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May 10, 2012

Will the Rating Agencies Really Do Their Job This Time?

Wow, Moody’s is talking like they are really going to do their job, in sharp contrast to their rubber stamping Triple A ratings in the years before the crisis, which enabled Wall Street’s toxic waste transmission belt to spread time bombs throughout the global financial system.  The Financial Times is reporting that Moody’s is including in their credit analysis the likelihood that the banks will evade any new capital requirements and juice up their leverage, just as they have repeatedly done in the past.

That, of course, greatly increases their riskiness and should reduce their credit ratings.

Before the crisis, the rating agencies did not do sufficient analysis to determine the credit worthiness of the banks and they also relied too heavily on the banks’ own models and claims about their businesses.  Given that the banks always want the highest ratings, their claims and assertions should never be relied on.  They should be subjected to rigorous independent analysis because the banks have a huge conflict of interest in everything they say to the rating agencies. 

Of course, the entire credit rating system is full of conflicts of interest and the one at the core is that the banks get to pick which rating agencies rate the securities they create and/or market.  And, how much money rating agencies make depends on how many times they are hired by the banks to rate securities so rating agencies doing their job and holding the banks to rigorous analysis isn’t in their economic interest. 

Moreover, the banks are used to getting their way and bullying the rating agencies is standard operating procedures for them.  As today’s article shows, that hasn’t changed since the crisis. 

Let’s hope the rating agencies get tough and stay tough this time.  We know what happened last time they didn’t and the American people are stiff suffering for those egregious failures. 



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