http://www.aaa3.net/aaa-diamond-rating-scale/
Fraud and greed of the confidence ratings agencies helped spread the credit crisis
By Shah Gilani
Contributing Editor
Money Morning
Behind the credit crisis gripping the U.S. and world economies is a crisis of confidence. The blame has been placed at the feet of the U.S. Federal Reserve, and a beer investment bankers' financial toxic products. Ultimately, however, it is assumed that the rating agencies of confidence that every person has to drink the poison Kool-Aid.
Fraud and pure greed analysts and executives rating agencies is astounding. Nobody has gone to jail, and none of the agencies have been closed is a travesty of justice in an infinite scale larger than the system Bernie Madoff Ponzi. To depositors, bankers and investors regain confidence in the quality of the skills we rely on to measure the financial stability and solvency tremors behind the credit crisis will last indefinitely.
Letter and number of ratings – AAA, Aa1, BBB and Caa1 – financial abbreviations due diligence for allegedly carried out by rating agencies after reviewing an issuer or the financial structure of a value, and assess the probability of to be able to pay interest and principal at maturity. Investors rely on the objectivity and fiduciary responsibility of rating agencies to publish assessments fair precise and uncompromising.
By law, some investors must rely on the ratings of a handful of Securities and Exchange Commission designated a "Nationally the recognized statistical rating agencies (NRSROs). For example, most state insurance regulators require only one power assets in the four above ratings by NRSROs are eligible investments. Similarly, money market funds can only invest in securities with ratings highest NRSRO. In fact, many institutions – public and private, national and international – mandate levels of quality of assets based on the number of large measure of maturity agencies.
Ratings Standard & Poor's, Moody's Investors Service (MCO) and Fitch Ratings Inc. are designated NRSROs by the SEC. They are the largest, best known and most profitable companies of scores in the small, $ 5 billion a year-universe of securities firms. S & P is a part of The McGraw-Hill Cos. Inc. (MHP), while Fitch is a subsidiary of France's Fimalac SA.
Moody's was spun off from financial publisher Dun & Bradstreet Corp. (DNB) as a public company in 2000. Warren Buffett's Berkshire Hathaway Inc. (BRK.A, BRK.B), apparently having discovered a rough diamond purchased D & B before separation, and finished with strong participation from 19% at Moody's after the spin-off was completed.
The problem with the business of rating securities issuers and the rating to issue securities – Such as mortgage-backed securities and obligations secured by mortgages – Is that rating agencies are paid by issuers to rate them. Objectivity aside, ratings companies are not in business to vote but to make money for themselves by qualifying issuers and their values. It's like all the contestants in the Miss World pageant judges pay the country … funds will not fair trial?
What is even more problematic in the system of rating business model is that analysts do not understand how to analyze structures and the effective rate highly complex flow of these new mortgage-backed securities. Not wanting to lose business to competitors, who were all in the same boat, they used Qualifications structures same model used to rate corporate bonds, although the two different values have nothing in common.
It was like asking to your local car mechanic to certify its citation jet V – just before taking off for a transatlantic flight to London. God help you if there is a problem.
Y there were problems. Lots of them. According to a February 15 "Review and Outlook" piece on The Street Wall Journal, Joseph Mason, professor of finance at Drexel University, studied collateralized debt obligations rated "Baa" by Moody's and found that were 10 times more likely to default than equivalently rated corporate bonds. The article continued by saying that a spokesman for S & P, when asked if he really considered the underlying mortgages in the pools, he replied: "We are not auditors, we are not accounting firms."
Although S & P – and to a lesser extent, Fitch – were playing the game, Moody's actually fled the ball. The surprisingly bright April 11 Journal article by Aaron Lucchetti exposed the unseemly underbelly of greed Moody. What stood out the most Article was the will of Moody's – under the direction of Brian Clarkson, who joined the firm in 1991 and became president and chief operating officer – to make impossible to accommodate the funding for issuers of mortgage-backed paper and structured. Clarkson was able to change if customers complained of analysts, which several did, including Credit Suisse Group AG (ADR: CS), UBS AG (UBS) and Goldman Sachs Group Inc. (GS).
According to Clarkson, Moody's expanded and grabbed a huge chunk of supply in market valuations cake. For 2006, the company was number $ 9 of every $ 10 raised in mortgage securities. For all of that year, the group of structured finance business generated over $ 881,000,000 in revenue, approximately 43% of revenues Moody's. And in 2007 it was estimated that the company rating of 94% of the approximately $ 190 billion in mortgages and structured finance CDO floated during the year.
But there was some concern, including some insider information. Moody's analyst Mark Froebe issues told The Journal that "There was never an explicit directive to subordinate rating the quality of market share. There was, rather, a palpable erosion of institutional support for the classification analysis that threatened market share. "In the same article, Stevenson's former executive Paul Moody was quoted as saying that" most recent problem is that the rating process became a negotiation ".
