SEC: Credit-Rating Agencies Require More Oversight
Ever notice the guys who crash planes into the sides of mountains don’t get to do the review of what went wrong?
Same thing with other gian calamities: The Captain of the Exxon Valdez didn’t do the crash review; The Challenger Shuttle engineers weren’t the ones who determined it was the O rings, etc. A separate team of experts comes in to objectively review the evidence.
So won’t someone explain to me why we give a rat’s ass what the big 3 ratings agencies think would be a better way to regulate themselves?
“Rating agencies have come under scrutiny over the past year after they gave overly generous ratings to debt — a move which some say exacerbated the financial crisis.
Agencies like Moody’s, Standard & Poor’s and Fitch Ratings have also been criticized for their business model in which issuers of securities pay the firms to rate them. Some believe this creates an inherent conflict of interest. On Wednesday, the heads of those firms and myriad other credit-rating experts gathered at the SEC to discuss what changes, if any, need to be made to improve oversight of the firms.”
Not critics of the horrific state of affairs — btut he companies themselves.
Well, its entertaining to say the least. The commentary from S&P via a white paper is especially HILARIOUS:
“Market participants should be free to choose from a variety of business models for credit-rating agencies, but all firms should try to strengthen their transparency, quality of performance and prevention of conflicts of interest, according to Standard & Poor’s.”
Now, I think that is funny. But they don’t — they are serious:
“In a new white paper, S&P lists six qualities investors want from ratings firms: all public ratings available to all investors without charge at the same time; a ratings process free from conflicts of interest and independent of issuers, investors and governments; ratings based on sound, consistently applied methodologies that consider real-world trends; broad and consistent coverage of a wide range of securities and asset classes; ongoing scrutiny to ensure timely upgrades or downgrades if appropriate; and freedom to choose rating opinions from multiple sources and additional benchmarks on issues besides the likelihood of default.”
These guys should work for HBO — seriously, give them a job doing anything but rating credit.
>
Sources:
Schapiro: More Oversight Needed for Credit-Rating Firms
SARAH N. LYNCH
WSJ, APRIL 15, 2009, 3:43 P.M.
http://online.wsj.com/article/SB123980931135221355.html
S&P: Rating Agency Goal Should Be Transparency, Independence
DOW JONES NEWSWIRES, APRIL 10, 2009, 3:52 P.M.
http://online.wsj.com/article/BT-CO-20090410-704685.html
SEC chief: need tighter oversight of rating firms
MARCY GORDON
AP, APRIL 15, 2009
http://www.google.com/hostednews/ap/article/ALeqM5i_mRZNfX8KzLDJwYh1IM0g-jb7FAD97J577G0
April 15th, 2009 at 7:46 pm
Barry- the problem is who else to turn to- does the USG make them pay any kind of premium in case they are proven wrong- a fund of sorts that pays out to defrauded investors?
April 15th, 2009 at 8:08 pm
The answer to the “conundrum” of the credit ratings agencies is the same as that for the banks, these guys failed and they should go out of business and replaced by firms like Egan-Jones who actually do an honest job.
OT – Did anyone ever mention that the tax system in this country is an unmitigated nightmare?
April 15th, 2009 at 8:09 pm
Barry,
I’m pretty sure those quotes are actually Miss Teen America contestants.
April 15th, 2009 at 8:29 pm
“It is evident from the state of the country, from the habits of the people, from the experience we have had on the point itself, that it is impracticable to raise any very considerable sums by direct taxation.”
Federalist Papers Authored by Alexander Hamilton by Hamilton, Alexander View in context
http://encyclopedia.farlex.com/taxation
“No person acquainted with what happens in other countries will be surprised at this circumstance. In so opulent a nation as that of Britain, where direct taxes from superior wealth must be much more tolerable, and, from the vigor of the government, much more practicable, than in America, far the greatest part of the national revenue is derived from taxes of the indirect kind, from imposts, and from excises. Duties on imported articles form a large branch of this latter description.
In America, it is evident that we must a long time depend for the means of revenue chiefly on such duties. In most parts of it, excises must be confined within a narrow compass. The genius of the people will ill brook the inquisitive and peremptory spirit of excise laws. The pockets of the farmers, on the other hand, will reluctantly yield but scanty supplies, in the unwelcome shape of impositions on their houses and lands; and personal property is too precarious and invisible a fund to be laid hold of in any other way than by the inperceptible agency of taxes on consumption.
If these remarks have any foundation, that state of things which will best enable us to improve and extend so valuable a resource must be best adapted to our political welfare. And it cannot admit of a serious doubt, that this state of things must rest on the basis of a general Union. As far as this would be conducive to the interests of commerce, so far it must tend to the extension of the revenue to be drawn from that source. As far as it would contribute to rendering regulations for the collection of the duties more simple and efficacious, so far it must serve to answer the purposes of making the same rate of duties more productive, and of putting it into the power of the government to increase the rate without prejudice to trade.
