November 27, 2012
Disturbing Reminders about Rating Agencies in Brummer’s New Article
Some disturbing reminders in The New Politics of Transatlantic Credit Rating Agency Regulation. Major rating agencies (CRAs)
generally did not verify the information used to determine the creditworthiness of the products they rated. Plus new models for rating subprime mortgages assumed that housing prices would continue to increase and the model did not consider the declining quality of the loans themselves. And even where signs did begin to arise, bonds were rated at specific intervals, and not necessarily in reaction to crisis, effectively preserving the long life of artificially inflated ratings. By giving MBS and CDOs high ratings, CRAs essentially encouraged investment in these products. The impact: “Of all mortgage-backed securities it had rated triple-A in 2006, Moody’s downgraded 73% to junk”. Similarly, 80% of CDOs rated AAA by S&P from 2005-2007 were downgraded below investment grade by 2009. Well over a third ended up defaulting, wrecking havoc on the financial system and causing the downfall of scores of financial institutions, including behemoths AIG and Lehman Brothers. (13-14, citations omitted)
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