After helping to create the financial collapse by giving dodgy securities triple-A ratings, moves are afoot to bring ratings agencies into line with legislation designed to make them collectively liable for inaccuracies. Just how that would work and what sort of liability remains to be seen.
But there is a real trust issue now with agencies. Why would anyone trust them? Particularly when they are paid by the companies who issue the securities that get the ratings. A more sensible solution would be to make the investors pay. But then, that would mean the US government getting serious about cleaning up the mess and it’s shown no sign of doing that.
McClatchy reports the Moody’s punished executives who questioned some of its ratings. McClatchy reports: “Instead, Moody’s promoted executives who headed its “structured finance” division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. Such products have another name now: ‘toxic assets’ … Others who worked at Moody’s at the time described a culture of willful ignorance in which executives knew how far lending standards had fallen and that they were giving top ratings to risky products. ‘I could see it coming at the tail end of 2006, but it was too late. You knew it was just insane,’ said one former Moody’s manager. “They certainly weren’t going to do anything to mess with the revenue machine.’ “
Writing in the New Yorker, James Surowiecki says fixing up the system won’t be easy because various US administrations have made the agencies a key part of the financial system. You can’t unscramble the egg.
As Surowiecki says, it’s really up to investors to start showing some responsibility. He writes: “Oddly, the ratings system, broken as it is, remains attractive to many investors who have been burned by it. For one thing, it provides an easily comprehensible standard: without it, we’d need to come up with new ways of measuring risk. More insidiously, the ratings system provides a ready-made excuse for failure: as long as you’re buying AAA-rated assets, you can say you’re being responsible. After the housing crash, though, we know how illusory those AAA ratings can be. It’s time for investors to face reality: working with a fake safety net is more dangerous than working without any net at all.”
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