AlyssaKatz.com

The ratings game

Yesterday Treasury released its new regime for the ratings agencies that failed so badly to police the mortgage securities and other credit markets, and at first glance it looks pretty good, with measures to preclude conflicts of interest, new disclosures, and so forth. If Congress agrees to them these reforms will serve as a roach bomb to purge corrupt practices that had become endemic in the engineering of mortgage securities.

Ultimately, though, the ratings agency regulations will only be as strong as the oversight of  derivatives, because credit default swaps are the secret ingredient in cooking up a triple-A rating – they provide the insurance that lets the ratings agencies promise investors they’ll get paid. As James Kwak, Gretchen Morgenson and others have noted, the administration’s proposed credit default swap regulations exempt “custom” transactions from the proposed oversight-and-exchange system – meaning that AAA ratings could continue to be propped up by dubious derivatives.

July 22nd, 2009 | Tags: credit default swaps, ratings agencies
Posted in A Lot More | No Comments »