Comments on: In Defense of the Ratings Agencies http://alephblog.com/2007/12/04/in-defense-of-the-ratings-agencies/ Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control Wed, 10 Mar 2010 00:36:18 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Outtanames999 http://alephblog.com/2007/12/04/in-defense-of-the-ratings-agencies/comment-page-1/#comment-16927 Outtanames999 Wed, 20 Feb 2008 19:22:43 +0000 http://alephblog.com/?p=391#comment-16927 I'm not sure I follow you. If you have to know the difference between a good rater and a bad rater, who needs any raters at all? The rating system itself is failing or at the very least is vulnerable. They turned a blind eye and indirectly created one crisis by blessing risky deals, now they've woken up and are creating another by jerking the leash. That makes them a single point of market failure and begs the question, who's rating the raters? Answer: evidently, no one, and thus the inevitable con. Investors don't want to pay for analyst research either, but there are now rules on the books separating them (somewhat) from the sales side. Of course, whether they wanted to or not, every investor in the market has certainly paid dearly over the past 6 months and is still recovering from the rating agencies mistakes. Altogether we paid a far higher price than the sum total of the market cap of these agencies. We paid alright, but we did not get what we paid for. Where there are conflicts of interest there must be counterbalancing transparency, disclosure and oversight or we will all pay the price again and again. Trust is not an option. If the market can't figure it out, then perhaps as a last resort it will take a quasi-govermental agency to ride herd on the raters... I’m not sure I follow you. If you have to know the difference between a good rater and a bad rater, who needs any raters at all?

The rating system itself is failing or at the very least is vulnerable. They turned a blind eye and indirectly created one crisis by blessing risky deals, now they’ve woken up and are creating another by jerking the leash.

That makes them a single point of market failure and begs the question, who’s rating the raters? Answer: evidently, no one, and thus the inevitable con.

Investors don’t want to pay for analyst research either, but there are now rules on the books separating them (somewhat) from the sales side.

Of course, whether they wanted to or not, every investor in the market has certainly paid dearly over the past 6 months and is still recovering from the rating agencies mistakes. Altogether we paid a far higher price than the sum total of the market cap of these agencies. We paid alright, but we did not get what we paid for.

Where there are conflicts of interest there must be counterbalancing transparency, disclosure and oversight or we will all pay the price again and again. Trust is not an option. If the market can’t figure it out, then perhaps as a last resort it will take a quasi-govermental agency to ride herd on the raters…

]]> By: David Merkel http://alephblog.com/2007/12/04/in-defense-of-the-ratings-agencies/comment-page-1/#comment-16910 David Merkel Tue, 19 Feb 2008 04:45:45 +0000 http://alephblog.com/?p=391#comment-16910 I don't think of ratings as a "con," and I do think that it would be very difficult to get users to pay for ratings. There's no concentrated interest. Ratings are needed for regulatory capital purposes, and the regulators don't have the capability. So, propose a better system that fits in with the way the fixed income community does business. Most of the institutional investors that I know, knew which ratings not to trust... People who invest only on ratings get what they paid for: trouble. I don’t think of ratings as a “con,” and I do think that it would be very difficult to get users to pay for ratings. There’s no concentrated interest. Ratings are needed for regulatory capital purposes, and the regulators don’t have the capability.

So, propose a better system that fits in with the way the fixed income community does business. Most of the institutional investors that I know, knew which ratings not to trust… People who invest only on ratings get what they paid for: trouble.

]]> By: Outtanames999 http://alephblog.com/2007/12/04/in-defense-of-the-ratings-agencies/comment-page-1/#comment-16907 Outtanames999 Tue, 19 Feb 2008 04:09:17 +0000 http://alephblog.com/?p=391#comment-16907 Well, congratulations. You have convinced yourself that the only way is the current way and the con game of Wall St. should continue, indeed, obviously to your way of thinking, the con game _must_ go on. One by one, the wall st. cons are falling, almost (but not quite) as fast as the cons think up new way to fleece investors. It's not the con you know that you should be worried about, it's the con you don't yet know. So, the question now is, what new cons does the street have up its sleeve? To see it, you have ask, now that the jig is up for the glossy varnish con of "ratings" that legitimize bogus value has met the light of day, what is stirring underneath, in the very heart of wall street. For that is where we must look for the next con - where they think we are not looking. Probably deep in the transactional stream itself, far from prying eyes. Yes to see it, you have to rub your eyes and look again at what is staring you square in the face, so obvious that you cannot see it. Today, that would be the rigged volatility we are seeing in the market. It's all just another con run by some guy behind a curtain. Focus now, come on, can you see it? Look closer... Well, congratulations. You have convinced yourself that the only way is the current way and the con game of Wall St. should continue, indeed, obviously to your way of thinking, the con game _must_ go on.