Clarkson, President and COO of Moody's, not was so badly negotiate their compensation, either. In 2006 he won $ 3.8 million, while the main company chief executive, Raymond McDaniel, won $ 8.2 million. Clarkson 'Withdrawn' under pressure last May and McDaniel, the CEO, added the title of president of its mantle.
Finally, the ever- late to the dance-SEC woke up with the idea that is supposed to be watching the watchers – the rating agencies. As hundreds of billions of dollars around the world payment is invested in playing the Wall Street version of the policy of Illinois governor, a broken heart and a lot of flat-broke investors found than the number of agencies had determined that "AAA" ratings were not the chief investment grade securities with those three letters said were, but were toxic frogs in the Amazon in place. Of course, demanding an investigation. And it was.
A 10-month "review" by the SEC, in July, uncovered, believe it or not, "the poor disclosure practices and procedures that guide the analysis of mortgage-related debt and insufficient attention to managing conflicts of interest. "Brilliant!
According to the report, which included as evidence of several email exchanges among analysts from the rating agencies not identified, had an obvious degree of knowledge and complicity in the game ratings. In an exchange, an analyst said its model scores did not reflect "half" of risk in the offer, but "could be structured by cows and we rate him." And yet another change most famous dated December 15, 2006, a manager wrote that the companies continued to create an "even bigger monster – the CDO market. Let's hope that all we are rich and retired by the time this house of cards falters. "
Did any heads rolled? No. Do the fines have been collected or any closed business? No. The SEC apparently went back to sleep after being awakened by intermittent failure of Bear Stearns Cos., Lehman Brothers bankruptcy Holdings Inc (OTC: LEHMQ), the nationalization of American International Group Inc. (AIG), and some other minor events nap-stop, including the rescue Citigroup Inc. (C). I only regret that the Commission should be disbanded hibernation once again be interrupted by an artist misdemeanor simple Ponzi scheme. Well, maybe time now can finally get some rest. For the sake of our future, someone please dismantle this gang of fools sleep.
Shortly after the review was published in July, a recognition that may be unwarranted attacks, S & P announced it was studying ways to take the volatility and stability into account in their ratings. But in a simultaneous explosion of clarity, S & P suggests that the fear that greater discipline and functional scores model make it more difficult for issuers to raise capital. Only days later, in fact, S & P went on the offensive, called proposals to boost SEC disclosure and mitigate internal conflicts of interest too costly for companies ratings. Among the proposals were pushed back to an era require a fee structure isolated and the classification system of structured products.
Fast-forward to December 3, and the presentation of the last of the SEC proposed rule changes. While toothless wonder folded like a pup tent again to all substantive changes that would have created a playing field more transparent and honest, who managed to sneak in some proposals, including those that said:
- Rating agencies can not help rate debt structure.
- The Analysts can not participate in the negotiations of fees.
- Analysts can not be given gifts worth more than $ 25.
- Analysts should report a 10% random sampling of their qualifications within six months.
- The ratings agencies must maintain a record of complaints against analysts.
- And that agencies should record when rating structured debt analyst different from a quantitative model.
Call proposed rules changes is baby steps like calling the Grand Canyon a ditch.
Because Wall Street does not like the idea, what they liked the changes rules were proposed to create different structures to assess the different products. And the most notorious of the rules was abandoned a proposal that the rating agencies make public all the underlying information used in making their ratings. What exactly is the necessary transparency.
There is an overwhelming heaviness to the credit crisis that has to do with our economic future. Excessive weight is established, selfish power brokers driving dump trucks full of money ill-gotten through any wake-up call for transparency. The underlying currency capital markets must be clearly and objectively rated instruments whose value is determined by the free market. Until confidence is restored on producers, products and financial services providers, investors are unlikely to thirsty participants of any new drilling.
[Editor's Note: The uncertainty will remain the watchword for at least the first part of the New Year. It is not surprising, since the global financial crisis continues to whipsaw financial markets in the U.S. so that has not been seen since the Great Depression. It's almost enough to make delivery. But what if you knew ahead of time what to expect market changes? Then we would be in the driver's seat - right? You know what to anticipate, could create an advantage strategy to follow, and then I could just sit, watching and waiting - and ultimately profiting from - the well you anticipated market developments.
R. Shah Gilani - a hedge fund manager retired and a nationally known expert on crisis U.S. credit - Has provided for five key financial crisis "mirroring" which he says will create significant revenue opportunities for investors who know exactly what these are replicas, and how to play. In the event trigger strategist, trigger events "such as paths huge profits. For all about these five replicas of the financial crisis, and the event benefit of activation strategies that feed into, check out our last report.]
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