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November 7th, 2012, 21:43
Originally Posted by blatantninja View Post
They were required, but statute, to do certain amounts of back testing to validate the models they were using to value those securities. They generally didn't and where they did, they often didn't have people in place to adequately understand the results.
By "back testing", do you mean putting historical trials into the model and see if the prediction matches the historical result? If that's the case, wouldn't it be hard to do historical checking on a mechanism that had no real history? The bundling scheme was a new approach at the time.
Originally Posted by blatantninja View Post
There was an article shortly after the debacle titled something like "Part-time MBA's vs PhD Rocket Scientists: How the ratings agencies were outmanned and outgunned". The gist of it is that they hired some really, really smart people back in the 90's to build the ratings systems for their securities. Those guys got hired off by hedge funds and I-banks for massive raises. They replaced them with people that, while smart, weren't up to the task of modeling these types of securities. It all came down to cost, they didn't want to pay what it would take get the right people, and even if they did, they didn't want to lose the revenues from the Ibanks for rating these securities.
Big difference between a poor short-view business plan and illegal, though.
Originally Posted by blatantninja View Post
Now there is nothing wrong with the above scheme (outside of the ratings), SO LONG AS IT IS DISCLOSED TO BUYERS WHAT THEY ARE GETTING INTO. That is where the ratings agencies come it. They are supposed to impartial 3rd parties.
Impartial does not equal infallible. Besides, wouldn't the whole thing be covered by that generic "investments can lose value" disclaimer that's on everything? Caveat emptor, and all that?
Originally Posted by blatantninja View Post
Well guess what, there are emails, memos, etc. of the few really smart people there, raising questions about the models lack of credit risk accountability! And those people being told to shut up and be a team player. That is at best a serious breech of ethics and at worst outright fraud.

Those ratings enabled pension funds, money markets, etc. to buy those securities when they otherwise would have been prohibited to do so. And they wanted to buy them, because everyone has been yield crazy (who hasn't complained about the yields on their savings or checking accounts, even when they were a few percent?).

The ratings agencies had a fiduciary responsibility that they completely punted on, and no one has held them accountable.
I guess the real question is, is the financial industry itself pissed off at these guys for what they did (as opposed to, for the end result of losing a ton of money in the crash), or does the industry see them as scapegoats? Seems to me like the latter, but I'm no investment banker. If people in the industry see the ratings guys as crooks, I'd certainly have to correct how I'm reading the tea leaves from the outside.

Sorry. No pearls of wisdom in this oyster.
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