Tuesday, April 29, 2008

Kevin Understands Moodys

Kevin put up two posts while I was away, here and here on bond rating agencies. He gets it. If a bond gets an AAA rating, it qualifies as investment grade. And if it does that ... well then lots of banks make lots of fees, and they pay the rating agency commissions, big commissions.

Oddly, when you can make $200,000 in fees if a given bond qualifies, lots of bonds JUST BARELY qualify. I mean, it's probably not just a sloppy mistake that they left their "model available to bankers that allows them to run the numbers until they get something they like and send it in for a rating." It's probably not coincidence that "[Joseph] Mason, of Drexel University, compared default rates for corporate bonds rated Baa with those of similarly rated collateralized debt obligations until 2005 (before the bubble burst). Mason found that the C.D.O.'s defaulted eight times as often." (note: corporate bonds are better understood and didn't have the same opportunity and gamesmanship)

Find the original NY Times article here.

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