Writing in Barron’s under the title “The Credit Umpires Blew It, Too”, Randall W. Forsyth concluded: [1]
…the leading ratings agencies aren't seen as venal, stupid or hopelessly conflicted by the way they're compensated. No, it's even worse. They're seen as irrelevant.
Forsyth remarks that nowadays bond investors look harder at the market for CDS and at the fundamentals. Yet:
Except…that many institutions have strictures about minimum ratings for their bond portfolios or limits as to how much unrated securities they may hold. So, the rating agencies call do count, if only because of those standards imposed years ago.
But that’s not the problem, the problem was, and is that the risk weighting of assets (read bond (securities) portfolios), plus the solvency of insurance companies and pension funds; is calculated from the ratings, as I pointed out a while back [2]
That’s not changing, the US Financial Reform Bill says nothing about that, which is why the bill is in the cold-light of day, nothing more than a load of hot-air designed to make the administration feel good and create more layers of bureaucracy that can only be handled cost effectively by Big Banks…specifically Too Big To Fail Banks.
The reason there was a credit crunch was that banks made foolish loans, they were allowed to make foolish loans by the regulators because the loans they made (and the securitized products that were distilled from those loans) were rated too high.
And in the event the amount of money that the previously highly rated assets could be sold for, was a pittance, compared to what the last sucker in the elaborate game of pass-the-bundle had paid.
The rating agencies will say (and said) that it is good the investors have started to do their own due diligence, and in fact, they advised them to do that all along. But that leaves the question, if all that a rating does is provide a government approved quality stamp; that no one believes, what useful economic function do they provide?
The answer to that question, based on past experience is not, “None”. It is less than none, because like it or not, if the government has (by proxy through the monopoly provider rating agencies), given that precious AAA stamp, that opens the door for devious and dishonest to exploit…
