E-Mail
Print
tool name
close
Wednesday, Oct. 21, 2009
Our View: Credit-raters need to disclose more
When lenders go 'shopping' for agency with lowest standards, they must be held liable.
In the old days, you went to the bank to buy a house.
The bank would decide whether you could repay the loan and collect a down payment to ensure you had "skin in the game."
The bank held the loan, providing an incentive to ensure that a borrower wouldn't default.
Everyone had a stake in the success of the borrower repaying the loan.
But that system was thrown out in favor of one in which no one had a stake in the success of a loan.
Lenders marketed loans that required little or no down payment and little or no documentation of income.
Brokers who steered borrowers to these high-fee loans would get fees, even if the borrowers had no ability to repay.
Then the model shifted from one in which the lender who made the loan held the mortgage to a model in which the lender sold the mortgages to Wall Street firms, who packaged them to sell to investors.
As a McClatchy Washington Bureau investigation in Monday's Sun-Star shows, this house of cards was dependent on credit-rating agencies (Moody's, Standard & Poor's and Fitch), which gave the highest investment-grade ratings to these pools of risky home loans.
The McClatchy investigation showed that credit-rating agencies turned a blind eye to unsound mortgage securities, and then silenced or punished analysts who warned of problems.
What should be done to fix this?
Much of the problem comes from conflicts of interest when those who are packaging securities are the same people who are paying the fees to the credit-rating agencies.
Not surprisingly, they go "shopping" to choose the credit-rating agency with the lowest standards.
The Obama administration has proposed reform legislation.
The Securities and Exchange Commission would review credit-rating agencies annually, and banks would have to disclose all ratings they receive from the agencies in an attempt to stop banks from shopping for the best credit rating for their products.
Rating agencies would have to disclose the fees they received for their ratings.
More disclosure is essential, as is the need to reduce investor reliance on the rating agencies.
The rating agencies also must face the hammer of liability if their ratings aren't sound.
A few rules are needed to help foster a feeling of community. We encourage a free, CIVIL and open exchange of ideas in a climate of mutual respect, but any post that violates someone's right to use and enjoy mercedsunstar.com is prohibited. Before you post, please read the terms of use and obey these simple guidelines. Here are the ground rules:
1. Be yourself. A nickname will be used for posts, but if an editor finds a user without a verifiable name , that user will be warned or banned.
2. Keep it clean. Foul language (defined by prime-time standards) will not be tolerated. Neither will the intentional misspelling of foul language or the use of non-English curse words.
3. Be truthful. Do not lie or link to sites that may be considered libelous, defamatory or false.
4. Be nice. Don't harass anyone. Don't threaten anyone. Don't use racial slurs. Don't post anything sexually explicit.
5. Be an individual. Do not advertise or solicit. Do not harvest any information for business use.
6. Be original. Do not post copyrighted material.
7. Follow the law. Don't do anything or post anything considered illegal by city, county, state or federal regulations and laws.
On most news stories, the commenting period is closed after three days. If you wish to continue a discussion, please use The Sunspot forum.
@Nyx.CommentBody@