The relative situation of these States; the number of rivers with which they are intersected, and of bays that wash there shores; the facility of communication in every direction; the affinity of language and manners; the familiar habits of intercourse; — all these are circumstances that would conspire to render an illicit trade between them a matter of little difficulty, and would insure frequent evasions of the commercial regulations of each other. The separate States or confederacies would be necessitated by mutual jealousy to avoid the temptations to that kind of trade by the lowness of their duties. The temper of our governments, for a long time to come, would not permit those rigorous precautions by which the European nations guard the avenues into their respective countries, as well by land as by water; and which, even there, are found insufficient obstacles to the adventurous stratagems of avarice.”
http://hamilton.thefreelibrary.com/Federalist-Papers-Authored-by-Alexander-Hamilton/1-6#taxation
April 15th, 2009 at 8:32 pm
CEOs want the same thing in a credit agency that they want in their auditors and out-of-house legal counsel: (1) Lots of Powerpoint presentations and charts,
(2) Prepared by people with dazzling academic and professional credentials,
(3) and Overseen by experienced and respected senior partners who know all of the downtown hotel concierges.
April 15th, 2009 at 8:41 pm
The HBO thing Barry mentions makes a lot of sense.. or perhaps Comedy Central… this is just for show to improve the perception that things are being done so these issues won’t happen again.. credit rating agencies are a joke. It would make sense that the USG would make a push to regulate all the unregulated things that were part of the past problem but it fails to anticipate and fix things going forward. Will there be hearings?!
http://moneyneversleepsblog.blogspot.com
April 15th, 2009 at 8:45 pm
Of course, this is stranger than fiction… we can’t even make a movie out of this because it’s too far fetched. : ) But, BR did get a book out of it, lol. A reliable source documenting incredulous happenings… it’ might sell.
April 15th, 2009 at 8:51 pm
These guys don’t believe in freedom of speech (Bailout Nation) so why would anyone listen to them?
I agree the Egan-Jones model works just fine and has kept them on the straight and narrow. They need to be told not asked. Will somebody PLEASE put some adult supervision in the SEC. Oh, and introduce a rule that no ex-SEC official may accept a job on Wall ST for at least 5 years after leaving.
I remain concerned that this one will fall through the cracks because these guys have a lot of clout. We, as in we the people, really need to keep an eye on this one.
April 15th, 2009 at 8:58 pm
Barry,
What’s wrong with listening to what they have to say? Listenin’ ain’t doin’.
April 15th, 2009 at 9:05 pm
I haven’t stopped laughing thinking about how the credit rating agencies would look to improve their regulations.
btw has anyone noticed how futures on the Dow & S&P have been managed this week?
April 15th, 2009 at 9:06 pm
franklin
dude- they failed- let’s push on alright?
April 15th, 2009 at 9:07 pm
what you are surprised that they got to be at the table? and i guess hearing them out lets you decide what you aren’t going to do. cause just about any thing they suggest would be…foolish at best.
April 15th, 2009 at 9:20 pm
“The Challenger Shuttle engineers weren’t the ones who determined it was the O rings, etc”
Actually, a lot of engineers at both Nasa and Tiokol were aware of the O-ring issue. Read Richard C.Cook Challenger Revealed for more insight, I did, it is a great tale of incompetence and mismanagement of one America’s most successful agencies in the decades before the STS fiasco. (Apollo days).
I do otherwise agree that rating agencies should crawl under a rock and weep some, but Challenger is just not a good corollary, Barry.
April 15th, 2009 at 9:30 pm
Finally, if we are to replace standard numerical probability usage with engineering judgment, why do we find such an enormous disparity between the management estimate and the judgment of the engineers? It would appear that, for whatever purpose, be it for internal or external consumption, the management of NASA exaggerates the reliability of its product, to the point of fantasy.
-Richard Feynman, Appendix to the Rogers Commission Report on the Space Shuttle Challenger Accident
@ gloppie: I would respectfully disagree. I think comparing the ratings agency debacle post mortem to the Challenger post mortem is very apt indeed. Note that there were a few ratings agency whistleblowers and clearly persons inside the agencies who knew their ratings were exaggerations “to the point of fantasy.”
April 15th, 2009 at 9:53 pm
Little OT but I feel like sharing my thoughts on this.
I had to be in the car a lot today so I decided I was going to tune in to some talk radio to hear about these “tea parties” today. What a complete joke IMO.
