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Home Publications Blogs Beat the Press Bond Rating Agencies Lowering Their Standards to Attract Business! Why Doesn't Someone Do Something?

Bond Rating Agencies Lowering Their Standards to Attract Business! Why Doesn't Someone Do Something?

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Thursday, 01 August 2013 20:42

Sometimes it can be painful to read the newspaper. The NYT had a fascinating piece yesterday that implied S&P is lowering its standards for investment grade ratings in order to attract business.

According to the article, S&P had tightened its standards considerably following the financial crisis. This was causing it to lose market share. In order to regain market share it has recently lowered its standards so that banks can count on much better ratings from their new issues from S&P than the other two major rating agencies.

While this story is striking, the piece neglected an important little bit of recent history. There actually was an effort to crack down on this problem in the recent past.

Senator Al Franken proposed an amendment to Dodd-Frank that would have required the banks to call the Securities and Exchange Commission (SEC) when they wanted to have a new mortgage backed security rated. The SEC would then pick the agency. This takes the hiring decision out of the hands of the bank and removes this obvious conflict of interest. Franken's amendment passed overwhelmingly, getting bi-partisan support. (Note: I had been writing about this idea since 2008 and had consulted with Franken's staff.)

In the House-Senate conference over the bill, Barney Frank replaced the original wording with a two-year study by the SEC (which took almost 3 years). In the course of this study, the SEC was bombarded by comments from the industry all of which said that picking a bond-rating agency was too complicated for the SEC. As a result, the Franken amendment was killed and we now have the NYT telling us that a major bond-rating agency appears to be lowering its standards to attract business.

Comments (7)Add Comment
File this under news media captured by Wall Street
written by JaaaaayCeeeee, August 02, 2013 3:03

Thank you for noting that this critical reform is still necessary, since corporate news media certainly is trying to bury it.
...
written by JSeydl, August 02, 2013 4:41
the Franken amendment was killed and we now have the NYT telling us that a major bond-rating agency appears to be lowering its standards to attract business.


lol
Berksshire never used the ratings agencies
written by pete, August 02, 2013 6:36
People in the know knew the ratings were/are not the be all and end all in credit analysis. The main problem was the SEC requiring the labeling. There is great analysis which shows that required labeling can be dangerous for consumers, and essentially lead to market power and inefficiencies.

This is only the beginning. We are likely in another prebubble run. Housing prices are at about the level when Shiller and Baker called them bubbly. Yet rents are high and mortgage applications tough. The call will soon be for lenders to increase lending to lower incomes, and the cycle will start over. Probably not as disastrous as this last one.
What Would a Picker Pick if a Picker Could?
written by Last Mover, August 02, 2013 7:02

Why should the SEC pick winners and losers in a free market? Especially when it's about picking pickers who pick other winners and losers through ratings.

It's double jeopardy plain and simple, no different than shopping for a judge before the trial begins who then picks ultimate winners and losers.

Get the government out of it and let the plantiff or defendant buy off the judge directly so justice can be served efficiently in a free market.
...
written by skeptonomist, August 02, 2013 5:08
The current national Case-Shiller housing index is close to the trend since 1970, if that trend is drawn through the middle of the pre-bubble curve:

http://www.jparsons.net/housingbubble/

The current average price is not especially low, but neither is it extremely high - nothing like a bubble level. It has been trending back up recently.
http://www.koolred.com/blog/vi.../742159966
written by http://www.koolred.com/blog/view/9347622962/742159966, August 05, 2013 11:45
...
written by NWsteve, August 10, 2013 9:47
imagine (shudder!!) that Underwriters Laboratories reduced it's standards so that more gadgets could be "labeled" and sold/traded as if they are the full-deal...

or we could dumb-down the ASME manuals...

then the nhsta could follow this model... and the cdc... and the faa... and ...

there's a lot of work to do here to get america working again! hot dam!!


jeeeezzzzzz

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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