Thursday, May 20, 2010
Congress: Don't Shoot The Economy In The Foot
Today I am playing golf and I have a few things to do before I play so I will try to be brief.
CONFIDENCE. Confidence in an industry where, at best everything is written on paper, and more so today nearly everything is in book entry form, is of utmost importance. It is imperative that those on both the buy side and the sell side have confidence in the "paper" (investment securities) they are trading and investing. Without confidence, there is nothing. There is meltdown - no one will give a bid because no one wants to position a bond that is not what it is represented to be. The credit rating agencies by the act of rating bonds, give them a value. If there is a rating and it is found out that there is no value, then the whole bond market has problems. Even US Treasuries that are used to secure loans to carry inventory come under pressure. Liquidity becomes an issue and trading grinds to a halt.
The new legislation must contain serious reform as far as the credit rating agencies and the way they operate is concerned. Without this, the economy can not recover with the speed it is capable of. Borrowing and securitization are not the enemies. What is needed is reform of the conflict of interests that exist on Wall Street between the bankers and the credit rating agencies. Without this reform in the new securities legislation the Congress is shooting the economy in the foot.