Economics

Expect to See More Headlines Like This One: "Ohio AG sues rating agencies"

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From the Cincinnati Enquirer:

The securities then plummeted in value as the housing market nose-dived over the past few years. Cordray alleges in the lawsuit that the agencies slapped the high rating on securities in return for high fees paid by those they were rating.

Attorney General Cordray filed the suit Friday in U.S. District Court in Ohio. He said that Standard & Poor's, Moody's Investors Service, and Fitch Ratings assured the pension funds that mortgage-backed securities had the highest ratings and lowest risk.

Ohio's attorney general has sued the three credit ratings agencies alleging that they gave unjustifiably high ratings to mortgage-backed securities that lost at least $457 million for five Ohio public pension funds.

More here.

Reason.com looked at the role of rating agencies and how subtle regulatory changes in the pursuit of higher home-ownership rates created "an expert-induced bubble." It's nauseating reading.

NEXT: Close Shave

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  1. I can’t figure out why this hasn’t happened already. The mess we’re in is largely because the rating agencies were asleep at the wheel, or worse, lying to us.

  2. FTnauseating reading: All of this is a telling lesson about how much and when to trust the experts.

    And what *is* an expert? It’s someone from out of town carrying a briefcase.

  3. This is one aspect of the meltdown that really has not received the publicity it should; the rating agencies are essentially granted a oligopoly on rating securities. They literally face no competition; there will never be an upstart competitor trying to steal their market-share.

    This is yet another case of the government having short-circuitet the protections provided by free markets: there were numerous financial heavyweights who saw the problem and locked horns with regulators/rating agencies over the insanity of rating mortgage backed securities as safe investments. Had they been free to enter the fray with their own rating scheme, I think they would have.

  4. Ther was an article in Business Week about municipalities being held to contracts with banks. Of course, the general tone was that banks are evil for holding banks to the contracts that clearly stated the risks.

    I still don’t know how you can rate any tranche of an nth CDO anything above junk. Magic rating madness. In the same breath I don’t know how anyone can purchase an nth CDO and expect it to be anything other than junk. But wait you can hedge it with a CDS. (that I understand to a point)

  5. Finally.

  6. Given the endless bailout guarantees, and the ranting from His Rotundity II about how all the FHA naysayers were really just trying to keep poor people away from mortgages, were the high ratings really unreasonable?

  7. Are the ratings agencies really protected from competition?

    I’m not sure what the rules are there, but it seems obvious to me that they should be just as busted as Arthur Andersen.

    How do these things work? How is it that anyone believes a word they say about anything anymore?

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