Too Much Attention To Moody's Swing

IBD Editorials ^ | December 15, 2010 | Staff

[Kaslin]

Tax Deal: The media are touting a rating agency's schizophrenic claim that keeping the Bush tax rates helps the economy, but hurts the country's credit standing. Are ratings firms even relevant anymore?

Manhattan Institute senior fellow Nicole Gelinas, in her richly detailed analysis of the roots of the financial crisis, "After the Fall: Saving Capitalism from Wall Street — and Washington," pulls back the curtain and exposes the ugly reality of the once all-powerful credit ratings agencies Moody's, Fitch and Standard & Poor's.

"Reliance on ratings agencies contravenes market principles," Gelinas warns. "The ratings-agency world is small and homogeneous, populated by a few thousand people with similar educations filling in similar boxes of financial-ratio calculations and going out for drinks with one another afterward."

She points out that "each ratings agency operates by consensus. The agencies have no system for rewarding a person who speaks out against the conventional wisdom, writing a report contrary to his colleagues' opinion" and have historically demanded "a unanimous verdict on every security."

So no wonder the ratings agencies were instrumental in allowing toxic mortgages to be sliced and diced, baked into securities, and spread all over the world.

As Cato Institute senior fellow Johan Norberg points out in his book, "Financial Fiasco," "The agencies' generous use of their A stamp is what made investors across the world believe in alchemy and scramble for" securities filled with rotten mortgages