S&P

So it is the perfect time for the sages at S&P to reward it with a ratings upgrade. Read more »

Even a ratings agency can see that a $400 million loss, some impending arrests and Mike Corbat’s heartache are not good for business. Read more »

Unlike mortgage-backed securities, supranational political entities simply cannot have this many sub-prime components and expect to keep its triple-A rating, according to S&P’s flawless debt-rating system. Read more »

Standard & Poor’s, as you may have heard, is fighting a federal lawsuit with a potentially 10-figure pricetag that accuses it of making up whatever CDO ratings it had to in order to win business rating CDOs. Its defense against these charges are (a) no one should listen to them and (b) that no matter how shady and underhanded their practices seem, the ratings they produced were fine, even if they were totally wrong.

You may note the absence of (c) we did not make up ratings to appease the people who pay for ratings. Which may have something to do with the fact that S&P is still kinda making up ratings to appease the people who pay for them. Read more »

  • 01 Aug 2013 at 11:44 AM

Bond Rating Agency Decided To Try To Rate Some Bonds

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 »

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?

The S&P case is a pretty weird beast because it’s brought under the FIRREA, a law designed to protect federally insured banks, and so the government has to assert that: Read more »

  • 21 Jun 2013 at 5:01 PM

Congressmen Have Some Advice For Ratings Agencies

The ideal financial regulatory regime would go like this:

  • 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.

These guys know what I’m talking about: Read more »