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Tuesday, December 8, 2009

You can't handle the truth

Remember when we all agreed that something serious had to be done about the hideous conflicts of interest that afflict the system by which corporate and government bonds are rated by outfits like Moody's and Standard & Poor's? An overhaul was badly needed in order for investors to get the straight scoop on the soundness of the bonds they were being offered.

Well, guess what. That reform isn't happening. Instead, we get what one noted economist is calling "Botox shots." It's a disgrace. Maybe the state attorneys general will show some guts. Let's hope so. The rating agencies are doing to our retirements what Joe Camel did to Grandpa's lungs.

Comments (5)

As explained by Dean Baker, a Washington economist, you can see that this conflict is just so complex and gnarly and intractable that we just have to live with it:

"One important aspect of the financial crisis was the willingness of the credit rating agencies to rate complex derivative instruments as investment grade, even though they were filled with junk assets. The rating agencies had a motive to do this because they are paid by the companies whose issues they rate. Since they do not want to lose the business of a Citigroup or Goldman Sachs, they have a strong incentive to give overly positive ratings.

The NYT notes that Congress seems unlikely to do anything about this basic conflict of interest in its regulatory reform bill. It would have been useful to note that this fundamental conflict could be easily eliminated, if Congress cared about it.

It is only necessary to take away the hiring decision from the company whose issuers are being rated. If a third party, such as the stock exchange on which the company is listed, selected the rating agency, then the agency would have no incentive to bend its analysis. Its ability to get future business would not in any way be helped by bending its analysis.

It is striking that it appears that Congress never seriously considered this simple measure."

I wonder if the President is afraid that if they come down on the rating agencies they will lower the rating on US Treasury debt? If they do that the effects would be terrible and given the amount of borrowing the President is doing, lowering the debt rating would not be unreasonable.

There may be a lot of self-interest. Imagine if the ratings agencies told the truth about Cali gen obligation bonds or Oregon's or CoP's?

What do you think that would do to the values of those. Guess who would have to make up the difference? I mean every extra upside in revenue is going to fund benefits now, we don't really need another ding.

It's remarkable that anyone listens to these agencies any more anyway. What is a Moody's AAA rating really worth? Jack squat judging from the last couple of years.

The public needs constant reminding that there has been essentially no financial reform since big banks were on the brink of collapse and had to be bailed out with HUGE sums of our money.

Nothing meaningful has been changed from the regulatory regime that brought us to that point. Literally EVERYONE knows that Glass Steagel must be restored but politicians in the White House and Congress won't do it simply because they're being paid not to by lobbyists.

Welcome to America in 2009. We taxpayers have only begun handing out our money on this one. 2010 will look exactly the same. Get ready for the commercial real estate bailouts.

There are some pretty straightforward disclosure requirements that might have shed a lot of light on the risk that was building up in CDO's.

Let's say, for example, composite FICO scores, composite debt to income ratios, debt to equity ratios etc. for the underlying mortgages and mortgagees, and the pct. mortgagees with stated vs verified incomes, and the average length of employment at current job.

There could also be reporting requirements on the track record of the agency placing the mortgage.

Data is so cheap and easy to come by and simple to compile these days, yet the regulatory system gravitates towards certifications by putative experts in lieu of disclosure. And the primary training of those experts is in MBA programs that teach 8 ways to Sunday on how to buy low and sell high -- hardly the crew you might look to for objective advice.

Let's get creative about creating a culture of disclosure and reporting. That would reduce or eliminate the importance of the middle-man bond raters.

And totally agree on the restoration of Glass Steagal.

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