Quis custodiet ipsos custodes?

By Cate Long
July 5, 2011

Quis custodiet ipsos custodes? Or “who watches the watchmen?” Credit-rating agencies are the main watchmen of the financial system.  But can we judge their performance, or are they just black holes filled with “opinions?”

The credit-rating agencies continue to make headlines as they try and keep pace with a slowly sinking Europe and the efforts there to rescue bondholders. European banks, the ECB, and officials from the EU are trying desperately to concoct some kind of structured investment vehicle that will solve the Greek sovereign debt crisis without requiring a default. So far, the rating agencies are not eating their “inventive” cooking, and they have yet to bless any new “solution.”

Many observers believe that credit raters completely mis-rated mortgage bonds and that this caused the global financial crisis. Meredith Whitney implies that credit raters are vastly underestimating the riskiness of municipal bonds and have overlooked pension and other liabilities when judging state and local governments’ creditworthiness. But do we have any statistical evidence of any this? Are credit raters getting the ratings wrong on every type of bond?

We do actually have a way to watch the watchmen. We have a way to judge, over time, if rating agencies are just slapping AAA on any weak, mashed-up structured product or over-leveraged financial issuer. It’s not well known, but in June 2007 the Securities and Exchange Commission issued new rules requiring credit-rating agencies to make all their ratings available on their websites. This includes any “rating actions” that have been outstanding for more than 12 months if the issuer paid for the rating and for more than 24 months if investors paid for a rating. These ratings must be made available in a computer readable format called XBRL, a computer language that the SEC makes corporate issuers use to file their public disclosures like annual reports and 8-Ks.

Here are the links for the credit-rating datasets:

A.M. Best
Dominion Bond Rating Service(DBRS)
Egan-Jones Ratings Company
Japan Credit Rating Agency
Kroll Ratings (improperly posted as PDF)
Morningstar/Realpoint (improperly requires log in)
Rating and Investment Information, Inc.
Standard & Poors (improperly requires log in)

The SEC rule which proposed this exposure of credit ratings (SEC 34-59342 page 17) :

…require an NRSRO [credit rating agency] to make and retain a record of the ratings history of each outstanding credit rating as well as an amendment that would require the NRSRO to make the ratings histories contained in the record publicly available on its corporate Web site in eXtensible Business Reporting Language (“XBRL”) electronic format, with each new ratings action to be made public…

I’ll double-check these laggard rating agencies that haven’t put their historical ratings data into the public domain. But otherwise have it at, and please let me know any results that you get.

Quis custodiet ipsos custodes? We watch the watchers!


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I have been watching the watchers for several years. At this point, focusing on minutia is a digression from obvious truth. Adversus solem ne loquitor.

The mortgage profiteering and subsequent financial collapse of 2007/2008 could only have happened if ratings agencies blessed faulty financial instruments created by blending low risk mortgages with high risk mortgages.

Any fool can see that such a blend could not possibly be worthy of the same rating bestowed upon groupings of exclusively low risk mortgages. The rating agencies are in flagrante delicto.

Sine poena nulla lex!

Posted by breezinthru | Report as abusive

I’ve been kind of obsessed lately with the “big three” ratings agencies S&P, Moody’s, and Fitch. I have two posts (this one and that one) where I discuss the idea of setting up open source ratings models to provide competition to them and hopefully force them to increase transparency (speaking of transparency, here’s an article which describes how well they cope with one of the transparency rules they already have).

http://mathbabe.org/2011/08/16/default-p robabilities-and-recovery-rates/

Posted by Cate_Long | Report as abusive