Comments on: Goodbye, Ratings? http://www.theratingsdebate.com/goodbye-ratings/ Sun, 29 Jan 2012 10:51:49 +0000 hourly 1 http://wordpress.org/?v=3.1.1 By: Lawrence Kramer http://www.theratingsdebate.com/goodbye-ratings/comment-page-1/#comment-61 Lawrence Kramer Tue, 29 Sep 2009 20:46:30 +0000 http://www.theratingsdebate.com/?p=405#comment-61 Brian - Actually, it doesn't matter who pays - costs are fungible. What matters is who has the risk. If the rater has skin in the game, it won't matter who writes the check. The conflict in interests arose because the raters had no stake (beyond reputation) in the quality of their ratings. Obviously, reputation matters - it accounted for the high credibility that the agencies enjoyed before they went south. But the late unpleasantness has put people in a state of mind where the actual dollar incentives of facing actual human beings will be given the greatest weight by the market. My UL model is not a "user pays" approach. Issuers pay for credit enhancement. I'm merely suggesting that the rater have a financial stake in investment results, and, of course, that the people who make the call get paid on those results and not on issuer-paid revenues. All of these changes will be judged by the bond markets, which will believe the ratings or won't. The spread between corporate and Treasury rates will measure the confidence that the raters have earned. Brian – Actually, it doesn’t matter who pays – costs are fungible. What matters is who has the risk. If the rater has skin in the game, it won’t matter who writes the check.

The conflict in interests arose because the raters had no stake (beyond reputation) in the quality of their ratings. Obviously, reputation matters – it accounted for the high credibility that the agencies enjoyed before they went south. But the late unpleasantness has put people in a state of mind where the actual dollar incentives of facing actual human beings will be given the greatest weight by the market.

My UL model is not a “user pays” approach. Issuers pay for credit enhancement. I’m merely suggesting that the rater have a financial stake in investment results, and, of course, that the people who make the call get paid on those results and not on issuer-paid revenues.

All of these changes will be judged by the bond markets, which will believe the ratings or won’t. The spread between corporate and Treasury rates will measure the confidence that the raters have earned.

]]> By: Brian Battle http://www.theratingsdebate.com/goodbye-ratings/comment-page-1/#comment-60 Brian Battle Tue, 29 Sep 2009 20:28:05 +0000 http://www.theratingsdebate.com/?p=405#comment-60 Lawrence- Great point. The Congressional examination will really focus on the easy to illustrate "conflict of interest". Certainly the ratings agencies were gamed, or duped. The ratings agencies level of complicity is to be fully discovered. They were also under earnings pressure and sought higher fee business. It doesnt look good. There are legal avenue of prosecution if laws were broken. To your point, I think there is room for the "Issuer pays" and "user pays models". Lets have the market decide. We need to focus part of the fiducuary duty back on the investors. HOWEVER; The effects of the downgraded, high quality assets is partially what ailes the economy generally. Lets use the system we have, but improve it. thanks for the comment. Lawrence- Great point. The Congressional examination will really focus on the easy to illustrate “conflict of interest”. Certainly the ratings agencies were gamed, or duped. The ratings agencies level of complicity is to be fully discovered. They were also under earnings pressure and sought higher fee business. It doesnt look good. There are legal avenue of prosecution if laws were broken. To your point, I think there is room for the “Issuer pays” and “user pays models”. Lets have the market decide. We need to focus part of the fiducuary duty back on the investors.
HOWEVER; The effects of the downgraded, high quality assets is partially what ailes the economy generally. Lets use the system we have, but improve it.
thanks for the comment.

]]> By: Lawrence Kramer http://www.theratingsdebate.com/goodbye-ratings/comment-page-1/#comment-58 Lawrence Kramer Tue, 29 Sep 2009 16:33:59 +0000 http://www.theratingsdebate.com/?p=405#comment-58 As a long-time <a href="http://tinyurl.com/mf3frj" rel="nofollow">blamer of the ratings agencies</a>, I suggest that the key concern should be the confict of interests inherent in the agencies' business model, not the advent of novel multi-obligor debt. It may, indeed, be impossible to rate multi-obligor debt, or at least to rate it AAA, but it certainly was possible to <i>decline</i> to rate it, and the agencies might have done so if they didn't have fees dangling in front of them. The refusal of the agencies to rate the debt would have brought about a new way of homogenizing the paper, which still needs to be found, as our trading partners still have all the money and still want safe, homogenized debt, as evidenced by the ridiculously low rates on Treasuries. I think the solution is something akin to Underwriters Laboratories, an agency funded by credit enhancers. I reach that conclusion from the premise that the credit insurers are the only ones with enough skin in the game to care about the quality of the paper, and that too much duplication of effort by all of those insurers would be wasteful, so they should pool at least the threshhold aspects of the underwriting process. (This is my first comment, and I hope my HTML works. A preview option might be a good addition to this site.) As a long-time blamer of the ratings agencies, I suggest that the key concern should be the confict of interests inherent in the agencies’ business model, not the advent of novel multi-obligor debt. It may, indeed, be impossible to rate multi-obligor debt, or at least to rate it AAA, but it certainly was possible to decline to rate it, and the agencies might have done so if they didn’t have fees dangling in front of them.

The refusal of the agencies to rate the debt would have brought about a new way of homogenizing the paper, which still needs to be found, as our trading partners still have all the money and still want safe, homogenized debt, as evidenced by the ridiculously low rates on Treasuries.

I think the solution is something akin to Underwriters Laboratories, an agency funded by credit enhancers. I reach that conclusion from the premise that the credit insurers are the only ones with enough skin in the game to care about the quality of the paper, and that too much duplication of effort by all of those insurers would be wasteful, so they should pool at least the threshhold aspects of the underwriting process.

(This is my first comment, and I hope my HTML works. A preview option might be a good addition to this site.)

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