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?

Stay tuned.


moneythoughts said...

Well, it looks like I wrote another piece that no one is going to comment. I guess this only goes to prove my point that what I am talking in this post is below the radar of 99.999% of the people.

I don't think I can make it any more straight forward.

Butch said...

Hey, I'm here. In fact, I just got here....8:54PM.

Sorry, but I will have to say I agree with you on why no comment. Or, maybe your regulars are just busy, which I am sure is the case of some. However, not your readers so much as those that don't understand and give up trying. It is like the news tonight about where our children in school now fall in the realm of things. If you think it is bad now, whoa, just wait for another 15 years or so. My daughter is 32, when she gets closer to our age she will have real idiots trying to run the country.

No need to worry about being taken over by terriost, all they have to do is wait the stupidity out and the country will be theirs. That is because NO ONE CARES. We have it too good, or had it too good, for too many years. The hard facts are showing up but not in full bloom. When the financial springtime finally turns to a financial summer it will be too late. The pedals will have fallen.

It's like the announcement today of Bank of America saying they won't charge anymore over draft fees on their debit cards. They simply won't allow it. If you run your card and you are a penny short for that lunch at McDonalds...woops, whos' next! All of a sudden the bank has to be your mom and dad because you don't have the adult ability to limit yourself in your greedish ways.

Oh, I guess we can learn after all. Those greedish ways were taught to us by the banks...AIG, GS, Lehman and the true doctors of education, our government officials.

When we quit runnning our kids to all the "extra" activities we think they need or have a right to and instead keep them and ourselves, the parents, at home to do their homework and, our reading to keep up with life, then and only then will we be able to read what you take the time to post and to understand.

Like I have said before, because of you, and somewhat my personality of wanting to know, I have taken the time to try to read more about CR's, the bond markets etc. Some of what I have learned has made me sick but it is worth it. Don't dispair. Keep up the fight. There are still some of us, the 00.001% that are in your radar.

moneythoughts said...

Butch, it is always good to hear from you. We need to spread the word about the CRAs to the other 99.999%. At least I need to continue to try to get my point across. President Obama and Joe Biden were never bond traders and neither were any members of Congress. So, where is it going to come from? May be Vogue will pick it up and it will become fashionable. The talking heads could do it, but I don't think any of them understand it.