So I come across some AM station, conservative, intelligent, talk radio, the dial was at 990 in my area for this. They interviewed one person after another that had attended a tea party and each said the same when asked why they where there “I’m concerned about the spending, I want a change or I’m going to vote these people out in 2010″…they were basically just repeating whatever the host of the show was saying
I started thinking a couple things.
1. This is anything but intelligent talk radio
2. Most of these people had no clue at all how to even answer the question why they were there. More important, where have all these people been, we’ve been spending we didn’t have for quite a few years now eh?
3. The facts are that probably 50-80% of the people interviewed were also part of the problem, they spent money they didn’t have, now they scream for the govt to stop spending.
4. the host of the show, Mike something, hard-core right winger, is going on and on about the spending, then reveals, “I want a bailout for the first and second mortgage on my home” Hmm. please, someone correct me if I’m wrong, but don’t you do a 1st and 2nd to avoid PMI, b/c your down pmt wasn’t big enough to get the 80/20 loan to equity. That was priceless to me, the guy who is levered up on his home, bitching about govt spending.
5. What the hell were they playing Braveheart clips for during the breaks? They played the …. they will never take our freedom! clip.
Anyone else a little surprised by the market today? I picked up some more SRS today, hope this works better than the last time I got into it. Also, we got that pump up right at the end that Mannwich has been talking about for a while now, quants are still running this show.
@ Mark,
As always, great links. Thanks.
April 15th, 2009 at 10:06 pm
ben22, imo, the most important read today was macroman… http://macro-man.blogspot.com/2009/04/tom-dick-and-harry.html this is my premise over the last few weeks.. dispend with your biases.. go with the charts..
April 15th, 2009 at 10:18 pm
Well put, Ben. The tea parties (and talk radio clowns) are a bad caricature of this country’s moral, cultural, and intellectual decline over the past few decades. We have institutionalized intellectual laziness that has become pervasive in every corner of this country. Where the heck have these people been over the past 6-8 years while we spent ourselves silly? Why, out spending themselves silly of course, demanding public amenities and not wanting to pay for them now (and not voting out their guy/gal because it’s not their guy/gal that’s “the problem), drinking the kool aid and blindly supporting GWB and “their party” down a road to ruin. Well, that, along with being distracted by the bread & circus that is all around us every day. This mindlessly taking political sides like it’s some sort of a sporting event where we cheer “our team” on has to stop. It’s a lot more complicated than that. People haven’t seemed to figure out that the political parties and their enablers are all too happy to make it a sport and divide us over petty issues while they make off with the loot and ruin this country. In the meantime, our political “leaders” in both parties and their elite cohorts are laughing at us all the way to the bank.
On another note – the market never surprises me these days. I grabbed more SRS into the close again today as well but feel a little like I’m tilting at windmills doing it. This charade that all is suddenly well can’t go on forever, can it?
April 15th, 2009 at 10:23 pm
I am also scaling into some TIPS in my retirement accounts to prepare long term for the coming inflation.
April 15th, 2009 at 10:31 pm
One can bankrupt oneself going long national intelligence. The problem is how do you short it?
April 15th, 2009 at 10:35 pm
@larster: Someone should start a quadruple short ETF on that one. I’d be a buyer on the dips. Would there be any dips though?
April 15th, 2009 at 10:37 pm
lefty and his firm will be heartened to note that CR’s blog is reporting that mortgage defaults are working their way up the foodchain.
April 15th, 2009 at 10:46 pm
Regulating themselves the first time didn’t work. So, why will it this time? There is so much collusion between the government and business that it’s not even funny anymore. Just socialistic. And that’s the stage between capitalism and communism.
April 15th, 2009 at 10:49 pm
I wonder if the guy/gal who said…
“Market participants should be free to choose from a variety of business models for credit-rating agencies, but all firms should try to strengthen their transparency, quality of performance and prevention of conflicts of interest, according to Standard & Poor’s.”
Ever had lunch with the guy/gal who said… “Let’s hope we are all wealthy and retired by the time this house of cards falters…”
Or is on the softball team with the guy/gal who said… “It could be structured by cows and we would rate it.”
As for taxes, people like to snatch it, confused and furious after being beaten over the head with it and beat someone or something else over the head with it.
I’m sure many of the participants in today’s “re-enactments” are in the “support the troops… lower my taxes” gang too. Common sense and reason abandoned for sloganeering.
April 15th, 2009 at 10:51 pm
I’m not sure these guys should have jobs at HBO. More likely, they should be in jail. But what the hell, part of me says Americans deserve what’s coming. Let the chips fall.
As Old Man Russell says, the U.S. dollar is stumbling towards the fiat currency graveyard. Quite a shock when you wake up one morning and realize your national “currency” is worth less than toilet paper.
April 15th, 2009 at 10:58 pm
EAR said: “I’m sure many of the participants in today’s “re-enactments” are in the “support the troops… lower my taxes” gang too. Common sense and reason abandoned for sloganeering.”
