Calculated Risk reports that Citigroup is livid that S&P would have the audacity to downgrade the senior tranches of commercial mortgage-backed securities.
Citigroup commented that the changes were “a complete surprise”, “flawed”, lacked “justification” and the “S&P methodology changes do not seem rational or predictable”. Ouch.
It’s nice to see that the banks – who spent the last decade shopping for favorable ratings from the rating agencies, and overwhelming them with thousands of complicated offerings backed with sophisticated models – and the rating agencies – who spent the last decade giving AAA ratings to the banks’ models and are now claiming that it was all the banks’ fault – are getting along so nicely. Some marriages truly are forever.
By James Kwak
The Baseline Scenario 
I think we should be pushing for an overhaul of the ratings system. Proper banking regulation will be very difficult with the current incentive structure.
James Kwak’s beautiful phrase “Some marriages truly last forever” BEAUTIFUL…. BEAUTIFUL……. BEAUTIFUL. Classic. I gotta find a way to get that entire posting in audio form, and replay it over and over and over. Robert Frost couldn’t write a stanza that touched my heart so deeply. By the way I’ve belonged to a credit union my entire life. Guys like Warren Spector and Alan D. Schwartz can eat my underwear. Mr. Kwak, what do you mean “feel good story of the DAY”???? Feel good story of the MONTH!!!!!!!!!!
I like the idea of banks and rating agencies arguing in public. Loud discussion does make it harder to hide things under the rug.
When the mediocrity of rating agencies was favoring the too big to fail banks, no one ever heard a peep from the banks. Now, when the same mediocrity isn’t playing nicely with the banks, the banks publically complain. Really good stuff! See http://www.bobgreenfest.wordpress.com for additional insights.
Even if the conflicts of interest posed by the rating agencies’ compensation model were removed, ratings would still make poor standards for use in regulations.
With even the most basic securities, there is still a tremendous amount of subjectivity involved in the ratings process and in deciding when to change a rating once conditions deteriorate. When financial innovations are introduced, the rating agencies can still legitimately fail to appreciate the risks involved on a grand scale. Anyone can.
Actually, I saw quite a few real feel good stories today. Japan’s exports rising, GDP shrinking less than expected, India’s GDP rising more than expected. Good Friday today.
How can there be “financial innovations” without appreciating first the risks involved?
What about a strict enforcing a strict deontology, everybody (bankers, raters) under oath, and stiff punishment if not? After all bankers, as it is, are in charge of creating everybody’s money… Such is the essence of the fractional reserve system lauded by Obama…
Sounds to me like this marriage is in the process of breaking up. Husband and wife are starting to blame each other now that the disfunctional but symbiotic relationship dynamics no longer work for their mutual benefit.
I for one hope this ends in a nasty divorce so that we can once again get independent rating agencies who look to get paid by the asset purchasers rather than the debt issuers.
I like that a bank is feeling something other than smug about their worth and performance.
I especially like that this could disqualify “assets” from PPIP! Yay!
The CRAs are constitutionally privileged to make false statements. For first amendment purposes they are on par with the NYT and the rest of the press, like it or not (you read them right after the sports or style sections, right?). They can not be sued and certainly not punished no matter how wrong they get it. This shields them from all kinds of suits, not just defamation actions. At the risk of sounding like Greenspan, this market should be self-correcting. Investors should not be relying on their opinions any more, so issuers should have no need for their services.
Bondgirl, which one of these Credit Rating Agencies do you work for??? (he asked, then guffawed)
Is this a case of closing the barn door after all the horses have escaped?
I do not work for a rating agency and saying that ratings are subjective is hadly defending the rating agencies.
Um, hardly.