tag:blogger.com,1999:blog-3764912039741974037.post3260310891279098252..comments2024-03-10T06:35:25.018-04:00Comments on Expect[ed] Loss: Rating Agency Reform ... continuedPF2http://www.blogger.com/profile/13893025381406343985noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-3764912039741974037.post-4107742615151458062009-08-18T16:53:28.213-04:002009-08-18T16:53:28.213-04:00Sane Person,
Your idealized "market" for...Sane Person,<br />Your idealized "market" for rating agencies does not exist because of regulatory restrictions around investments by fund managers. What exactly do you propose as an alternative, because the status quo obviously has not worked (since Enron)?<br /><br />Secondly, why would you need a government agency to monitor ratings quality? It's trivial to examine ratings assigned, versus losses realized on an instrument after assignment of the rating. If losses > [losses implied by rating] the agency/analyst had it wrong. Of course, this raises other problems - such as analysts being unwilling to downgrade etc. etc., but it's definitely preferable to the "publishing company" defense put forth by the agencies so far.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-3764912039741974037.post-91520046055623086582009-08-11T10:33:11.152-04:002009-08-11T10:33:11.152-04:00As it currently stands, however, rating agencies d...As it currently stands, however, rating agencies define what AAA means, what "default" means, and they remain unsupervised in their collection and representation of their rating performance.loanshttp://www.capitallynk.comnoreply@blogger.comtag:blogger.com,1999:blog-3764912039741974037.post-77564299877584464802009-08-10T14:11:12.097-04:002009-08-10T14:11:12.097-04:00The measure that should disincentivize rating agen...The measure that should disincentivize rating agencies from assigning egregiously poor quality ratings would be their reputation in the free market.<br /><br />Now, sure, other factors in the market made this somewhat inconsequential historically: the S&P/Moody's duopoly, the issuer-pays model, etc etc..<br /><br />Just saying that having an artificial government agency with some fuzzy, pretty much undefinable mandate on punishing rating agencies for poor performance makes virtually no sense in the real world.<br /><br />Just separating the business unit from the ratings unit in the agencies (a la #1) would go a long way. Rating analysts generally aren't stupid which, in the current structure, cuts both ways when it comes to ratings quality.Sane Personnoreply@blogger.comtag:blogger.com,1999:blog-3764912039741974037.post-4358593955779419612009-08-10T11:41:39.566-04:002009-08-10T11:41:39.566-04:00@Sane Person,
You make a good point insofar as th...@Sane Person,<br /><br />You make a good point insofar as the increased regulation is not always a net positive. At the very least, it's expensive and burdensome.<br /><br />As it currently stands, however, rating agencies define what AAA means, what "default" means, and they remain unsupervised in their collection and representation of their rating performance.<br /><br />As Dr. van Deventer points out in his Kamakura blog, Fannie Mae, Freddie Mac and AIG were conveniently excluded as "defaulted" assets by the rating agencies for the purposes of measuring the performance of AAA securities. <br /><br />Thus S&P continues to show an (exemplary) 0% cumulative 2-year default rate for AAA corporate assets. Taking only FNMA and FHLMC into account, brings this number up to 0.18%, which tarnishes S&P's record.<br /><br />As our guest blogger noted: "the agencies act as judge, jury and executioner, and are not required to justify their actions to any regulator or other third party." Their opinions therefore, protected from lawsuits by the 1st amendment, remain largely unsupervised and have been given free-reign. It's not surprising, thus, to have seen the decline in rating standards and quality over time.<br /><br />Thus, we do believe that there should be both: <br />(1) oversight of a rating agency's measurement of its own performance - not necessarily on the security-by-security level, but more likely overall or within a certain asset class and; <br />(2) some measure that disincetives rating agencies and/or rating agency analysts from assigning egregiously poor quality ratings. Perhaps you could suggest a preferable way to create that outcome?<br /><br />GPGPhttps://www.blogger.com/profile/06092575382467139269noreply@blogger.comtag:blogger.com,1999:blog-3764912039741974037.post-43239389503428117872009-08-10T11:13:41.060-04:002009-08-10T11:13:41.060-04:00#1 and #2 make sense. #3, on the other hand, is la...#1 and #2 make sense. #3, on the other hand, is laughable.<br /><br />"Reform must shift the cost of unreasonably bad ratings back to the agencies and their shareholders."<br /><br />I find it hard to believe that Mr. Froeba hasn't noticed the Moody's stock price drop from the 70s to the teens.<br /><br />"should be subject to special oversight, including the measurement of rating accuracy and the imposition of financial penalties for poor performance"<br /><br />It doesn't take a rocket scientist to realize that this concept is entirely unattainable, naive, and silly. How do you measure the performance of a rating? A rating is the reflection of probability, not one future path. Future events do not validate or invalidate a probability. Even looking across the entire asset class, on average, does not work because there are an infinite number of factors in the performance of financial instruments, very many of which are unpredictable by anyone.<br /><br />If this is such a great idea, perhaps we should create ANOTHER government agency (staffed with bright, responsible government workers) whose job is to watch over this magical new government oversight agency and fine THEM for giving out unfair fines to the agencies.<br /><br />Yes, yes, the answer is always more government.Sane Personnoreply@blogger.com