Moody’s, Fitch, and S&P need to be called to account. How can we have information transparency when the umpires are blind?
If having choices is the heart of making decisions, having good information about those choices is the aorta. Indeed, the one thing that makes public markets work is information transparency . . . than anyone interested has access to the same information about the thing in question and that the information is as full and complete as possible. On the global stage, the American financial markets have stood tall for at least three reasons . . .
- Size
- Liquidity
- Information Transparency
You can tell I’m headed somewhere with this, and that somewhere is the Ratings Agencies, the nice people who collect the big fees to tell us all about the quality of the bonds that play such a huge role in global finance. Yeah, those bonds. The ones that are now busy doing a China syndrome on personal and corporate balance sheets from here to some town you’ve never heard of in East Timor. A piece that appeared on the American Institute of Economic Research website points out that once again, the big rating agencies were either completely asleep at the switch, or criminally negligent or collusive when it comes to Bear Stearns.
Even last week, when a proverbial run on the bank put Bear in desperate straits, the agencies’ downgrades left the firm’s rating still at “investment grade.” This, when JP Morgan Chase was about to acquire Bear (including its Manhattan office tower) for only $2 a share—a smidgen of Bear’s closing stock price Friday, $30 a share. If Bear was that hollow, what was the investment-grade seal of approval supposed to mean to investors?
This too-little-too-late adjustment by the agencies last week echoes their reluctance in 2007 to come to terms with the spread of the subprime mortgage debacle. While top officials at the agencies blame inadequate information and faulty mathematical models, it is also clear that market incentives led to foot-dragging by the ratings agencies. The raters are paid by the issuers of securities (the borrowers), not by investors (the lenders). Moreover, the bond rating agencies not only assigned risk to the bundled (or “securitized”) issues of sub-prime mortgages—the ones that turned sour once house prices began to fall. They were also active (and well-paid) early-stage participants in the packaging of such issues into more complex Collateralized Debt Obligations (CDOs).
Would somebody please institute video-replay here? Moody’s, Fitch, and S&P need to be called to account.
Tags: AIER, American Institute of Economic Research, Moody’s, Fith, S&P, Bear Stearns, JPMorgan, Decision Making, Decision Quality