Yes.

We have kind of a dual problem in that we want investors to do a better job of evaluating the risks, and maybe better ratings would help on that. At the same time, the existing rating agencies did a bad job, so we have to criticize them. We have to ...

The regulatory structure has been changed now as a result of the law that was passed in 2006, at least if you’re talking about getting the regulatory stamp of approval from the SEC to become a nationally recognized statistical rating organization. That’s now just a notification process by ...

Oh, it’s definitely not a random sample of asset classes that we chose to look at. The rating agencies have done a great job in many other places, I agree.

I definitely agree with you that it’s more difficult to rate structured-finance securities than corporate securities because with structured-finance securities you have a lot of quantitative modeling of future cash flows with a lot of uncertainty. Clearly the ABS CDOs are very complicated structures because it’s a two-layer ...

Your impression may be more informed than mine, but I would say that the rating agencies are doing a lot of self-examination now. I haven’t seen them willing, in my opinion, to go far enough in the directions that we’ve outlined. A lot of their recommendations focus on ...

SIVs had partial liquidity backup lines from banks covering one week’s maximum withdrawal or two weeks’ maximum withdrawal. That was the way to a rating. The SIVs were operating under the regulation of the rating agencies. The rating agencies modeled their portfolios, and they modeled the inflows and outflows ...

All the SIVs are in the process of winding down now, and in the immediate aftermath of what happened in August, that was when there was a crunch in the ABCP market.

A lot of the SIVs were standalone entities managed by independent asset- management companies that were set up to do that.

Really, the question is, What sort of market forces would produce that outcome? It certainly seems as though things should move in that direction, and we feel that some of the recommendations we are making on the differentiation between structured-finance securities and corporate securities would encourage the rating agencies to ...

I agree. In fact, ABS CDOs are disappearing or have disappeared. Investors don’t have any appetite for them. SIVs are disappearing as well.

We think the real problem is that they didn’t differentiate well enough between structured-finance ratings and corporate ratings, and that is where we would like to put the focus. Securities regulators are already focused on conflicts of interest, and there are codes of conduct regarding how rating agencies have ...

I know, but I am a Federal Reserve economist. I would agree with your point that separating out these nonrating businesses from the rating businesses is important, and rating agencies have announced some changes along these lines. When we looked at our recommendations, we didn’t really feel as though ...

There is certainly a possibility that conflicts of interest were occurring in all these areas. We are taking a somewhat neutral position because we don’t really have the detailed information to say more.

There is. We are not denying that there is a conflict of interest. We looked at some of the mechanisms that rating agencies have put in place to address conflicts of interest, and that is something that every rating agency is aware of. The only question is whether the mechanisms ...

That used to be the way it was before 1970—the investors paid. I think the common explanation for why that model faded was that, once photocopy machines came into existence, there was no way to constrain the information that they were providing just to subscribers.

There are plenty of investors who said, “We are staying out of that ABS CDO market because we don’t trust the ratings and we don’t think we have an ability to model it.” But there are also enough who were willing to take on that risk. So I ...

Are you talking about the credit rating agency weaknesses?

As noted in the top left panel of exhibit 5, we would like to stress two key points on the rating agency and investor issues. First, credit rating agencies are one of the weak links that helped a relatively small shock in the subprime mortgage market spread so widely, though ...