Bingo. Add constant “War on Terruh” to my list above of things that millions of halfwits in this country blindly support but don’t want to pay for now or any time in the future on their dime. They love a “strong military” (which, of course means funneling billions of borrowed largely wasted public dollars to defense contractors and that’s not a problem) but pay for it? They’d just as soon make future generations do that rather than have “my taxes raised”. “I know best how to spend my own money, dammit.”
April 15th, 2009 at 11:04 pm
MannW – we have a war on everything, war on terror, war on drugs, war on war on crime, everything is a war. what’s up with that? Just bs slogans.
from 10:37, I want to buy a nice (up the food chain) retirement place in FL. Any regionally specific data?
April 15th, 2009 at 11:06 pm
Mannwich…
“I know best how to spend my own money, dammit.”
“And to prove it, I’ll take you to my house right now and show you all the shit I levered up to eternity to get… then we’ll go over to the other house I used to have and I’ll show you how nice it was… is. You gotta take a malaria pill before you see the pool though.”
April 15th, 2009 at 11:09 pm
@Wes: Check out the blog Calculated Risk. It’s a recent post from today. I believe they’re citing various regions of California in the data. Actually, here’s the link to the original story….
http://nctimes.com/articles/2009/04/15/business/z9c534f8aa44d3f0f8825759800649427.txt
April 15th, 2009 at 11:09 pm
JD – so, how are you planning to manage your long range financial plans when the US currency is being debased?
April 15th, 2009 at 11:16 pm
MW, thanks. North County = northern San Diego County. Very nice environment – absolutely beautiful. Live d there (Cardiff by the Sea) for couple of years right after school. State Income Tax is a negative, as are potential earthquakes. How low will they go (home prices), nobody knows when the wheel stops….
April 16th, 2009 at 12:12 am
larster, mannwich…LOL!!
Reminds me of a one-liner from Winston Munn from like 2 years ago: to “short honesty and go long obfuscation”.
April 16th, 2009 at 12:29 am
Barry,
There is nothing to explain. Congress has decided a long time ago that doing the business of the people was too much to ask. They settled for pocketing campaign contributions from everyone, but to attend the business of the highest bidders only. It’s that simple when one cut through the fog of constant spin, delusions and BS.
With a financial sector so powerful in DC, don’t expect anything else. The money masters know how to subvert the will of the representatives of the people, to gain even more power and influence. As per Will Durant in his seminal work on the history of civilizations this is one of the most common way great civilizations come to perish.
Judging by the numerous signs and symptoms of this crisis, we’re well on our way to this sorry fate. How to explain otherwise, what you just described, as well as the abysmal difference in treatment of the automakers versus the banksters, the steady erosion of our civil liberties, the growing inequality, the absolute failure of the mass media to simply report the FACTS etc.?
We need to jackhammer a multiple rabbit punch in the kahunas of the Establishment soon…or else.
April 16th, 2009 at 9:23 am
Why do they have to be third party institutions? It seems like that business will always find it very difficult to remain objective . After the failure of these companies, why does/must any firm still use or even believe their numbers? Im amazed that after that betrayal of duties the market has not crushed them… whats up with that
April 16th, 2009 at 9:43 am
Its the same old song and dance………have a meeting, put out a statement, make it appear that the issue has been vented, and then continue on with the wholesale liquidation of America’s resources. And all the while nobody seems to be able to get anything done due to the polarization of society thanks to the grand machinations of our media outlets. Gee, did I just get off topic?
April 16th, 2009 at 10:29 am
the Tea party crowd are just the right wing wackos coming unhinged. They can’t take the fact that they lost the last election, some are closet racists who can’t bear the thought of BO president, and want to start a revolution, but, of course, want someone else to actually do the revolt. I had a conversation with a so called member of the “Michigan Militia” a few weeks ago. I couldn’t make any sense of what his position stood for, except he was against everything going on right now. From what he was arguing I concluded his most likely parabola would lead him to drive to Detroit and take it out on Union Auto Workers. But as I said he hoped someone else would do it for him.
April 16th, 2009 at 2:18 pm
Call for Huey Long! Call for Huey Long!
April 16th, 2009 at 3:25 pm
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April 17th, 2009 at 4:07 am
Explicit explanation for Geithner, Paulson, Summers, Dudley. Reason same dudes at all the institutions being Stress Tested are the same dudes. Absolutely nothing is going to change.. We already know who is going to pay. Is there any doubt? Any inconvenience to Bonds is systemic risk. That’s why none of these guys have much to say that is new — cause what they are doing isn’t new.
April 17th, 2009 at 4:08 am
And people act surprised. That’s was drives me crazy.