The Abysmal Track Records of Moody's, Fitch and S&P

Nov. 21, 2007 7:06 AM ETMoody's Corporation (MCO)2 Comments
Barry Ritholtz profile picture
Barry Ritholtz
581 Followers

“How could the credit-rating agencies be so wrong consistently? [They were] wrong on Mexico, wrong on Asia, wrong on Enron, wrong on subprime. . . . ”
-Congresswoman Carolyn Maloney (D–New York)

“Most people don’t really know how the bond raters compete in the structured-finance area. “[At my agency], we tried to do our best, but we also understood the conflicts. We all assumed that if we pounded the table too much we’d be left out of the deal.”
-A former employee at a Big Three rating agency

Freddie Mac's (FRE) troubles are front page news today (WSJ: Mortgage Giant Fuels Worries With Steep Loss). Treasury Secretary Hank Paulson has figured out that the Housing slow down isn't bottoming anytime soon, and that 2008 will be worse than 2007.

But the most interesting read of this morbid tale comes from the lesser known publication Trader Monthly (website: TraderDaily.com). Well known muckraker (and CNBC on air editor) Charlie Gasparino (his most recent book, “King of the Club", covers the rise and fall of Dick Grasso) gives the full monty to the Big 3.

Hidden behind a free registration firewall, Berating the Raters pulls no punches. Gasparino calls the rating agencies track record "ABYSMAL." He explains what he describes as their "hopelessly conflicted business model." He challenges readers to consider the track record of "what they get paid to do — weighing the risks for investors and traders who buy bonds."

Most of all, he notes simply: The rating agencies significantly contributed to the subprime crisis that caused the credit crunch this past summer and that may sink the economy into recession.

(How's that for a well crafted and powerful sentence?)

Here's a potent excerpt:

"The bond raters make money through one of the most flawed and conflicted business models in

This article was written by

Barry Ritholtz profile picture
581 Followers
Barry Ritholtz is Chief Market Strategist for Ritholtz Research, an independent institutional research firm specializing in the analysis of macroeconomic trends and the capital markets. He is also President of Ritholtz Capital Partners, a New York hedge fund driven by the analysis performed by Ritholtz Research. Mr. Ritholtz is a frequent contributor to many leading financial publications and writes The Big Picture, an insightful, popular and vibrant weblog. Visit his blog: The Big Picture (http://bigpicture.typepad.com/)

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