Saturday, September 4, 2010

Foggy AAA Ratings

Congress, the Obama Administration and government regulators have done next to nothing to rein in Wall Street excesses. So the games continue.....

One can describe Wall Street today as a foggy valley of shadows where clever bankers and brokers pick the pockets of the lost, wandering masses.

Where are the beacons of light in this fog-shrouded valley? They are nowhere to be seen.

One beacon of light is supposed to be the ratings agencies. Their job is to assess investment risk and provide a clear playing field for investors of every kind. They are supposed to be the guys with the lanterns leading the masses out of the fog.

Instead, they did the opposite - they led the lambs to slaughter. Last month, a Senate study determined that over 91% of the AAA-rated mortgage backed securities issued from 2006-2007 have since been downgraded to "junk" status. Wall Street snake oil salespeople sold these toxic securities - what I call "briefcase nukes" - all over the world.

The ratings agencies excuse? "Hey, don't blame us. Our economic 'models' said these bonds would be ok."

Maybe the housing statistics from the Great Depression were "lost". Or maybe the raters deliberately left those statistics out of their models. After all, in modern America housing prices could never drop 20% in a year - we're so much smarter than anyone else has ever been.

Whatever the reason, it is incredible that the ratings agencies not only remain, but prosper. The very obvious conflict of interest is still in place. Let me lay it out for the readers:

1) Investors want the "safety" of AAA-rated securities.

2) Investment banks deliver want their clients want.

3) Investment banks PAY ratings agencies for their services.

4) The service of a ratings agency is to rate securities.

Pick your metaphor. It's like a student paying his teacher to grade his homework. Or a plaintiff paying the judge's salary.

Despite all the obvious common sense issues - incompetence, conflict of interest, past performance - the US government is turning a blind eye to this tawdry corner of the financial services industry. And taxpayers around the world are paying the price for it.


  1. I find it extremely interesting that these credit rating agencies don't label U.S. dollars as junk. Why not? We've printed astronomical amounts of this funny money.

  2. The only credit agency which has a lower credit rating for the US is from China - Datong. It's sad when we get more honesty from China than we do from our own instittutions.

  3. Turns out a lot of that triple a stuff was junk.