TEXT OF INTERVIEW
Kai Ryssdal: Moodys, the credit rating agency, raised its earnings forecast today. It’s going to do just fine thanks very much. Profits are expected to be up around 9 percent from a year ago. Moodys is one of the three rating agencies that, as you might remember, gave triple-A grades — the highest they go — to billions of dollars in what turned out to be worthless mortgage-backed securities. And it seems the raters are still having a hard time getting it right.
A couple of weeks ago Standard & Poor’s announced it’s going to lower its ratings on a whole bunch of mortgage-backed bonds. ProPublica’s Jesse Eisinger had the story today in the New York Times’ Dealbook.
Thanks for joining us.
Jesse Eisinger: Thanks for having me, Kai.
RYSSDAL: These rating agencies have been downgrading mortgage-backed securities for a while now. What’s the big deal about this announcement by S & P?
Eisinger: Well this announcement is about ratings that they put on in 2010 and 2009, after the financial crisis, after they were supposed to take into account that housing crash that you may have heard of. And they are still making mistakes.
RYSSDAL: What I get from your story in the paper today is that even after two years or two and a half years of financial crisis, they don’t understand how to do these mortgage-backed securities — the raters just don’t get it?
Eisinger: It’s pretty astonishing but they made some very basic methodological errors here. They didn’t know how to account for the way interest was supposed to flow through these complex securities. Now, I can’t figure that out, but they’re the rating agencies, they’re supposed to be doing that. And they didn’t do it properly, so they admitted that they messed up on almost 1,200 securities.
RYSSDAL: And these 1,200 securities, we ought to mention, are of a specific kind: they’re call re-remics, and they are in fact bonds that had already gone bad.
Eisinger: Yes. They were sort of do-overs by Wall Street. They took bad bonds and then they re-bundled them and split them up again, just like the sort of magic stuff they did during the boom. And the rating agencies obligingly rated a big portion them triple-A. Now they’re reassessing those, and they’ve already downgraded, some of these triple-As have gone into default, which is stunningly rapid and shouldn’t really happen. Many more do so or be downgraded very soon.
RYSSDAL: You’ll understand me if I say this is deeply, deeply distressing news.
Eisinger: I agree. I think the fact that the rating agencies don’t really have a handle on this kind of stuff raises big questions. You would think, well, at least there’s some reform coming. At least there’s Dodd-Frank.
RYSSDAL: The financial reform act, yeah.
Eisinger: Exactly. Unfortunately, those reforms are being rolled back there in limbo. So we really have almost nothing substantively changing except for the goodwill of the rating agencies and Wall Street to change this process.
RYSSDAL: And how much goodwill is there on the part of these rating agencies to fix what they clearly still don’t understand?
Eisinger: The problem is that they’re still susceptible to the things that got them in trouble in the first place. One of the things is that the Wall Street banks pay for the ratings, and they know a lot more about the bonds that they put into these structures. And so, they can be game, the rating agencies could be gamed by Wall Street. The other thing is that they really care about market share, these rating agencies, and so what happens is that the Wall Street firms can go shopping for the most lenient ratings and that doesn’t give the rating agencies much incentive to get it right.
RYSSDAL: So here’s a heretical thought: what would happen if the rating agencies just disappeared?
Eisinger: In some ways, we can just use prices, bond prices, which would substitute for ratings. It would be a wonderful thing. But the problem is the infrastructure of the capital markets is so dependent on ratings, it’s easy and it’s kind of protection against our own laziness.
RYSSDAL: Jesse Eisinger, he writes for ProPublica and the New York Times Dealbook. Jesse, thanks a lot.
Eisinger: Thanks for having me.
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