Rating Agencies Point Out Catch-22

August 25, 2010 by · Leave a Comment
Filed under: General, The Rating Agencies 

The investigations on Capitol Hill have turned to how the rating agencies publicly shared the computer models they used to devise ratings. Ostensibly, the practice ensures that banks and other issuing bonds aren’t surprised by a weak rating that can adversely affect their ability to sell. What the Senate Panel took issue with is how it opened the door for bankers to work backwards: tinkering with complex mortgage deals until the model delivered the desired rating.

David Weinfurter, a spokesman for Fitch Inc., defended his company by saying it had made its models public in response to demand for increased transparency. He also pointed out that a committee, not the models, ultimately assigned ratings.

“There’s a bit of a Catch-22 here, to be fair to the ratings agencies,” said Dan Rosen, a member of Fitch’s academic advisory board and the chief of R2 Financial Technologies in Toronto. “They have to explain how they do things, but that sometimes allowed people to game it.”

Speak Your Mind

Tell us what you're thinking...