Senator Norm Coleman, ranking member of the subcommittee, told the Journal, "We're going to look at the root causes of this, looking at whether the inherent conflict clouded the judgment of these agencies. Somebody missed something here. Was it because of the complexity or was it in the zeal to make money?"
Even if the fault of the errors lie in the complexity of the product, the bond rating agencies still failed everyone who depends on them for making investment decisions. The bond rating agencies should not rate something they find too complex to competently rate. Unfortunately, by doing so they destroyed everyone's trust in their competency to rate securities in the future. Obviously, they were just looking to make the bucks with very little concern for the people who depended on their abilities to rate bonds.
I don't see this situation as being much different than the scandals surrounding analysts after the Internet bubble burst. It was exposed at that time that many analysts wrote positive reports to generate business for their firms even as they wrote emails calling the stocks they were recommending "dogs" and other negative terms.
The SEC has proposed rules that will make it illegal for anyone who determines a credit rating from negotiating the fee that bond issuer will pay for the rating. The SEC also wants bond rating agencies to differentiate their ratings between structured finance products and corporate bonds. The securitization industry wants to stop that rule because they know this separation would likely create lower ratings for their products.
In addition to looking at the how rating agencies determined their ratings, Senator Levin, who heads the subcommittee, wants to look more closely at credit-default swaps and how they were marketed.
Lita Epstein has written 25 books including "Trading for Dummies" and "Reading Financial Reports for Dummies."
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Reader Comments (Page 1 of 1)
11-20-2008 @ 6:39PM
ATHELSTAN said...
Don't expect any action from the committees investigating Wall Street. Senator Chris Dodd and Congressman Barney Frank will have their usual circus of dancing bears, corn pone covered hacks and policy wonking committee members bloviating on and on. Dodd and Frank, the ringmasters, will wring their hands, pounce on their high profile guests, and end up providing lots of bread and circus events to C-Span and other viewers. It is theater for those who hang on to every word of congressional committee hearings. When everything is over, the bond rating agencies will be back to their usual dissemination of falsehoods.
The only way investors can protects themselves is to immunize oneself from their influence by checking other sources, or ignore them altogether.
11-21-2008 @ 8:23AM
ttspiez said...
Athelstan, excellent - you said it all!