Monday, March 16, 2009

The Light of Day

A lot has already been written about the bonuses that AIG, the insurance company, has to pay its employees in the London branch of the company that sold the credit default swaps that put AIG in so much trouble. Hell, it brought the company down except the the Federal Government bailout. And, we have heard from the experts that AIG must pay these bonuses because of contract law in England. This kind of crap gets a lot of attention, but really has nothing to do with the restoration or flow of credit for consumers in our domestic economy.

I find it difficult to understand how so much talking can be done about the economy, the stimulus package, unemployment and even what the First Lady is wearing, and not a word is spoken about how the credit rating agencies are going to be fixed.

Perhaps the Federal Government is looking into and preparing to bring fraud charges against the three largest credit rating agencies, and that is why no one is talking about them. I am not a lawyer. I know nothing about being a lawyer, but I have watched a lot of cop shows on TV and I read The Wall Street Journal for over 35 years. If putting a AAA rating on all those mortgage-backed bonds was not fraud, then I do not know what fraud is. Perhaps the Federal prosecutors have to show intent, not simply that the credit rating agencies were stupid to give these bonds their AAA rating.

If the credit rating agencies used mathematical models to assist them in their research that lead to the AAA ratings, and the math from the models showed that these bonds should not have received the AAA rating, but the bonds were given the AAA rating anyway, would that not be a clear case of fraud? I guess we will have to leave that for the lawyers to decide.

As I have written on MONEYTHOUGHTS many times, without a creditable and honest, with no conflict of interest, credit rating system, the flow of credit for housing, manufactured housing, car loans and credit card debt will be seriously impacted. Credit and the securitization of credit into bonds is the way business is done in the 21st century. Remember, credit is no more than the bringing together of the individual that needs to borrow money with the organization that has money to lend. The large pools of investable cash are found in state pension funds and mutual funds, and it is because of the development of structured debt obligations that credit exists beyond the walls of the commercial banks.

I am waiting to see what the new regulations that will be governing the banking and securities industry will look like as we go forward. At some point, even this must reach the light of day.

Stay tuned.

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