Credit Ratings ‘Shopping’ by Banks Still a Risk

Matt O’Brien of the Washington Post reports that credit rating agencies are still allowing banks to shop for the most favorable ratings on questionable bonds.

“‘Ratings shopping,’ of course, gives credit rating agencies good reason—i.e.,  their bottom lines—to give banks the ratings they want.”

“Dodd-Frank didn’t fix this, and now it’s coming back … The Financial Times reports that banks are once again asking around to get AAA ratings on dubious bonds. One way to tell is that Fitch has only ‘been hired for four of the 29 subprime auto ABS deals this year, after telling issuers that the vast majority of bonds did not deserve AAA ratings.’ … We haven’t gotten rid of the credit rating agencies’ perverse incentives to rate bonds better than they deserve just to drum up business.”

“It was dumb enough to create a system that encourages the credit rating agencies to take a Panglossian view of the bonds they’re supposedly rating. It’d be even dumber to leave it in place after we’ve seen what a disaster it is.”

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