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BullBear
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Rating Agencies - What's the point?

December 19th, 2008, 10:45 am

Goldman, UBS, Deutsche Bank Among 12 Banks Lowered by S&PTell us something we don't know...
 
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wham
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Rating Agencies - What's the point?

December 22nd, 2008, 8:44 pm

IMO these are the biggest scams running (apparently among many!) in financial markets. I can't understand why these firms seemingly have any credibility left at all. Most likely just another part of the epic dog and pony show. Anybody who seriously values a company does their own due diligence anyway.I disovered recently that these agencies have paid by issuers since the 70s! They are in the business of rating the creditworthiness of companies but they are paid by those same companies?? Utterly insane!I also read comments to congress made by a former AIG CEO (grain of salt alert). His contention was that certain accounting regulations which require securities to be reported at market value contributed to the firm's downfall. If AIG holds security xyz to hedge a certain liability, they don't care what the market value is. But they have to report it, and if xyz drops precipitously, it adversely affects how the rating agencies perceive the firm's balance sheet.Assuming the ratings are ever accurate, they will still always greatly lag the actual circumstances at any given firm. Rating agencies focus very much on stability. So, before downgrading for instance, they wait and wait to be sure a company won't recover for a very long time. Then they will finally make the downgrade. There are other problems. I'd have to dig up the research to be certain, but I seem to recall the historical overlap between the ratings and actual defaults is pretty bad.
 
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fars1d3s
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Joined: August 14th, 2004, 12:28 pm

Rating Agencies - What's the point?

December 22nd, 2008, 8:59 pm

This is why some people vehemently support and defend the concept of "free markets". Some people do so for the right reasons, while others do so for the wrong reasons.Apparently, this is a cost to society. Free markets are not free.
 
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hamster
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Joined: October 12th, 2008, 3:51 pm

Rating Agencies - What's the point?

December 24th, 2008, 12:07 pm

QuoteOriginally posted by: whamI disovered recently that these agencies have paid by issuers since the 70s! They are in the business of rating the creditworthiness of companies but they are paid by those same companies?? Utterly insane!A man (= rating agency) is carrying a timber (= ratings for all models using them) a long the street (= the market) where many other pedestrians walking around (= other market participants). >>> suddenly someone is yelling and the man turns to have a look around...Of course, it's very efficient having few men carrying all the big and long timber. However, they harm all other pedestrians if they become distracted. And, who's yelling, and why? I don't think it's very effective relying on information monopolies. The question is more, whether investors want good information or cheap information?
 
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BullBear
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Joined: August 18th, 2007, 8:33 pm

Rating Agencies - What's the point?

December 26th, 2008, 5:28 pm

QuoteOriginally posted by: hamsterQuoteOriginally posted by: whamI disovered recently that these agencies have paid by issuers since the 70s! They are in the business of rating the creditworthiness of companies but they are paid by those same companies?? Utterly insane!A man (= rating agency) is carrying a timber (= ratings for all models using them) a long the street (= the market) where many other pedestrians walking around (= other market participants). >>> suddenly someone is yelling and the man turns to have a look around...Of course, it's very efficient having few men carrying all the big and long timber. However, they harm all other pedestrians if they become distracted. And, who's yelling, and why? I don't think it's very effective relying on information monopolies. The question is more, whether investors want good information or cheap information?I agree! The problem is that financial markets are populated by "trend followers". Few companies develop proprietary models and now they're paying (and making others pay) a huge price for their mistakes and for relying on 3rd parties! The message should be: "Always do your homework!".
Last edited by BullBear on December 25th, 2008, 11:00 pm, edited 1 time in total.
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