Oligopoly Watch
Mortgage crisis and the rating oligopoly
Among the culprits in the mortgage crisis, the three credit rating giants deserve a good hare of the blame, according to a Wall Street Journal article ("How Rating Firms' Calls Fueled Subprime Mess" , 8/15/07). Not that the rating oligopoly is solely to blame, according to the WSJ article. "It was lenders that made the lenient loans, it was home buyers who sought out easy mortgages, and it was Wall Street underwriters that turned them into securities,"
But the big three rating firms (Standard & Poor's, Moody's Investors Service. and Fitch Ratings may a number of big mistakes on 200 on that contributed to the current financial crisis. these companies.
- Did not downrate banks and mortgage companies that gave high-risks mortgages such as "piggyback" and interest-only loans.
- They consulted with securities underwriters who put together the mortgage-backed securities in the first place.
- Then they "gave top ratings to many securities built on the questionable loans, making the securities seem as safe as a Treasury bond."
And as the WSJ article explains, the subprime mortgage area has been a very profitable one for the rating firms.
Compared with their traditional business of rating corporate bonds, the firms get fees about twice as high when they rate a security backed by a pool of home loans."It was always about shopping around" for higher ratings, says Mark Adelson, a former Moody's managing director, although he says Wall Street and mortgage firms called the process by other names, like "best execution" or "maximizing value."
In turn underwriters shopped around to the rating firms to get a high rating, starting a downward spiral of rating objectivity. The high ratings tempted institutional investors, including pension funds, to buy into the mortgage securities market, something they would not do with a lower-grade rating. And the earnings were too good to be true, while most highly rated investments were getting ho-hum returns.
Interesting to us is the way in which all there agencies went along gladly. Oligopolies converge, and the thinking at the leading companies often comes to run in lockstep. Any of the three companies that sat out of the subprime frenzy would have drawn cruces form shareholders about getting lower profits than their the rivals. And if they all get themselves (and the economy as a whole) in trouble, the adolescent excuse that "everyone else was doing it" will be brought out.
. [Oligopoly Watch]
10:29:37 PM 
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