Analysis of information sources in references of the Wikipedia article "Credit rating agency" in English language version.
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table 3, Ratings in U.S. regulation
The agencies had charts and studies showing that their ratings were accurate a very high percentage of the time. But anyone who dig more deeply could find many instances when they got it wrong, usually when something unexpected happened. The rating agencies had missed the near default of New York City, the bankruptcy of Orange County, and the Asian and Russian meltdowns. They failed to catch Penn Central in the 1970s and Long-Term Capital Management in the 1990s. They often downgraded companies just days before bankruptcy – too late to help investors. Nor was this anything new: one study showed that 78% of the municipal bonds rated double A or triple-A in 1929 defaulted during the Great Depression.
"Not a single analyst at either Moody's of S&P lost his job as a result of missing the Enron fraud. Management stayed the same. Moody's stock price, after a brief tumble, began rising again .... 'Enron taught them how small the consequences of a bad reputation were.'
Moody's downgrades GE paper.
What caused Moody's to change were three things. ... the inexorable rise of structured finance, and the concomitant rise of Moody's structured products business. ... the 2000 spin-off, which resulted in many Moody's executives getting stock options and gave them a new appreciation for generating revenues and profits.
Between the time it was spun off into a public company and February 2007, [Moody's] stock had risen 340%. Structured finance was approaching 50% of Moody's revenue – up from 28% in 1998. It accounted for pretty much all of Moody's growth.
[Example from page 118] "UBS banker Robert Morelli, upon hearing that S&P might be revising its RMSBS ratings, sent an e-mail to an S&P analyst. 'Heard your ratings could be 5 notches back of moddys [sic] equivalent, Gonna kill you resi biz. May force us to do moddyfitch only ...'"
S&P, Moody's and Fitch control 98 percent of the market for debt ratings in the U.S., according to the SEC. The noncompetitive market leads to high fees, says SEC Commissioner Casey, 43, appointed by President George W. Bush in July 2006 to a five-year term. S&P, a unit of McGraw-Hill Cos., has profit margins similar to those at Moody's, she says. 'They've benefited from the monopoly status that they've achieved with a tremendous amount of assistance from regulators,' Casey says.
Moody's, the only one of the three that stands alone as a publicly traded company, has averaged pretax profit margins of 52 percent over the past five years. It reported revenue of $1.76 billion – earning a pretax margin of 41 percent – even during the economic collapse in 2008. S&P, Moody's and Fitch control 98 percent of the market for debt ratings in the U.S., according to the SEC. The noncompetitive market leads to high fees, says SEC Commissioner Casey, 43, appointed by President George W. Bush in July 2006 to a five-year term. S&P, a unit of McGraw-Hill Cos., has profit margins similar to those at Moody's, she says.
[B]ank models of risk assessment have proved to be even less reliable than credit ratings, including in the largest banks where risk management was widely believed to most advanced.
These courts have held, among other things, that rating agencies are protected by the "actual malice" standard, which insulates them from liability for their ratings unless the publications are made with "knowledge of falsity" or "reckless disregard for the truth."
By 2006, Moodys' had earned more revenue from structured finance – $881 million – than all its business revenues combined for 2001
'The three major rating agencies hold a collective market share of roughly 95%. Their special status has been cemented by law – at first only in the United States, but then in Europe as well,' explains an analysis by DeutscheWelle.
In 2007, as housing prices began to tumble, Moody's downgraded 83% of the $869 billion in mortgage securities it had rated at the AAA level in 2006
Rating entered a period of rapid growth and consolidation with this legally enforced separation and institutionalization of the securities business after 1929. Rating became a standard requirement for selling any issue in the United States, after many state governments incorporated rating standards into their prudential rules for investment by pension funds in the early 1930s.
In this era of rating conservatism, sovereign rating coverage was reduced to a handful of the most creditworthy countries.
Changes in the financial markets have made people think the agencies are increasingly important. ... What is disintermediation? Banks acted as financial intermediaries in that they brought together suppliers and users of funds. ... Disintermediation has occurred on both sides of the balance sheet. Mutual funds ... now contain $2 trillion in assets – not much less than the $2.7 trillion held in U.S. bank deposits. ... In 1970, commercial lending by banks made up 65% of the borrowing needs of corporate America. By 1992, the banks' share had fallen to 36%
The third period of rating development began in the 1980s, as a market in low-rated, high-yield (junk) bonds developed. This market – a feature of the newly released energies of financial globalization – saw many new entrants into capital markets.
Today [2008] expressions of concern about rating performance – how good the rating agencies are at their business – have become the norm. Newspapers, magazines, and online sites talk continuously about the agencies and their failings.
The concern of the Justice Department's antitrust division was that unsolicited ratings were, in effect, anticompetitive. Rating firms could use the practice to 'improperly pressure' issuers in order to win business.... If they come to be viewed as 'shakedown artists,' using ratings to generate business, this will undermine credit markets.
In the late 1960s and early 1970s, raters began to charge fees to bond issuers to pay for ratings. Today, at least 75% of the agencies' income is obtained from such fees.
Quoting Robert Clow in Institutional Investor, 1999
It is very hard to see how this combination can be justified. Imagine if patients were forced to use doctors whose incomes depended on the pharmaceutical companies, but who were immune from lawsuits if they prescribed a toxic drug.
Credit ratings also determined whether investors could buy certain investments at all. The SEC restricts money market funds to purchasing "securities that have received credit ratings from any two NRSROs ... in one of the two highest short-term rating categories or comparable unrated securities." The Department of Labor restricts pension fund investments to securities rated A or higher. Credit ratings affect even private transactions: contracts may contain triggers that require the posting of collateral or immediate repayment, should a security or entity be downgraded. Triggers played an important role in the financial crisis and helped cripple AIG.
