More Than A Few Gold Coins Under The Mattress

What does it mean to say the triple-A credit rating is not bottomless? Could there be an Olympic Games where everyone wins a gold medal? What would a gold medal mean if everyone got one?

It is my opinion that the credit rating agencies (CRAs) would have continued to slap their triple-A credit rating on every bundle of mortgages that reached their desks for securitization until the game finally fell apart, and it did. At what point does the weight of all those triple-A rated mortgage-backed bonds bring down the real estate market and create a financial crisis?

Even a crane used to build tall buildings around the world has a weight limitation before it too will collapse. Nothing can withstand unlimited stress, not even passing out triple-A credit ratings for every mortgage-backed bond issue that is underwritten by Wall Street can withstand that kind of stress.

For the Federal Reserve Bank not to see the relationship between the issuance of the triple-A credit rating by the credit rating agencies, and the mortgage-backed bond market meltdown, is to ensure that we, the United States, will have a repeat of the financial crisis that we have already been through. Doing the same thing and expecting a different result, without taking steps to correct our mistakes, is a formula for more disaster.

The credit rating agencies have a built in conflict of interest with the mortgage-backed bond underwriters because it is the underwriters that pay the CRAs for the rating. As long as this remains the situation, the underwriters on Wall Street will “shop” the credit rating until they get the triple-A rating they need to pedal their bonds.

The CRAs played a key role in the financial crisis along with the guys that paid their bills, the underwriters on Wall Street. For the Fed to ignore the facts of our recent financial history, means that we as a nation are doomed to repeat the same financial history again.

The Federal Reserve Bank must take control of the credit rating process. It is important that the size of the securitized mortgage market be a calculation into the monetary policy decisions of the Fed. This in the world of securitization of mortgages is essential if the Fed is to have the kind of influence they need to have to manage monetary policy in the 21st century.

If politics trumps doing the right thing for the American people, as far as a future financial crisis and bond market meltdown are concerned, then, we all better be putting more than a few gold coins under the mattress.

Stay tuned.