Thursday, September 17, 2009

Ongoing SEC meeting on the ratings agencies(MCO, MHP)

AlphaNinja - Below (bottom) is a link to the live webcast of the SEC's meeting discussing the ratings agencies and what to do about their (in my opinion) criminal activities. I've posted too many times on the worthlessness of Moody's, Fitch and Standard & Poors' ratings. Still, I'll share my favorite two examples, for any who are new to this site.

From a previous post:

As for whether the agencies believe in their ratings, here's their own thoughts on the matter, from a 2007 text message between S&P officials:

Official #1: Btw (by the way) that deal is ridiculous.
Official #2: I know right...model def (definitely) does not capture half the risk.
Official #1: We should not be rating it.
Official #2: We rate every deal. It could be structured by cows and we would rate it:




Almost 2 years ago, Robert Rodriguez of First Pacific Advisors scared the pants off anyone listening to a lecture of his. I've pasted his associates' questions put to a Fitch official, regarding the models behind Fitch's ratings on Mortgage-Backed Securities. Fitch admits that their models would "start to break down" if home prices flattened out, and if housing prices went DOWN (crazy thought at the time), their model would "break down completely." Incredible.

"We were on the March 22 call with Fitch regarding the sub-prime securitization market’s difficulties. In their talk, they were highly confident regarding their models and their ratings. My associate asked several questions. “What are the key drivers of your rating model?” They responded, FICO scores and home price appreciation (HPA) of low single digit (LSD) or mid single digit (MSD), as HPA has been for the past 50 years. My associate then asked, “What if HPA was flat for an extended period of time?” They responded that their model would start to break down. He then asked, “What if HPA were to decline 1% to 2% for an extended period of time?” They responded that their models would break down completely. He then asked, “With 2% depreciation, how far up the rating’s scale would it harm?” They responded that it might go as high as the AA or AAA tranches."




Here's the link to today's meeting:





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