Thread by @ritholtz

“We obviously cannot ask payment for rating a bond. To do so would attach a price to the process, and we could not escape the charge, which would undoubtedly come, that our ratings are for sale.”

Can you guess who said that?

1/

It was Edmund Vogelius, a Moody’s vice president, who explained the company’s business model in a 1957 article in The Christian Science Monitor

Its almost quaint how naive that sentiment was...

2/

Now consider this statement:

“These errors make us look either incompetent at credit analysis or like we sold our soul to the devil for revenue, or a little bit of both.”

—A Moody’s managing director responding anonymously to an internal management survey, September 2007.

3/

Both of those statements were from a 2008 column by Gretchen Morgenson

(Note in the above its not an either/or situation -- Moody's can be both incompetent and corrupt.)

nytimes.com/2008/12/07/bus…

4/

This has been on my mind lately ever since a WSJ journal column discussed the Credit Rating Agencies biz model.

The key takeaway? Nothing much has changed since the GFC

wsj.com/articles/infla…

5/

There is a complicated, interesting regulatory history behind this, dating back to 1975.

mercatus.org/publication/br…

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There have been SEC attempts to fix this via disclosure, but that only means we get 50 pages of unread fine print. Disclosure does not seem to work here.

jenner.com/system/assets/…

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My preference would be to impose legal liability for incompetent or misleading ratings.

Higher duties of care are usually more effective than mere disclosure solutions

8/

Back to those 1975 changes:

In that era of high rates and higher inflation, I doubt anyone could not have imagined an era of ZIRP + QE.

I suspect it was also unimaginable that CRAs would put their credibility out for sale

ritholtz.com/2019/08/bbrg-t…

9/

Regardless, from those SEC changes in 1975 that created the designation of ratings agencies as NRSRO, the world has changed. So too did Moody's and S&P, who morphed their business from being bond analysts to selling bond rated t issuers and underwriters.

10/

Nothing of great significance has changed since the crisis -- ratings are still up for sale.

I have a few suggestions as to how to fix the ratings agencies, but do not hold your breath that there will be any changes anytime soon...

bloomberg.com/opinion/articl…

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I cannot imagine that after the financial crisis, any serious bond manager would rely on Moody's or S&P...

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Issuers who garner better ratings pay lower borrowing costs.

So here we are with rates very low, a decaying infrastructure that (eventually) will require big federal, state, & muni spending, and a bond ratings system that seems to be wholly corrupt.

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Hardly the sort of system that garners respect or is solid enough to build an entire bond market upon.

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I am not forecasting another CRA related financial crisis, but rather, I am pointing out that the same conditions which led to 2008-09 are still in place.

Why is it that we in finance seem to learn very little from history?

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