The Credit Rating System Stupid

First things first: Happy St. Patrick’s Day to everyone that celebrates this day of friends, fun and drinking.

Yesterday at The White House there was a ceremony with President Obama and small business people from around the country. President Obama announced that the Federal Government would be buying between $10 and $20 billion in Small Business Administration loans from commercial and community banks. In his presentation at The White House, President Obama made mention of the fact that in order for banks to be able to continue to lend money to small businesses, that they would need the Federal Government to buy up these loans, so they can make new loans when they sell the old loans to the Federal Government. This is all well and good, but $10 to $20 billion is not enough to really get this economy moving.

A better way to do this is for the Federal Government to take over the credit rating responsibility from the credit rating agencies and guarantee that the Federal Government will stand behind the credit ratings of the small business loans that would then be bundled into bond issues and then sold around the world. If the Federal Government did this, the restriction of $10 to $20 billion would be unnecessary as supply and demand would take over.

I do not mean to continue to beat a dead horse, but when are these experts at the Treasury Department and the Federal Reserve Bank going to wake up to the fact that they can get a lot more money in the hands of small businesses around the country if they simply fix what is broken -- the credit rating agencies. As I have written before, this is not brain surgery or rocket science. Bundling loans into debt obligations is nothing new as we have been doing this for years. With a responsible credit rating system the flow of credit can once again be up and running.

At some point, these bright well educated men have to figure this out. It is the credit rating system stupid.

Stay tuned.

The Light of Day

A lot has already been written about the bonuses that AIG, the insurance company, has to pay its employees in the London branch of the company that sold the credit default swaps that put AIG in so much trouble. Hell, it brought the company down except the the Federal Government bailout. And, we have heard from the experts that AIG must pay these bonuses because of contract law in England. This kind of crap gets a lot of attention, but really has nothing to do with the restoration or flow of credit for consumers in our domestic economy.

I find it difficult to understand how so much talking can be done about the economy, the stimulus package, unemployment and even what the First Lady is wearing, and not a word is spoken about how the credit rating agencies are going to be fixed.

Perhaps the Federal Government is looking into and preparing to bring fraud charges against the three largest credit rating agencies, and that is why no one is talking about them. I am not a lawyer. I know nothing about being a lawyer, but I have watched a lot of cop shows on TV and I read The Wall Street Journal for over 35 years. If putting a AAA rating on all those mortgage-backed bonds was not fraud, then I do not know what fraud is. Perhaps the Federal prosecutors have to show intent, not simply that the credit rating agencies were stupid to give these bonds their AAA rating.

If the credit rating agencies used mathematical models to assist them in their research that lead to the AAA ratings, and the math from the models showed that these bonds should not have received the AAA rating, but the bonds were given the AAA rating anyway, would that not be a clear case of fraud? I guess we will have to leave that for the lawyers to decide.

As I have written on MONEYTHOUGHTS many times, without a creditable and honest, with no conflict of interest, credit rating system, the flow of credit for housing, manufactured housing, car loans and credit card debt will be seriously impacted. Credit and the securitization of credit into bonds is the way business is done in the 21st century. Remember, credit is no more than the bringing together of the individual that needs to borrow money with the organization that has money to lend. The large pools of investable cash are found in state pension funds and mutual funds, and it is because of the development of structured debt obligations that credit exists beyond the walls of the commercial banks.

I am waiting to see what the new regulations that will be governing the banking and securities industry will look like as we go forward. At some point, even this must reach the light of day.

Stay tuned.

Saturday Is For Art

Sometimes a painting starts with an idea and other times, at least for me, it starts with a particular picture frame. One of my next painting projects got started because I had this old picture frame with a gold insert. The frame looks fairly old yet it is in good condition except that it needed a coat of paint. I decided to paint the wood frame with gold acrylic paint after putting down a primer coat of red oxide. The frame now has a nice fresh look. The other day I bought a piece of canvas board 16" by 20" and placed it on the back of the insert so I could trace the outline of the insert's opening. Then I removed the board from the insert and started to draw what will eventually be another version of a painting I made in 1995 titled "Mother & Child, Level Playing Field Out The Window". I donated that painting to the Clifton Senior Center's Progressive Dinner in the summer of 1995 and it sold at their silent auction. That was the only time I donated a painting to that group because they never asked me for a painting again. I guess someone did not like the painting even though it sold and they made money. As I said, I donated the painting for FREE. The painting was in oil on board and I framed it myself. Political art in Clifton is evidently a no no. You know my attitude about that, F**k'em, political art is what I do. Today, I have posted a photo of the original painting, as it looked, just before turning it over to the people at the silent auction.

Walk and Chew Gum, Part 2

There is a difference between the study of economics and our economy. Economics is the study of such things as supply and demand for goods and services. While our economy on the other hand involves what I like to refer to as the politico-economic interpretation of events, which after they take place, becomes our history.

The three sectors that President Obama has placed at the top of his “to do list” are energy independence, healthcare reform and education. Besides getting our domestic economy moving forward again, with the flow of credit to those points around the country, the Obama administration has taken a page from history, and quite correctly in my opinion, decided that these three sectors will be the foundation upon which the Obama administration will build our future.

