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Tags: auto | credit | rating | shopping

WaPo: Credit Ratings Agencies Are Repeating Pre-Meltdown Behavior

By    |   Wednesday, 17 September 2014 12:58 PM

The credit ratings agencies, which some experts blame for being enablers in the nation's 2008 financial meltdown, apparently have been back-sliding toward their old behavior.

Big banks and other lenders were motivated to push worthless loans off as valuable during the profit scramble before the bubble burst, and critics said the credit agencies went along for the ride.

"They made their money rating bonds, and only rating bonds," The Washington Post noted. "If it turned out their ratings were garbage, and contributed to a once-in-three-generations crisis — well, oops. But thanks for all the fees! It was one part incompetence, and another part incentives."

Editor’s Note:
Dow Predicted Will Hit 60,000 — Buy These 4 Stocks Now


Of course, what makes things tempting for the credit ratings agencies is their fox-in-the-henhouse business model — their clients are also the very companies whose creditworthiness they rate.

"There are three major credit rating agencies, but Wall Street only needs one of them to rate a bond. So a bank can ask all of them what rating they would give a bond, and then go with the one that rates it highest," The Post stated.

"This 'ratings shopping,' of course, gives credit rating agencies good reason — i.e., their bottom lines — to give banks the ratings they want. There's no point being Cassandra if it drives you out of business."

According to The Post, the Dodd-Frank financial reform act unwisely did not remedy the potential conflicts in the credit agencies' business models.

In fact, ratings shopping among lenders "has returned with a bang," Financial Times columnist Tracy Alloway noted.

Sales of bonds backed by loans used to finance car purchases by the least creditworthy borrowers have reached pre-crisis levels in the United States, leading to a Department of Justice investigation, Alloway explained.

For example, Fitch Ratings has been hired to rate only four of the 29 subprime auto bond deals sold so far in 2014, after telling issuers that the vast majority of the bonds did not deserve the triple-A ratings reserved for the highest-quality credits.

"Fitch — one of the 'big three' agencies alongside Moody's and Standard & Poor's — warns that a flood of new entrants into the subprime auto lending market are lending to riskier borrowers as they seek to establish a foothold in the market," she wrote.

Participants in commercial mortgage-backed securities (CMBS) deals said the quality of those loans also is slipping.

A Morgan Stanley analyst told Alloway that CMBS issuers appear to be avoiding Moody's ratings on parts of their deals where the agency may require higher levels of credit than its competitors — another potential sign of rate shopping.

"The good news is that the subprime auto loan market isn't nearly as big, or systemically important, as the subprime mortgage market was before the crash," The Post noted. "But the bad news is that we haven't gotten rid of the credit rating agencies' perverse incentives to rate bonds better than they deserve just to drum up business."

Editor’s Note: Dow Predicted Will Hit 60,000 — Buy These 4 Stocks Now

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Finance
The credit ratings agencies, which some experts blame for being enablers in the nation's 2008 financial meltdown, apparently have been back-sliding toward their old behavior.
auto, credit, rating, shopping
506
2014-58-17
Wednesday, 17 September 2014 12:58 PM
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