The Bond Rating Fiasco Is Back

Let our journalists help you make sense of the noise: Subscribe to the Mother Jones Daily newsletter and get a recap of news that matters.

The Wall Street Journal reports that bond rating firms are once again in brutal competition, which allows bond issuers to promote only the highest rating their funky new products receive:

Fierce competition among ratings firms in a fast-growing corner of the bond market is allowing issuers to cherry pick the most favorable ratings. The result is that securities deemed safe by the ratings firms have increasingly smaller cushions against losses.

The security in question is a cross between two of Wall Street’s hottest markets—commercial mortgage bonds, which are backed by mortgage payments on apartment buildings, malls and the like—and collateralized loan obligations, which are pools of bonds backed by payments on corporate borrowings.

I won’t pretend that the ratings fiasco of the aughts was a huge driver of the 2008 financial collapse. Still, it played a role. By routinely slapping AAA ratings on opaque and complicated securities, rating agencies helped make them more popular than they otherwise would have been. When the collapse came, this meant the world was flooded with trillions of dollars worth of CDOs that had iffy counterparties and lots of hidden risk, essentially causing the entire market to freeze up because no one knew for sure which issues were solid and which ones weren’t. This made an already bad situation even worse.

And now it’s happening again. Of course it is. Because Wall Street is incapable of keeping lessons in its tiny collective head for more than about five or six good years. Then the Minsky cycle seizes them yet again.

FACT:

Mother Jones was founded as a nonprofit in 1976 because we knew corporations and the wealthy wouldn't fund the type of hard-hitting journalism we set out to do.

Today, reader support makes up about two-thirds of our budget, allows us to dig deep on stories that matter, and lets us keep our reporting free for everyone. If you value what you get from Mother Jones, please join us with a tax-deductible donation today so we can keep on doing the type of journalism 2020 demands.

payment methods

FACT:

Mother Jones was founded as a nonprofit in 1976 because we knew corporations and the wealthy wouldn't fund the type of hard-hitting journalism we set out to do.

Today, reader support makes up about two-thirds of our budget, allows us to dig deep on stories that matter, and lets us keep our reporting free for everyone. If you value what you get from Mother Jones, please join us with a tax-deductible donation today so we can keep on doing the type of journalism 2020 demands.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate