While reading up on the subprime debacle, I came across this fascinating and unsettling tidbit. Bond rating agencies to not do due diligence but rather unquestioningly accept the data as presented by the firm who wants their bond rated.
As Moody’s puts it in its own code of conduct, “Moody’s has no obligation to perform, and does not perform, due diligence.” The other two agencies have similar provisions.
“A rating is completely irrelevant when gauging whether a [structured finance] deal is safe, because ratings agencies aren’t obliged to look for fraud [and analytical methods sometimes need improvement]
What a cozy arrangement for all involved.