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Fixing a Broken Model

What will it take for regulators to take rating agency reform seriously? The last round of reforms did little to protect investors against the subprime mortgage meltdown and now the cries for change are growing louder

By Dave Lindorff | Updated on May 01, 2008

Ed Dwyer, treasurer at Bristol-Myers Squibb, thought that he had found a nifty way to make a nice gain on some $800 million in cash the company had on hand available to invest. He parked the funds in auction rate securities (ARS)–interests in collateralized debt obligations (CDOs) supported by pools of residential and commercial mortgages or credit cards, insurance securitizations and other structured credits, including corporate bonds which had collectively been rated AA by Standard & Poor’s, Moody’s and Fitch.

Unfortunately, in late 2007 the investments tanked and on Jan. 31 the pharmaceutical company had to report a fourth-quarter charge of $275 million. A few weeks later, Dwyer was ousted by Bristol-Myers Squibb, a victim of a collapse in the structured finance market that none of the credit rating agencies upon whom he had relied ever saw coming.

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