One by one, the wall st. cons are falling, almost (but not quite) as fast as the cons think up new way to fleece investors.

It’s not the con you know that you should be worried about, it’s the con you don’t yet know. So, the question now is, what new cons does the street have up its sleeve?

To see it, you have ask, now that the jig is up for the glossy varnish con of “ratings” that legitimize bogus value has met the light of day, what is stirring underneath, in the very heart of wall street. For that is where we must look for the next con – where they think we are not looking. Probably deep in the transactional stream itself, far from prying eyes.

Yes to see it, you have to rub your eyes and look again at what is staring you square in the face, so obvious that you cannot see it. Today, that would be the rigged volatility we are seeing in the market. It’s all just another con run by some guy behind a curtain. Focus now, come on, can you see it? Look closer…

]]> By: Josh Stern http://alephblog.com/2007/12/04/in-defense-of-the-ratings-agencies/comment-page-1/#comment-15860 Josh Stern Tue, 04 Dec 2007 15:02:48 +0000 http://alephblog.com/?p=391#comment-15860 The pseudo-simplicity of the letter grade system used the the agencies seems like an anachronism to me. Wouldn't it be more sensible to give two numbers, one for probability of default and one for expected discounted cash flow on a given obligation (with fully stated assumptions) or some equivalent? Intuitively, we'd expect less sticky friction and more frequent updates if numerical ratings were used. Using two numbers would also prevent confusions like the one we've seen with subordinated tranches of CDOs, where default implies very high loss expectations. The pseudo-simplicity of the letter grade system used the the agencies seems like an anachronism to me. Wouldn’t it be more sensible to give two numbers, one for probability of default and one for expected discounted cash flow on a given obligation (with fully stated assumptions) or some equivalent? Intuitively, we’d expect less sticky friction and more frequent updates if numerical ratings were used. Using two numbers would also prevent confusions like the one we’ve seen with subordinated tranches of CDOs, where default implies very high loss expectations.

]]> By: KSmith http://alephblog.com/2007/12/04/in-defense-of-the-ratings-agencies/comment-page-1/#comment-15858 KSmith Tue, 04 Dec 2007 13:00:30 +0000 http://alephblog.com/?p=391#comment-15858 David Totally agree with your assessment of the ratng agencies. Maybe I'm mistaken but my impression is most of those calling for change in rating agencies are not dedicated fixed income investors. One area you did not touch on was the stocks and their future earnings power. At what point do you think they become attractive from a valuation standpoint? Moody's talks about only having one down year in revenues over the last 20, which is a testament to the consistent growth in debt and their position as toll keeper. But the last few years were well above trendline growth in debt -- how long could the hangover last? could international markets offset the US? 2008 could be down (Tony C. said yesterday that debt issuance is actually holding up well so far) but that seems expected by the consensus. Any thoughts on MCO or MHP would be much appreciated. thanks Kyle David

Totally agree with your assessment of the ratng agencies. Maybe I’m mistaken but my impression is most of those calling for change in rating agencies are not dedicated fixed income investors. One area you did not touch on was the stocks and their future earnings power.

At what point do you think they become attractive from a valuation standpoint? Moody’s talks about only having one down year in revenues over the last 20, which is a testament to the consistent growth in debt and their position as toll keeper. But the last few years were well above trendline growth in debt — how long could the hangover last? could international markets offset the US?

2008 could be down (Tony C. said yesterday that debt issuance is actually holding up well so far) but that seems expected by the consensus. Any thoughts on MCO or MHP would be much appreciated.

thanks

Kyle

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