Ratings Arbitrage - Letting the Credit Ratings Agencies off the Hook

An amendment just passed the Senate which allows regulators to assign a credit rating agency to evaluate asset based securities. To date, the ones hiring the credit rating agencies are the ones making up these fictional derivatives.

That said, we have this New York Times article reporting more investigations of banks, but this time trying to find evidence the poor little ole' credit ratings agencies were just played as suckers by the banks (cough, cough):

The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.

Since ratings models were available to the ones creating the structured finance product, in this case, credit default obligations (CDOs), issuing firms could analyze the ratings methods to figure out where to hide the toxic, worthless crud contained within, yet still land a AAA rating.

What is not good is trying to let credit ratings agencies off the hook by claiming they were duped. As we saw from this congressional hearing, trying to feign ignorance by the credit ratings agencies is fiction.

Stuffing a CDO as standard practice is material we've covered before. In not only bad math, bad computation too, is a HOW TO manipulate these derivatives. Now when will Congress call in the geeks and realize if something cannot be independently validated, is not even mathematically correct by a model, then it sure as hell should not be sold for billions! Get it together Congress and pay attention to these products in and of themselves. They are snake oil, ok?

At Goldman, there was even a phrase for the way bankers put together mortgage securities. The practice was known as “ratings arbitrage,” according to former workers. The idea was to find ways to put the very worst bonds into a deal for a given rating. The cheaper the bonds, the greater the profit to the bank.

Subject Meta: 

Forum Categories: