Joseph Stiglitz, the Nobel Prize-winning economist, Columbia University Professor and former Chairman of the Council of Economic Advisors within the Clinton administration, has written what, IMHO, is the most definitive piece that's been published to date on our current economic crisis appearing in the January '09 edition of Vanity Fair, entitled: "Capitalist Fools." In it, Stiglitz writes from a historical perspective of the five most important reasons as to why we're in the mess we're in, today.
Number four on Stiglitz' all-time hit list of reasons for our economy's epic failure is the inherently corrupt nature of the current bond ratings process. The pathetic reality is, and has been, that the financial services companies that hire the bond ratings firms (the leading firms in that group being Standard & Poor's, Moody's, and Fitch Ratings) to rate their products are the very institutions that are selling them.
(It is somewhat common knowledge throughout the financial services industry, and it has been for years, that the entire ratings industry is nothing less than a pathetic joke.)
As Stiglitz put it in the Vanity Fair article:
...Agencies such as Moody's and Standard & Poor's are paid by the very people they are supposed to grade. As a result, they've had every reason to give companies high ratings, in a financial version of what college professors know as grade inflation. The rating agencies, like the investment banks that were paying them, believed in financial alchemy--that F-rated toxic mortgages could be converted into products that were safe enough to be held by commercial banks and pension funds. We had seen this same failure of the rating agencies during the East Asia crisis of the 1990s: high ratings facilitated a rush of money into the region, and then a sudden reversal in the ratings brought devastation. But the financial overseers paid no attention...
So, when I read an article like this tonight:
"Fed Loans Guided by Raters Grading Subprime Debt AAA," it makes me sick.
Putting this in my own words, the very firms that helped get us into this mess are the exact same organizations that are providing the ratings guidance to Bernanke and Paulson as they make determinations with regard to what debt they're buying from these financial services firm with $1 trillion-plus of our hard-earned taxpayer dollars!
By Alison Fitzgerald
Dec. 18 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke is basing hundreds of billions in emergency lending on credit ratings from companies that gave AAA grades to toxic securities.
The Fed has purchased $308.5 billion in commercial paper and lent $631.8 billion under eight credit programs, most of which require appraisals of short-term debt and loan collateral by "major nationally recognized statistical ratings organizations." That, in effect, means Moody's Investors Service, Standard & Poor's and Fitch Ratings.
It is foolhardy to rely on the three New York-based companies, said Keith Allman, chief executive officer of Enstruct Corp., which trains investors in financial modeling and asset valuation. The major raters issued top marks to $3.2 trillion in subprime mortgage-backed securities at the root of the financial crisis.
"They're outsourcing the credit assessment to a group of people whose recent performance has been unbelievably bad," said Allman, the New York-based author of three books on structured finance and a former vice president in Citigroup Inc.'s securitized markets unit. "If their goal is to not take a loss on these assets, they should be hiring independent analysts."