pathetic state of the industry as everybody is still forced to care about output of the [ algorithm + business process it is embedded in ] combo that produced AAA for mortgage bonds junk
If you think you can invent an algorithm that produces a more accurate picture of default risks on various types of assets, then I'm sure the world will beat a path to your door. Until then, this is the best we have.
Whatever about inventing a better algorithm, it's clear that the ratings agencies didn't do any kind of due diligence before slapping AAA ratings on junk mortgage securities...they were afraid of losing business from the investment banks! They should have been the ones telling the banks what was what.
Those in the know would describe the ratings agencies as "brain-dead", the lowest on the totem pole on Wall Street...traders who made money would game the credit ratings scores so S&P and Moods would rate the junk they were peddling AAA. A modern form of alchemy - turning junk into investment gold.
For a nice, easy-to-read account of those who made a fortune from the mortgage market collapse that tells you how exactly the ratings agencies were played for fools: The Big Short, by Michael Lewis (of Liar's Poker fame)
>We all know the weather forecast isn't absolutely 100% accurate
forecasters who forecast "sunny" paid handsomely, while forecasters who forecast "fog" aren't paid at all - what would be accuracy of a given forecast for London from these forecasters?
Your point is spot-on, except that it really isn't foggy in London much. It's a US misconception that's a hangover from Victorian smog, Jack-the-Ripper movies, and various songs.
More apt would be if the weather forecaster wouldn't be paid for forecasting 'dreary, drab, grey, occasional pathetic rain, etc'. Which would be most of the UK summer...
"Starting in the early 1970s, the "Big Three" ratings agencies (S&P, Moody's, and Fitch) began to receive payment for their work by the securities issuers for whom they issue those ratings, which has led to charges that these ratings agencies can no longer always be impartial when issuing ratings for those securities issuers."
If that weather forecast said it was going to be sunny and warm, you'd be pretty pissed to encounter hailstorms and hurricanes when you arrived at the beach. Similarly, you might not trust it so much when the weatherman was bleating about thunderstorms while all you can see are high clouds and blue sky.
Coming from the east coast I trust the forecast less than just looking out the window. It's just too inaccurate.
When you look out the window and see that the US is still the healthiest big developed economy out there, what do you do? Do you trust your own eyes or the ratings agency?
First the impact of a false prediction on a weather forecast is not as dangerous as that of a false prediction in default rates, second, even an erroneous weather forecast isn't too far from the observed weather.
