We all know that no one listens to what credit ratings agencies say, and that if you were buying up all of that RMBS eight years ago marveling at what a great deal you were getting on triple-A rated stuff, you had it coming. But wouldn’t it be neat if you could put the tiniest bit of stock into a credit rating? Wouldn’t it be great if the folks at Fitch and Moody’s and S&P actually had to do the things they get paid to do?
- 15 Aug 2014 at 1:01 PM
Regulators May Finally Get Around To Dealing With The Things That Almost Destroyed The World Economy A Few Years BackBy Jon Shazar
- 04 Jun 2014 at 11:20 AM
- 16 Jan 2014 at 2:27 PM
There are apparently companies without the resources to buy triple-A credit ratings from the Big Three. A little fourth has arrived to help, but plans to studiously avoid stepping on larger incompetent toes. Read more »
- 01 Aug 2013 at 11:44 AM
What does a AA credit rating mean? The intuitive answer is something like “it means that the rating agency rating the thing thinks it has a probability of default no higher than X% and no lower than Y%,” where X and Y are the boundaries of AA- and AA+ respectively, and sure, that’s about right. But there’s an important loophole there which is that each rating agency can set X and Y to be whatever they want. I can make AA a ~1% probability of default, and you can make it ~20%, and no one can tell us who’s right and who’s wrong, because it’s just some letters, y’know? There’s no a priori relationship between those letters and any particular probability of default.
That seems sort of odd, so Congress in the Dodd-Frank Act directed the SEC to look into standardizing the relationship, and the SEC looked into it, and in 2012 they came back to Congress and said no dice. Because basically everyone – ratings agencies but also issuers of and investors in bonds – preferred the current non-standardized system where ratings agencies just rate bonds however they want.1 Read more »
- 17 Jul 2013 at 5:06 PM
The judge hearing the Justice Department’s CDO-rating lawsuit against S&P refused to dismiss it yesterday, rejecting S&P’s much-mocked theory that its pre-crisis claims of independence and objectivity and, like, plausible ratings were just “puffery” that no one should have taken seriously. Here is the story, and here is his opinion, and here is a rhetorical question:1
At the hearing on this matter, Defendants repeatedly asserted that no reasonable investor would have relied on S&P’s claims of independence and objectivity. Regarding the question of materiality, S&P argued that, since the issuer banks had access to the same information and models that S&P analysts did, they could not have been fooled by faulty credit ratings. This begs the question: if no investor believed in S&P’s objectivity, and every bank had access to the same information and models as S&P, is S&P asserting that, as a matter of law, the company’s credit ratings service added absolutely zero material value as a predictor of creditworthiness?
Well so I mean do you want an answer? How much value do you think they added?
- 21 Jun 2013 at 5:01 PM
- Regulators would tell market participants not to screw up.
- Market participants would not screw up.
- Peace and harmony would reign throughout the land.
This is ideal not only because of the peace and harmony but also because it omits any work by the regulators. Why choose whether to set capital ratios based on risk-weighted or total assets when you can just tell banks not to lose any money? If they never lose money then it doesn’t matter how thinly capitalized they are.
- 17 Jun 2013 at 9:41 AM
Would you have predicted this?
This paper investigates the impact of credit rating changes on the sovereign spreads in the European Union and investigates the macro and financial factors that account for the time varying effects of a given credit rating change. We find that changes of ratings are informative, economically important and highly statistically significant in panel models even after controlling for a host of domestic and global fundamental factors and investigating various functional forms, time and country groupings and dynamic structures. Dynamic panel model estimates indicate that a credit rating upgrade decreases CDS spreads by about 45 basis points, on average, for EU countries.
I would not have! Perhaps I am biased from living in a country where credit ratings are a contrary indicator of sovereign interest rates, and where municipal defaults inevitably lead to helpful comments from ratings agencies like “If the payment doesn’t get made, we would downgrade the rating.” Apparently, though, sovereign ratings matter, at least in Europe and at least at some points on the ratings scale.1 Read more »
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- Executive Editor
- Bess Levin
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