Some people will disagree with his priorities and others will say this is not the responsibility of the central government. Those that disagree with those three priorities are entitled to their opinion, but if you have been in the United States since 1973, you know what an oil embargo is and what it can do to our economy. As for the second argument that this is not the responsibility of the central government, I would answer that national security is the responsibility of the central government and importing 70% of the oil we need weakens our national security. From a purely economic perspective, importing $700 billion worth of foreign oil is not good for an economy to run such trade imbalance. Exporting cash for oil when there are other forms of energy within the borders of our country is quite simply poor economic policy. We need to control a greater percentage of our energy needs from a national security standpoint if nothing else.

Healthcare is perhaps the toughest of the three sectors to argue because there are millions of opinions about how healthcare should be done. Everything from do not touch a thing to universal healthcare for all. The interesting thing since the attempt to reform healthcare during the Clinton administration is that the business sector has come to realize that if other countries take on the burden of healthcare costs from the giant corporations, that our corporations are at an economic disadvantage to compete on price of goods sold in the USA. If foreign corporations had to add the cost of healthcare back into the price of their products, American made products would find themselves on a more level playing field. American industry has now come to realize that healthcare costs have put them at a price disadvantage against Europe and Asia. As a result of this change, healthcare reform in the United States is an economic necessity.

And finally the education sector is the future of this nation. The United States does not have a national education policy, and yet test scores of American children are constantly compared to test scores of children from around the world where nations have a national education policy. If we have any hope of remaining an important country in the 21st century, we must develop better education policies to meet the challenges ahead.

We must be able to meet a series of challenges at the same time, much like anything else in life we must be able to walk and chew gum.

Stay tuned.

Walk and Chew Gum

Unemployment in the United States has reached a high of 5.3 million. And, while many many economists have said that a bigger stimulus package is needed to pull our domestic economy out of the current recession, and to prevent a possible depression, the Republican members of Congress find fault with the fact that President Obama can walk and chew gum at the same time.

Before we restart our economy, the foul lines need to be put down in something more than chalk dust. The games that are played on Wall Street require real regulation and our government’s commitment to put in place enough trained people to enforce the rules. The Madoff Fraud, while perhaps one of the biggest headline catching of all the wrong doings that took place, is certainly not the only one.

Over the years the apparatus that was put in place to protect the investor, whether large or small, was systematically destroyed by a political philosophy of deregulation. Money to the politicians from Wall Street paved the way to have the safe guards, that were put in place generations ago to protect investors, weakened to the point that a fraud of $50 billion could occur. The new financial instruments, such as credit default swaps, that have come along since the original rules were set in place, must be included when the new regulations are written.

The talking heads of TV news programs and the people that come on their shows do not know enough about the way the capital markets operate to make intelligent noises about what needs to be done. There are people on President Obama’s team of advisors that understand the capital markets and know the changes that must be made before the flow of credit can once again be truly a world wide bond market. Confidence in the credit ratings assigned to collaterized mortgage obligations (CMOs) and other structured debt instruments is very basic to the flow of credit around the world and the lifting of our economy, and thus our stock market.

Stocks will eventually (once again) sell at a price earnings ratio, but only when there are tangible earnings and some indication that the earnings per share are moving in an upward direction. While this may be several months or a year away, the growth in earnings will come to our economy, and those that can see beyond the next several months will be rewarded. There are many corporations that will make a strong comeback when this economy turns.

Stay tuned.

This Is Not Rocket Surgery

No one wants to bite the bullet or take responsibility for the financial disaster. The business people that paid the lobbyists to push for the changes in the rules and laws that protected all of us from a financial disaster are not going to raise their hand and admit their mistakes anymore than the politicians who took their money and voted to change the laws that worked since the 1930s and 1940s. Now Bernake thinks we need a holistic system of regulation, but no where do I see him or anyone else addressing the issue of the credit rating agencies (CRAs). This is something to watch for me because I could clean up this mess in a month or two if I had President Obama’s ear. Where is Paul Volcker? I can not believe Paul Volcker does not know the formula to fixing the flow of credit. Larry Summers could handle this too, I think. There must be some strong politics behind the lack of movement. I can not for the life of me believe that these two guys, Volcker and Summers, do not know how to fix this thing. This is not rocket surgery.

Stay tuned.

Old Problems & A New Day for Science

Two points, then I am going to put my blog away for the day.

First, after listening to the talking heads and politcians on TV, especially the news programs on Sunday morning, it is my opinion that there is more bull being spoken than actual knowledge about the economy or the banking and investment banking situation in the United States or around the world. No one, I repeat, no one is talking about the credit rating agencies and the key role they play in the movement of credit in the 21st century, nor their pivotal position as it relates to structured financial obligations, and the world wide bond markets. So, either these people don't understand the important role credit ratings play in the movement of credit from the borrower of credit to the investor in credit obligations, or no one has the balls to deal with the problem, the conflict of interest the CRAs have with the underwriters. Until this conflict of interest is dealt with effectively, and confidence and honesty can be brought to the credit rating porcess, the movement of credit is going to continue to go no where for structured asset obligations. The fact that TV talking heads, the print journalist, nor the politicans talk about this situation, leads me to believe that they do not understand the important role the CRAs play in the flow of credit in the 21st century. The talking they encage in misses the point.

Second, it is good to hear that science will once again take the lead in medical research. Stem cell research will now get back to exploring all possibilities. I could write more about my feelings about the Bush administration's position on science, but why bother. President Bush is gone now. Now is the time for science to prevail.

Stay tuned.