Purchasers of the safer tranches got a higher rate of return than ultra-safe Treasury notes without much extra risk—at least in theory. However, the financial engineering behind these investments made them harder to understand and to price than individual loans. To determine likely returns, investors had to calculate the statistical probabilities that certain kinds of mortgages might default, and to estimate the revenues that would be lost because of those defaults. Then investors had to determine the effect of the losses on the payments to different tranches. This complexity transformed the three leading credit rating agencies—Moody's, Standard & Poor's (S&P), and Fitch—into key players in the process, positioned between the issuers and the investors of securities.
In October 2007, the M4-M11 tranches [on one subprime mortgage backed deal the FCIC followed] were downgraded and by 2008, all the tranches were downgraded. Of all mortgage-backed securities it rated triple-A in 2006, Moody's downgraded 73% to junk.
Participants in the securitization industry realized that they needed to secure favorable credit ratings in order to sell structured products to investors. Investment banks therefore paid handsome fees to the rating agencies to obtain the desired ratings. "The rating agencies were important tools to do that because you know the people that we were selling these bonds to had never really had any history in the mortgage business. ... They were looking for an independent party to develop an opinion," Jim Callahan told the FCIC; Callahan is CEO of PentAlpha, which services the securitization industry, and years ago he worked on some of the earliest securitizations
The three credit rating agencies were key enableers of the financial meltdown ... forces at work ... includ[e] flawed computer models, the pressure from financial firms that paid for that ratings, the relentless drive for market share, ...)
[When asked if the investment banks frequently threatened to withdraw their business if they didn't get their desired rating, former Moody team managing director Gary Witt told the FCIC] Oh God, are you kidding? All the time. I mean, that's routine. I mean, they would threaten you all of the time... It's like, 'Well, next time, we're just going to go with Fitch and S&P.'
Overall, my findings suggest that the problems in the CDO market were caused by a combination of poorly constructed CDOs, irresponsible underwriting practices, and flawed credit rating procedures.
Investors, including public pension funds and foreign banks, lost hundreds of billions of dollars, and have since filed dozens of lawsuits against the agencies.
According to the theoretical literature, CRAs potentially provide information, monitoring, and certification services. First, since investors do not often know as much as issuers about the factors that determine credit quality, credit ratings address an important problem of asymmetric information between debt issuers and investors. Hence, CRAs provide an independent evaluation and assessment of the ability of issuers to meet their debt obligations. In this way, CRAs provide 'information services' that reduce information costs, increase the pool of potential borrowers, and promote liquid markets.
{{cite news}}: CS1 maint: deprecated archival service (link)When the phrase NRSRO was first used, the SEC was referring to the three agencies that had a national presence at that time, Moody's, Standard and Poor's and Fitch.
Table 1. Selected Bond Rating Agencies
Critics say this created perverse incentives such that at the height of the credit boom in 2005 to 2007, the agencies recklessly awarded Triple A ratings to complex exotic structured instruments that they scarcely understood. They have profited handsomely. In the three-year period ending in 2007, the height of the credit boom, S&P's operating profit rose 73 percent to $3.58 billion compared to the three-year period ending in 2004. The comparable gain for Moody's over the same period was 68 percent to $3.33 billion.
Adam Davidson: And by the way, before you finance enthusiasts start writing any letters, we do know that $70 trillion technically refers to that subset of global savings called fixed income securities. ... Ceyla Pazarbasioglu: This number doubled since 2000. In 2000 this was about $36 trillion. Adam Davidson: So it took several hundred years for the world to get to $36 trillion. And then it took six years to get another $36 trillion.
A more recent example is the 1989 regulation allowing pension funds to invest in asset-backed securities rated A or higher.
When the phrase NRSRO was first used, the SEC was referring to the three agencies that had a national presence at that time, Moody's, Standard and Poor's and Fitch.
Table 1. Selected Bond Rating Agencies
By 2006, Moodys' had earned more revenue from structured finance – $881 million – than all its business revenues combined for 2001
'The three major rating agencies hold a collective market share of roughly 95%. Their special status has been cemented by law – at first only in the United States, but then in Europe as well,' explains an analysis by DeutscheWelle.
S&P, Moody's and Fitch control 98 percent of the market for debt ratings in the U.S., according to the SEC. The noncompetitive market leads to high fees, says SEC Commissioner Casey, 43, appointed by President George W. Bush in July 2006 to a five-year term. S&P, a unit of McGraw-Hill Cos., has profit margins similar to those at Moody's, she says. 'They've benefited from the monopoly status that they've achieved with a tremendous amount of assistance from regulators,' Casey says.
Moody's, the only one of the three that stands alone as a publicly traded company, has averaged pretax profit margins of 52 percent over the past five years. It reported revenue of $1.76 billion – earning a pretax margin of 41 percent – even during the economic collapse in 2008. S&P, Moody's and Fitch control 98 percent of the market for debt ratings in the U.S., according to the SEC. The noncompetitive market leads to high fees, says SEC Commissioner Casey, 43, appointed by President George W. Bush in July 2006 to a five-year term. S&P, a unit of McGraw-Hill Cos., has profit margins similar to those at Moody's, she says.
In 2007, as housing prices began to tumble, Moody's downgraded 83% of the $869 billion in mortgage securities it had rated at the AAA level in 2006
These courts have held, among other things, that rating agencies are protected by the "actual malice" standard, which insulates them from liability for their ratings unless the publications are made with "knowledge of falsity" or "reckless disregard for the truth."
In some countries, credit rating agencies are starting to provide other types of services, including credit reporting serv-ices.
When the phrase NRSRO was first used, the SEC was referring to the three agencies that had a national presence at that time, Moody's, Standard and Poor's and Fitch.
Table 1. Selected Bond Rating Agencies
