Tuesday, October 6, 2009

Worse than I thought

As I'm sure you know, I've certainly criticized the rating agencies a fair amount in the past. However, I was still shocked to discover the following statistics in a Financial Times column by Michael Milken* the other day.

Many investors have relied on another fallacy – that rating agencies accurately rate enterprises and securities across different sectors. For much of the 20th century, AA-rated railroad bonds defaulted twice as often as single-B industrials. Recent regulations provided incentives for investment in complex, AAA-rated mortgage-backed securities never close to AAA quality. Ironically, investors will lose more money on AAA credits than on any other rating category.

With results like those, it's a no wonder the rating agencies need government support to sustain their oligopoly.

*Yes, that Michael Milken

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