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Home Publications Blogs Beat the Press The Washington Post Exonerates Moody's

The Washington Post Exonerates Moody's

Wednesday, 01 September 2010 05:07

The first sentence of a Washington Post article on the decision by the SEC not to pursue legal action against the company told readers that the rating agency "misjudged" many securities that subsequently plunged in value. This assertion is exactly what is in dispute.

The rating agency clearly mis-rated many securities, giving investment grade ratings to issues that were clearly junk, at least in retrospect. The question is whether the erroneous ratings were honest mistakes -- misjudgements -- or whether they were due to fact that Moody's knew that issuers wanted investment grade ratings and would not hire them in the future if they could not be relied upon to produce such ratings. The Post has somewhere determined that Moody's just made honest mistakes and told readers so in the very first sentence.

Comments (12)Add Comment
written by izzatzo, September 01, 2010 6:29
With a forecaster like Mark Zandi, how could Moodys be wrong?
Fiduciary responsibilities
written by scott, September 01, 2010 7:49
Moodys should be bound by established laws of agency. This is far preferable to "regulation" where a regulator and the political system of kickbacks, paid for loopholes and the like. The question, to be resolved in court and not in WaPo, is the one you name, but again, this should be the subject of a class action lawsuit.

Liberals need to figger out a way to advocate for smarter, smaller gov't, so that it continues to do what it should and quits what it shouldn't.

Gov't shouldn't regulate/indemnify professional markets, but laws of agency should.
What about the conflicts of interest?
written by Ron Alley, September 01, 2010 7:54
As I understand, the federal government owns a large amount of bonds tainted by undeserved ratings. If the SEC were to pursue actions against Moody's and others, what would happen to the value of those bonds?
in email veritas
written by frankenduf, September 01, 2010 8:08
the wapo reporter should simply scan the subpoened emails of moodys, which clearly show that the ratings agents knew that the aaa ratings had become a farce- it might not matter tho- blanfein testified before congress that goldman knew they were selling junk securities, under the disingenuous ethical claim of 'market maker'- as a public admission of fraudulent marketing drew no legal claims against of negligence, one would wonder where any prosecutor with a backbone is on the planet to go after moodys, who may not be as arrogant as to admit fraud
under fiduciary law...
written by scott, September 01, 2010 8:10
Good point Ron,

The gov't could join the class action lawsuit. Instead we have "regulation" which is a smokescreen for indemnification.
under fiduciary law...
written by scott, September 01, 2010 8:10
Good point Ron,

The gov't could join the class action lawsuit. Instead we have "regulation" which is a smokescreen for indemnification.
Ratings above Baa3
written by Scott ffolliott, September 01, 2010 8:46
That should insure that the Washington Post, now heading toward insolvency, would keep its ratings above Baa3.
written by diesel, September 01, 2010 10:01
Scott, why shouldn't we instead dissolve the link between government and the private sector by publicly funding our elections and outlawing private and corporate donations to political parties? Liberals could care less about the size of government per se, they want effective, transparent government--and by that standard, the U.S. places dismally low. Size has been, especially since Reagan, a red herring. The issue is not size, but conflict of interest on the part of the appointed "regulators". You say "Gov't shouldn't regulate/indemnify professional markets, but laws of agency should.", but this begs the question. You have simply introduced a mediating step into the process. Gov't still creates the legal rules under which class-action suits are undertaken. To take an example, would it be wiser to regulate smoke stake emissions directly or wait for the judicial process to work its way to a satisfactory solution? For that matter, why should "gov't" impose speed limits on our roads or require us to drive on the right side of the road? At times, government acts so as to represent the Commons. Not all interests are represented by "private interests". And sometimes the Commons are the rules of the game under which the players tacitly agree to act. They are bound by them, they are not free to make them up as they go along.
Castanza Credit Ratings Agencies
written by Greg, September 01, 2010 10:13
This is my favorite part of the WPost article:
"After the passage of a 2006 law that required that credit-rating firms register with the SEC, Moody's filed paperwork stating that it would only take into account the credit quality of securities when issuing ratings and not consider the effect of a rating on Moody's itself.

In its investigative report, the SEC said that Moody's did the opposite of what the company pledged it would do.

The SEC said that Moody's did not change its approach until it was revealed publicly in a report by the Financial Times in May 2008."

It's like a version of Seinfeld, and Moody's got caught up in its own Castanza mode. It said it would do the opposite, but it got confused. Moody's was ALREADY doing the opposite, just like George in Seinfeld when he started dating beautiful women by doing the opposite of what he regularly does. Moodys' was already making tons of cash (getting beautiful Benjamins) by doing the opposite of what it should regularly do (or should be doing), "only take into account the credit quality of securities when issuing ratings."

George Castanza would be proud, and would be able to identify the confusion. Moody's, shouldn't feel all bad however. On the bright side of emulating George Castanza, Moody's did manage to burn down the US financial system just like George burned down the cabin owned by his fiance's father.

Classic positive reinforcement by the WPost for more poor enforcement. Everybody wins.

Unlike George Castanza, Moody's did a reverse Castanza. Moody's was already doing the opposite of
written by scott, September 02, 2010 7:03
"Gov't still creates the legal rules under which class-action suits are undertaken."

You're confusing markets. Smoke stacks refer to utilities--externalities being a social cost born by gov't. Fiduciary laws relate to professional markets. And, you are mistaken, case law establishes the fiduciary duties.

I am not against all regulation, but regulation should be uniform. That said, I would like to consider allowing citizens to use a big polluter. In fact, it is often regulation that prohibits the right of citizens to sue (indemnification)

Another reform would be to substitute product liability law for FDA. If you know (or should've known) you're making a harmful product, you're liable. Regulation offers a bar that, when crossed extends indemnity.

This is proof of the sophism of the anti-regulatory attitude. First, they took away our right to sue, requiring regulation, then they bitch about regulation--no consequences.
And yet, and yet....
written by diesel, September 02, 2010 6:43
After the Exxon Valdez disaster, I'm wary of the claim that justice or recompense can be had through the courts. And when a clown like Bush claims that industry can regulate themselves--well, that only shows that he's never really made anything in life, never produced anything. Anyone who has actually designed something welcomes another person's check on the accuracy of their calculations.

As someone else posted earlier, what about blind, random sampling by an independent agent who could analyze and assess the accuracy of the ratings? Yes, I know, rating the ratings agencies, ad infinitum, where would it end?

You buy a gallon of gas and take it for granted that the three different grades actually faithfully represent different products. But none of us are in a position to perform the chemical tests necessary to verify that. So who does? And how is it done? What if a large batch of premium actually damaged engines, but the damage was subtle, like a carcinogen, and its effects were not evident for a year or so? Could you imagine a more nightmarish scenario than that of trying to establish whose car was damaged and by how much and to what amount of monetary award they would be entitled? Far simpler to randomly sample the product and immediately intervene. Psychological experiments with rats and pigeons demonstrated that random rewards were more effective in eliciting a behavior than regularly scheduled rewards (kinda explains slot machines). So, by the same reasoning, randomly sampling and testing any offering would prompt the most compliance.

But the case you make gives one cause to pause.
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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.