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How are Ratings Agencies Like Cows?

There has been a lot of cow talk during Rep. Henry Waxman's (D-Calif.) Oversight committee hearing underway right now on the Hill, which is taking a look at the role of the credit rating agencies in the current financial crisis.

The cud-chewing started with documents Waxman produced showing a text-message exchange between two executives at an unidentified credit-ratings agency who were being asked to favorably rate a security that was clearly unworthy.

The deal "could be structured by cows and we'd rate it," one texted the other.

Later, Sean Egan, managing director of Egan-Jones Ratings, a tiny competitor to Moody's, S&P and Fitch, said that ratings agencies are supposed to function like meat inspectors at a slaughterhouse looking for tainted meat -- in this case, ex-cows. If they find it, they're supposed to shut down the line, not let it keep churning out bad product.

Rep. Tom Davis (R-Va.) drolly observed that Egan had "milked" that analogy for what it was worth, eliciting groans (moos?) from the hearing room.

Then Egan, who appears to have bovines on the mind, referred to the "the tragedy of the commons," an influential economics paper that talks about parties destroying shared resources with individual actions. In this case, the tragedy was allowing one cow to stand on a village commons. Then another cow is allowed to join the first cow, then another and so on and eventually, your commons is filled with cows and you've lost your commons.

Egan said the "cows" in our story were bad deals that depended on positive credit ratings that were pushed through without regard for what their cow was doing to the commons.

-- Frank Ahrens

By Frank Ahrens  |  October 22, 2008; 11:59 AM ET
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For example all the new condo developments in the metro area and new housing developments in the suburbs had their own marketing company, their lender working exclusively with them, their own title company and guess what. things happened.

How was the appraised value arrived at for
the purpose of writing a loan.

well they would use the comparable 'sale' or 'under conract' price in the very same building to underwrite the subsequent sale.

The mortgage company used the sales in the building itself to arrive at the value of subsequent sales in the building.

so who would argue with sale prices if the mortgage compnay or bank was handling the whole condo building.

It was such a value that you could mortgage 100% plus add in closing costs because the value in the building under construction kept going up?

only the marx brothers would have attempted this logic......

Posted by: JohnAdams1 | October 22, 2008 12:52 PM | Report abuse

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