In this subprime mortgage caused financial meltdown, public opinion accuses\u00a0some players of abject greed\u00a0and others of downright fraud. But incompetence is a charge\u00a0perhaps\u00a0reserved only for credit rating agencies.<\/p>\n
The aspiring homeowner could buy a bigger house with the larger mortgage he got from his bank.<\/p>\n
Mortgage brokers and bankers could meet their sales quotas faster – and earn larger bonuses – by making larger mortgages that had the blessings of their\u00a0companies.<\/p>\n
Investment bankers and other financial intermediaries were\u00a0not straying from their duties\u00a0when they packaged and sold heaps of\u00a0mortgage-based securities that were rated AAA (the highest rating for debt instruments) by reputed credit agencies.<\/p>\n
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\u00a0the competence to analyze the assets underlying\u00a0the securities they rated. These assets had danger signs all over them –\u00a0some mortgages were for amounts too\u00a0high to be\u00a0justified by the homeowner’s income, others were made to NINJAs (people with No Income No Jobs or Assets) or without any documentation. What\u00a0led them to give AAA\u00a0ratings when they should have put large ‘Buyer Beware’ stickers on such securities? If not sheer incompetence, was it\u00a0corruptness, as some have accused?<\/p>\n
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\u00a0that his company’s global headquarters skyscraper figured on New York City’s tourist map\u00a0when 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,\u00a0“alas not a single McGraw is alive today”.<\/p>\n
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\u00a0lynched on the streets of Manhattan have a few lessons to learn from him on how to stay low profile?<\/p>\n
UPDATE DATED 2 MAY 2018:<\/strong><\/p>\n 10 years after precipitating the GFC with their sheer incompetence, Top 3 Credit Rating Agencies still enjoy 94% market share – via @WSJ<\/a> . #WhitherDisruption<\/a>?https:\/\/t.co\/NR7Xqjohhs<\/a> pic.twitter.com\/LnQY9MdlxW<\/a><\/p>\n — Ketharaman Swaminathan (@s_ketharaman) May 2, 2018<\/a><\/p><\/blockquote>\n\n