people who were supposed to be doing due diligence on this who just didn't do it.
Mr. Clarkson on the prospects for reforming ratings:
The ratings go to the creditworthiness of an instrument. Instead of trying to put things like volatility or pricing into the rating, we're looking at a different scale, like we did in banks. We feel like we have to. We've been asked by some regulators: "You're on notice now that people are using ratings for purposes that they weren't intended, so what are you going to do?" In banks, what we did was we came up with a bank financial-strength rating, which is a different scale [separate from the one that starts with triple-A]. We've had that for 12 or 13 years, and very few people use it, because they want the comfort of using the one that they actually know. Were not saying people will use volatility ratings or price ratings or transition ratings, but we feel like we have to put them out there. If you're concerned about volatility, here's the scale of volatility. It could be a triple-A-5 for example, with five being the most volatile.
Mr. Clarkson on whether securitization has been a net positive or negative:
If you're looking narrowly at sub-prime mortgages in 2006, I could argue that it really didn't do a lot of good. But if you look at all securitizations issued since 1984 or '82, I'd say I think it is a good thing. But what you have to do is make sure the 2006s don't happen too often so it doesn't tilt the other way.
Now all the criminals in their coats and their ties
Are free to drink martinis and watch the sun rise
-BD
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