Commission looks into ratings agencies
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Kai Ryssdal: We had an interesting and revealing moment on the broadcast yesterday. I was talking to Alan Greenberg, the former chairman and CEO of Bear Stearns. I asked him how in the world he and all the other people who’d spent their lives on Wall Street wound up buying into mortgage-backed securities that were worth little more than the paper they were printed on. Here’s part of what he said.
Alan Greenberg: I think really, Kai, the big mistake was that Bear Stearns was highly leveraged, and we were under the impression we owned triple-A securities, because those triple-A securities, you know, weren’t triple-A. And in a very short period of time, they went down to 50 or 60 cents to the dollar.
Those bonds were triple-A, because the ratings agencies — Fitch, Standard & Poor’s and Moody’s — said they were. Those companies and the ratings that Mr. Greenberg and his colleagues relied on were topic A at a Financial Crisis Inquiry Commission hearing today. Remember that’s the panel that’s supposed to tell us, by December, what caused the finance market meltdown of the past couple of years.
Guy Lebas: This is a very challenging topic, ’cause the entire investment universe uses the ratings agencies.
That’s Guy LeBas. He handles fixed income strategy for Janney Montgomery Scott in New York. His point is an important one. That in the debt crisis we’re still working our way out of, everybody in the debt markets had to use the ratings agencies. Even a guy you’ve probably heard of, Warren Buffett, the star witness at today’s hearing.
Warren Buffett: It makes for a wonderful economic model.
That helps explain why Buffett owns 13 percent of Moody’s — but it doesn’t mean he has to like it. Buffett and anybody else who issues debt and a lot of institutional investors who buy that debt have to have a rating agency seal of approval.
Buffett: I need a Moody’s rating and a Standard & Poor’s rating. I need both of them. It’s required in many cases by the rules under which our life insurance company operates or our property cash company. So if they say to me, my bill is a billion dollars, and I say, “Gee, I’d like it to be $900,000 or I’ll go down the street” — essentially, there is no down the street.
Buffett, for what it’s worth, says he doesn’t use agency ratings when he’s making investments for his holding company, Berkshire Hathaway. A lot of other big investors do their risk management due diligence in-house as well. Others, though, like Mr. Greenberg and Bear Stearns, trusted the ratings agencies — flaws and all.
Jill Fisch is professor of law at the University of Pennsylvania, where she directs the Institute for Law and Economics.
Jill Fisch: There isn’t very much accountability for ratings agencies right now. People have sued, tried suing, for years, claiming that the rating agency didn’t do a good investigation, claiming that they’d lied and so forth. And by and large, courts have held that the ratings agencies are not subject to liability.
Congress is working on some fixes as part of the financial reform bill, which may change things. But the panel today had only questions, like, why do the big three ratings agencies have all the power? Can’t that be spread out a little bit? And also, who can you trust if you can’t trust the raters?
The answers will come in December when the commission issues its report. But we called an actual bond trader today, Mike Hatley, the president of West Gate Horizons here in Los Angeles, to ask one more thing: Whether the rating system can go on the way it is.
Mike Hatley: I would say yeah, we probably could. It’s hard to envision a scenario where they get it so wrong, again.
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