I’ve written a couple of previous times about the corrupt relationship that commercial rating agencies i.e. S&P and Moodys, have with bond issuers and bond purchasers. The rating agencies got paid by bond issuers who would have trouble placing their bonds if the agencies gave them a poor rating. In turn, if the agency provided a poor rating, they wouldn’t get future business from the issuer. It was a situation where both entities benefited from the rating agency providing a high rating regardless of what the real quality of the bonds were.
Today the rating agencies got their turn in the barrel at the Congressional hearings. As a part of the testimony, some text messages between executives of S&P were introduced. The exchange was:
Official #1: Btw (by the way) that deal is ridiculous.
Official #2: I know right…model def (definitely) does not capture half the risk.
Official #1: We should not be rating it.
Official #2: We rate every deal. It could be structured by cows and we would rate it.
Rating agencies were one of the few checks that were supposedly available for determine risk in bond issuance. It was thought that the rating agencies were “independent” and would provide an unbiased, integrity based assessment of the quality of the debt instrument being offered. Apparently the these two executives at S&P didn’t believe they had that responsibility.
There were clearly some people and organizations who were not “playing by the rules” and contributed to the current financial challenges. While I don’t really expect it to happen, I hope the Congress and others ferret these folks out and prosecute them with extreme prejudice. I also hope that changes are made to how rating agencies interact with debt issuers and purchasers. The relationship needs to be independent. Without independence, the rating agencies perform no service and the debt issuers may as well rate the bond themselves.
S&P may have given positive ratings to debt even if the deal was “structured by cows.” That’s understandable because both cows and S&P deliver shit, cows at least have the positive attribute of providing milk.
