Tuesday, December 14, 2010
Perhaps Mortgage Bonds Should be Kosher?
I am happy to hear that Elizabeth Warren is working towards a more level playing field for consumers of financial products. I wish she would go after the credit rating agencies too. Besides credit cards and mortgages, consumers also need some help with the credit rating agencies that give letter ratings to fixed-income securities.
The credit rating agencies claim that they are protected by the First Amendment of our constitution - Freedom of speech. Well, I take exception to this line of thinking. The credit rating agencies are not just writers, but they are Nationally Recognized Statistical Rating Organization "NRSRO". That means that the Securities & Exchange Commission (SEC) permits financial organization to use their ratings in carrying on their business. The credit rating agencies are not merely journalist writing about what they think.
Some of you may be aware of a symbol that can be found on the label of food products that are sold around the country. I am talking about the letter "U" inside the letter "O". This symbol tells the buyer that the contents inside the jar, can or box is kosher. A food manufacture can not put this symbol on the label of their food product unless the manufacturer has met certain standards overseen by a rabbinical authority. The symbol stands for Union of Orthodox Rabbis.
Putting a triple-A rating on a financial product, to my mind, is the same thing. The triple-A rating means that certain statistically measurable standards have been met and that the mortgage-backed bond meets those standards. No, that doesn't mean that the bond is kosher, while that may not be a bad idea, but it does mean that credit quality behind the bond has been reviewed and found to meet a very high level of security.
Perhaps it is time for Elizabeth Warren to check out what kosher means, and see if we can't get our financial products to stand for something.