Thursday, March 26, 2009

How I Feel About It

Today Secretary Geithner goes before the House Committee on Financial Services to talk about the new regulations that the Federal Government will want to bring to the financial markets. In the little reading that I have done on this subject, I have yet to see any mention of the reforms that are planned for the Credit Rating Agencies (CRAs). There is talk about hedge funds and credit default swaps, but not a word about these agencies that place a credit rating on the bonds that credit default swaps are created to insure. To insure against those very bonds failing is the purpose of a credit default swap.

In that my blog, if I am lucky, is read by a dozen people a day, I still feel that I should try and bring some light to the subject of credit ratings. The whole purpose for structured debt is to expand credit for our economy. These instruments exist because of the demand for credit, and because on the other side of the transaction there are investors looking for a place to put their money to work. Pension funds, endowments, foundations and mutual funds are the buyers of structured debt obligations. And, these institutions use the credit rating system as a guide to determine the mix of risk they wish to put in their fixed income, also known as their bond portfolio. Without confidence in the credit rating system, credit ratings such as a triple-A rating is meaningless. If the highest rating, the AAA rating, is meaningless, what does that say about the ratings below AAA?

Whatever regulation the Congress decides on, I sincerely hope that they fund the new regulations with the necessary people and tools to do the job right. But, who is going to watch that Congress does not sell us out again? To me a good statement of Congress’ sincerity would be to hang a few past members on the steps of the Capitol. Those that worked to destroy the regulatory framework that protected us all for the many years since the Great Depression need to be punished. Let that serve as a warning to all members of Congress that those that sell out the American people for a few pieces of silver will pay a price. That is how I feel about it.

Stay tuned.

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