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Author: warrl Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 461345  
Subject: Re: Government "Payback" for Downgrade Date: 2/4/2013 8:32 PM
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It certainly hasn't taken the government 5 years to figure out that the ratings agencies were the ultimate enablers of the overpricing of subprime mortgage bonds.

But I don't believe that the rating agencies WERE the ULTIMATE enablers.

You see, at one time the rating agencies owed their livelihood to big investors - banks, pension funds, and mutual funds - who BUY bonds. Those folks want ACCURATE ratings.

Today, they owe their livelihood to big borrowers who SELL bonds. Those folks want FAVORABLE ratings.

Why the change?

The US government changed the rules. It ripped the rating agencies away from those who have strong incentive to seek ACCURATE ratings, and tied them into the arms of those who have strong incentive to seek FAVORABLE ratings.

The rating agencies, like pretty much any other business or politician, looked for how it could give the people paying them what those people wanted.

The US government is the ULTIMATE enabler of the overpricing.

And the proposed solutions I've seen amount to leaving the rating agencies in the arms of those who want ratings favorable to the bond issuers, but also make them answerable to people who don't pay them a dime but want ratings favorable to the government. People who just want accurate ratings would still be left out in the cold (and eventually paying a large share of the consequences of inaccurate ratings).
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