Monday, May 10, 2010
The Credit Rating Agencies: Sometimes You Need To Build A Fire
The investment business, for whatever reason, has remained over the years an area of modern/contemporary life that the vast majority of people have not taken much of an interest. My own interest in cars does not go very deep either. I love to drive, and I love to drive my BMW on the highways, but do not ask me any questions about what is under the hood or how it operates. I know how to put gas in the tank (I even know how to put in an extra quart of oil when it needs some). I am happy with that, and if something goes wrong, I take it to my BMW dealer for maintenance and repairs. I almost never read an article about the latest in automotive engineering, and yet I love to look at new and classic cars.
The investment business is not that complex, but there are a lot of terms and jargon that one needs to know to understand the finer points of the business. Without a knowledge of this specialized vocabulary, the world of bonds is a world of mystery. I have over the last two plus years written a great deal about bond terms and the bond market. One area, the credit rating agencies has remained "under the hood" so to speak for the general public. People working with bonds and bond portfolio management know what that credit ratings agencies do and the importance their credit ratings are to the process of taking a new issue of bonds from the underwriting through to the sale of the public offering of the bond issue.
Last week, on May 2, 2010, The New York Times wrote an editorial about the fact that the three largest credit rating agencies, the same agencies that gave out their Triple-A credit rating to the billions of dollars of mortgage-backed bonds, were somehow not included in the financial reform legislation that is making its way through Congress. This does not surprise me because they, the credit rating agencies, have some very powerful players involved in their business as investors. As I have written many times, "money talks and bullshit walks." Mr. Warren Buffett is a big time player and he owns a nice size piece of Moody's parent company as well as a nice size piece of Goldman Sachs. It is no mistake that the politicians glossed over this finer point of corrective legislation.
But, let us give credit to The New York Times for bringing this point to the greater public's attention. Now all we need is for the talking heads on the network news and the cables news people to pick up on this and keep it in front of the public's eye. As I have written many times, economics is easy, politics is hard. Removing the low hanging fruit from the reach of powerful old men is no easy task. They and the politicians that they contribute to will not do the right thing just because it is the right thing to do. Sometimes you need to build a fire.