Friday, June 25, 2010
Integrity, Bond Ratings & The Economic Recovery
The new financial regulatory legislation is probably so watered down that it will still leave plenty of room for less than honest people on Wall Street to cheat investors, but I suppose I should wait until I have read more about it before I pronounce this another piece of shit legislation.
As those who have been reading Moneythoughts know, my big thing was the Credit Rating Agencies and the role they played in the mortgage-backed bond market meltdown. This meltdown then put a liquidity crisis in play at the banks that had large positions of these now worthless bonds on the books and had leveraged themselves beyond reason. The liquidity crisis lead to the financial crisis which lead to the total economic crisis that resulted in more home foreclosures.
Trust in bond ratings and the Credit Rating companies that place the ratings on the bond issues is key to a successful bond market. Unfortunately, I do not believe that the new legislation deals honestly or effectively with this challenge. As long as the Credit Rating Agencies can be pressured by the investment bankers, the underwriters of the bond issues, there is going to continue to be fraud in the bond rating process.
If this credit rating problem is not dealt with in a satisfactory manner then investors, large and small, will not be comfortable with the credit rating process and this in turn will hold back economic growth. The economic engine can have every part working, but if the distributor cap is removed from the distributor, the engine is not going anywhere. The issuance of debt and the securitization of that debt is a powerful economic tool when used with integrity. Without it, the recovery of the economy is placed in jeopardy.