Apr 22, 2008

ratings agencies

If you're still interested in the mortgage crisis there is a very nice piece in the NY Times this weekend (also here) that focuses on the ratings agencies and their conflicts of interest with the banks. Usually when the NY Times does a big piece like this it can become a hatchet job or it can be wrong in certain parts. I don't see any glaring lack of objectivity in this piece or anything seriously wrong with what is written either. It's long but worth a read.
What the bankers in these deals are really doing is buying a bunch of I.O.U.’s and repackaging them in a different form. Something has to make the package worth — or seem to be worth — more that the sum of its parts, otherwise there would be no point in packaging such securities, nor would there be any profits from which to pay the bankers’ fees.

That something is the rating. Credit markets are not continuous; a bond that qualifies, though only by a hair, as investment grade is worth a lot more than one that just fails. As with a would-be immigrant traveling from Mexico, there is a huge incentive to get over the line.

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