Wednesday, March 10, 2010
The Credit Rating Agency Issue Again
Today, I am back talking about the credit rating agencies and the role they play in the world of investment securities. The difficulty is not in explaining what the credit rating agencies did or their role in creating the financial crisis, but in getting people in government to understand the significance of their role and how they abused and corrupted the system they were charged with protecting with their integrity. The credit ratings they placed on billions of dollars of securities (mortgage-backed bonds), namely the Triple-A credit rating, lead to the whole mortgage debt crisis.
This is so under the radar that even those educated in finance and banking do not fully comprehend the size of the role the credit rating agencies played in the mortgage-backed bond meltdown or the credit default swap fiasco. How do you get people, charged with making the laws and regulations, to understand the role the credit rating agencies played if they have no hands-on experience dealing with these corporations?
Bond traders and bond underwriters understand what I am writing, but few outside the business really comprehend the size of the role the three largest credit rating agencies played in the disaster. In simple English, their credit ratings made the housing bubble possible and lead to the eventual meltdown of the mortgage-backed bond market. Their conflict of interest, their need to grow their own earnings by rating structured debt financing lead to the financial crisis and eventually the economic recession that followed.
A couple of States are suing the three largest credit rating agencies and it will be interesting to see what happens to them in court. No doubt they will appeal the decision all the way to the Supreme Court if the decision goes against them. Given the intellectual make up of the Supreme Court today, I would not bet which way those jug heads will go. But, the federal government needs to do something about the built-in conflict of interest credit rating agencies have with the bond underwriters that pay for the credit ratings.
And lastly, credit ratings and their acceptance, like the acceptance of money, is a very important factor in the economic recovery of the nation. If every Federal Reserve Note was suspect, and no one trusted that they were not counterfeit, What would happen to the movement of goods and services throughout the economy? The integrity of the Triple-A credit rating and its acceptance among buyers and sellers is no less important than the acceptance of our paper money - Federal Reserve Notes.
How do you get this very basic and simple truth across to the politicians that make the laws?