Thursday, May 13, 2010

Did Banks dupe Rating Agencies?

US Federal Prosecutors are investigating 8 Banks to determine whether they lied to Rating Agencies and manipulated the underlying asset pools to get the highest possible ratings for their mortgage backed instruments.

This leaves only two possibilities regarding the role of Rating Agencies.

1) They are innocent and got duped: This would mean that they didn't understand the instruments very well and were fooled by representations made by the banks. This also means that they had no business assigning any ratings to these instruments since they didn't understand them well.

2) They understood the instruments and worked along with the Banks to fudge the ratings: Well, in this case, they have no business rating any instrument and should be barred from doing so.

Either way, it doesn't look good for the rating agencies.

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