Cheat Sheet
The Best In Brief
Bernanke's Ratings Blind Spot
Isn’t anyone paying attention? Part of the cause of the financial meltdown was the allocation of inappropriate credit ratings to banks that had leveraged themselves into deepest risk. But according to Bloomberg, "Federal Reserve Chairman Ben S. Bernanke is basing hundreds of billions in emergency lending on credit ratings from companies that gave AAA grades to toxic securities." Most of the Fed's $1 trillion in transactions have required appraisals by Moody's, S&P, or Fitch. "They're outsourcing the credit assessment to a group of people whose recent performance has been unbelievably bad," said one asset evaluator. "If their goal is to not take a loss on these assets, they should be hiring independent analysts." Rather than relying on the three big ratings agencies, says another source, we should be ending the trio's "official status as the government's favored arbiters of credit quality." It's impossible exactly to figure out how the Fed analyzes debt. In order to discover exactly where taxpayers’ bailout money is going, Bloomberg has filed a federal lawsuit seeking full disclosure.
Partner Sites: Expedia| Hotels| Hotwire| Urbanspoon| Vimeo
Unfortunately the rating agencies remain the only game in town. The sheer quantum of due diligence that would be required to meaningfully assess the creditworthiness of these securities is jaw-dropping -- just for starters, it would mean assessing the creditworthiness of each underlying mortgage -- which is why all the banks and other investors who bought these novelties were more than happy to rely on the rating agencies. Of course, the agencies didn't do nearly enough of the dirty work either, and were more than happy to overlook their reservations when they remembered who wrote their paychecks.
Not always awed by Grethen Morgenson's column, but this is a good summary of some of the problems with the rating agencies: http://query.nytimes.com/gst/fullpage.html?res=9F02E4DC123CF934A35751C1A96E 9C8B63
Thank you.
As a first time user, your comment has been submitted for review. It can take anywhere from a few hours to a day or two for your comment to be reviewed, depending on the time of week and the volume of comments we receive.
Please log in to leave comments.