Tuesday, March 16, 2010

What About The Credit Rating Agencies Washington?

The politicians in Washington are patching together some sort of regulations to deal with too big to fail and to protect consumers of financial services from being cheated. This is a good thing. But, the same politicians are being ever so careful as not to upset their contributors from Wall Street.

I have not read the new rules, but I have yet to hear one word about the credit rating agencies (CRAs). Without taking aim at the inherent conflict of interest that the CRAs have with the investment bankers that pay them their fee for their services, we haven't changed a thing. The ability of Wall Street to continue to work hand in glove with the CRAs to produce phony Triple-A rated bonds has not been dealt with, and unless this crime is outed and eliminated, we are right on track to go down the same disastrous road again.

The history of finance is filled with stories of phony securities. It is interesting to me that counterfeiting money is a crime, but countering bonds is not. Selling a "story bond" is as old as debt financing itself. Bond ratings were to take the guess work out of an investor or portfolio manager buying a weak debt instrument. So, a system of credit ratings was created. These credit ratings were to give the investor some idea as to the ability and willingness of the issuer of the debt to pay principal and interest in a timely fashion. Giving a bundle of mortgages a Triple-A when the mortgages were sub-prime and not deserving of that high a credit rating lead, in my opinion, to the housing bubble that followed. These mortgage-backed bonds were then sold around the world to institutional investors by the billions and was the "air" the created the housing bubble.

Congress can not ignore these simple facts about the CRAs and their role in the bond market meltdown, toxic assets and the eventual financial crisis that followed. But, let me be clear, without a change in the way business is done between the CRAs and the underwriters of bonds of structured debt, the phony Triple-A rated crap will continue. Maybe not right away, but it will come eventually.

Stay tuned.


LceeL said...

Would it be possible to sue the CRA's for malfeasance?

moneythoughts said...

Ohio and California are doing just that.