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Warning: We've lost our Mind... Signed, Credit Rating Agencies

Written By Brian Hicks

Posted February 6, 2008

Warning: Don’t depend on what we’re saying.

Credit rating agencies, fingered as culprits in the credit crisis, have a new plan to regain investor confidence. They’re going to put warning labels on credit ratings, alerting thousands of investors of the limitations of their research, and the possibility that they may be wrong.

Hey, they’re only human, right? They only cost us hundreds of billions of dollars. No harm done. We’ll just put a warning label on ratings, and everything will be fine.

Fortunately, Congressional committees and attorney generals are launching formal investigations into whether the agencies wrongly inflated ratings to win Wall Street banking business.

So, before my head explodes from the stupidity I see most days, let me see if I have this right.


  • Moody’s and other agencies labeled a bunch of junk with AAA ratings.
  • Banks and brokers then fed these opportunities to their clients, who ate it up.
  • Once the dung hit the fan, the banks and brokers holding this worthless AAA-rated paper now had to write down $130 billion.
  • Banks had credit ratings downgraded by the companies that rated the original AAA-rated paper, which lead to the write-downs, which lead to the credit rating downgrade.
  • And the solution is to replace letter grades with number grades? 

Unfortunately, it’s too little, too late. Billions of dollars worth of mortgage-related securities have been written off, many of which were rated AAA.

The solution is to arrest these dimwits.

Says a Wall Street Journal article:

“In an acknowledgment that the system it used to rate billions of dollars of mortgage-related securities was potentially flawed, Moody’s Corp. said it is considering a new way of rating those and other sometimes-volatile structured finance vehicles.

The credit-rating firm is considering an overhaul of its rating procedures that could include new labels to help investors distinguish collateralized debt obligations and other structured-finance investments from corporate bonds and Treasury securities.

One of the most significant changes being considered by the parent of Moody’s Investors Service: a new, 21-point numerical scale to rate structured securities. Moody’s familiar letter grades — from triple-A to single-C — would continue to be used for corporate and government bonds, including tax-exempt municipal debt.

More broadly, the ratings firm is trying to decide whether to add warning labels that essentially acknowledge the limitations of its ratings.

This is the first time since the methodologies of Moody’s and rival credit-rating firms came under attack this past summer that any of the firms has suggested it might change how it issues its hugely important ratings. The move also is an indirect admission that Moody’s ratings didn’t work right, even though the firm still insists some investors relied on them too much.”