Subprime meltdown caused by bad incentives for ratings agencies?

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	Subprime meltdown caused by bad incentives for ratings agencies?

greenrd

4-1-2008 10:18 AM

216 views

tags:

subprime, capitalism, incentives, subversion

greenrd says:

OK, I'm simplifying a little with my title there...

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<div style="margin: 12px 0px; font-family: arial; color: #333333; background: #ffffff; border: solid 4px #e5e5e5; width: 100%; clear: left;"><div class="CM_CTB_Content_Wrap" style="margin: 0px; padding: 0px;background-color: #ffffff;"><div style="border-bottom: solid 1px #dcdcdc; white-space: nowrap; margin-bottom: 8px; background-color: #eeeeee ;background-image: url(http://clipmarks.com/images/source-bg.gif); background-repeat: repeat-x; height: 24px; line-height: 24px; vertical-align: middle; padding-bottom: 4px; color: #666666; font-size: 10px;" ><a href="http://clipmarks.com/clip-to-blog/" title="see clips that are hot right now"><img src="http://content.clipmarks.com/blog_embed/65f9455e-03f7-495b-a4c3-64677e300e82/25B6575D-F450-46D1-BD77-B6AA123FE019/" alt="" width="19" height="19" border="0" style="vertical-align: middle; margin: 0px 4px; display: inline; border: none; float:none;" /></a>clipped from <a title="http://crookedtimber.org/2008/03/31/riddles-wrapped-in-mysteries-inside-enigmas/" href="http://crookedtimber.org/2008/03/31/riddles-wrapped-in-mysteries-inside-enigmas/" style="font-size: 11px;">crookedtimber.org</a></div><blockquote style="text-align: left; padding: 0px 8px; margin: 4px 0px 8px 0px; background: transparent; border: none;" cite="http://crookedtimber.org/2008/03/31/riddles-wrapped-in-mysteries-inside-enigmas/"><P>The really dangerous conflict, which nobody seems to be picking up on, is that rating agencies have a vested interest in allowing/encouraging innovation in structures and products. The more ratable, and especially triple-A ratable, structures/products the more business they get, and they don’t even have to bother with grubby favouritism. It’s doubly dangerous because it bypassed the agencies’ undeniable strength – statistical analysis of historical credit performance. If the structure or product has no history, statistical analysis is useless. So they were forced to venture deeper into the world of assumptions and analsyis of factors outside their expertise, like liquidity or market value.</p> <P>It was probably this conflict that led the agencies to grant triple-A ratings to products that turned out not to deserve them – CDOs of <SPAN class="caps">ABS </SPAN>(especially mezzanine <SPAN class="caps">ABS</SPAN>), SIVs, <SPAN class="caps">CPD</SPAN>Os etc.</P></blockquote></div><div style="margin: 0px 6px 6px 4px;"><table style="font-size: 11px;border-spacing: 0px;padding: 0px;" cellpadding="0" cellspacing="0" width="100%"><tr><td style="background:transparent;border-width:0px;padding:0px;">&nbsp;</td><td align="right" style="background:transparent;border-width:0px;padding:0px;width:107px" width="107"><a href="http://clipmarks.com/share/25B6575D-F450-46D1-BD77-B6AA123FE019/blog/" title="blog or email this clip"><img src="http://content8.clipmarks.com/images/c2b-foot.png" border="0" alt="blog it" width="107" height="17" style="border-width:0px;padding:0px;margin:0px;" /></a></td></tr></table></div></div>

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