Credit Rating Agencies & The Financial Meltdown

In this subprime mortgage caused financial meltdown, public opinion accuses some players of abject greed and others of downright fraud. But incompetence is a charge perhaps reserved only for credit rating agencies.

The aspiring homeowner could buy a bigger house with the larger mortgage he got from his bank.

Mortgage brokers and bankers could meet their sales quotas faster – and earn larger bonuses – by making larger mortgages that had the blessings of their companies.

Investment bankers and other financial intermediaries were not straying from their duties when they packaged and sold heaps of mortgage-based securities that were rated AAA (the highest rating for debt instruments) by reputed credit agencies.

But, when it comes to credit rating agencies like Standard & Poor, Moody’s and Fitch, it’s a completely different story. They were required to have the competence to analyze the assets underlying the securities they rated. These assets had danger signs all over them – some mortgages were for amounts too high to be justified by the homeowner’s income, others were made to NINJAs (people with No Income No Jobs or Assets) or without any documentation. What led them to give AAA ratings when they should have put large ‘Buyer Beware’ stickers on such securities? If not sheer incompetence, was it corruptness, as some have accused?

Harold “Terry” McGraw III, fourth generation McGraw family member and CEO for over a decade of McGraw Hill Corporation (of which Standard & Poor is a division), was recently pleased to learn that his company’s global headquarters skyscraper figured on New York City’s tourist map when he heard the guide announce that their double-decker tourist bus was approaching the landmark. He was however taken aback by the guide’s announcement, “alas not a single McGraw is alive today”.

McGraw III should be thankful that his virtual incognito status is perhaps what came between him and the pitchfork of public ire for the alleged incompetence and corruptness of S&P under his charge. Maybe the folks at AIG who nearly got lynched on the streets of Manhattan have a few lessons to learn from him on how to stay low profile?

UPDATE DATED 2 MAY 2018:

10 years after precipitating the GFC with their sheer incompetence, Top 3 Credit Rating Agencies still enjoy 94% market share – via @WSJ . #WhitherDisruption?https://t.co/NR7Xqjohhs pic.twitter.com/LnQY9MdlxW

— Ketharaman Swaminathan (@s_ketharaman) May 2, 2018