Credit Ratings Agencies Are Pimps of Wall Street: It's Time to Ban Them!
Continued from previous page
In our economy, the Federal Reserve sets interest rates, not the bond markets, although the latter may impact on the prices and yields of longer-term investment assets.
But in general, the Bank of Japan showed in the period from the mid-1990s onward that they can keep interest rates very low (zero) and issue as much government debt as they wanted even in the face of consistent credit rating agency downgrades, by organizations of dubious ethics.
So when a government stands up to the agencies, the impact is likely to be minimal. Here's another idea: they can just outlaw them. This may seem draconian, but consider that the FDIC puts criminally run banks out of business all of the time. It’s hard to see why the ratings agencies, as their enablers, should be treated any differently. The reality is that the so-called Big Three – S&P, Fitch and Moody’s -- were all criminally incompetent. They prostituted themselves in a pay-to-play scheme in which they would give to garbage securities any rating sellers desired, so long as the assessed fees were sufficiently high.
At a very minimum one would have thought we could introduce reforms that would align incentives, with buyers of rated securities paying for assessment of risk. The ratings agencies like S&P never actually looked at any of the mortgages that collateralized the securities they rated (it was all too pedestrian for them). As we now know from internal emails, they neither checked the loan tapes (the data provided by borrowers), nor the expertise in rating mortgages (all of their experience was in rating corporate and government debt), nor took the time to assess credit risk. And they have never understood how to rate sovereign government debt, failing to consider that there is no default risk for a country that issues its own currency. And yet the ratings agencies have provided higher ratings to low-quality NINJA loans (short for No Income No Job No Assets) than to countries with riskless sovereign debt!
Sadly, Congress and the Obama administration, in their deliberations to “reform” our financial system via Dodd-Frank, did nothing then to reform the ratings agencies. They worried that somehow, by introducing widespread reforms to the ratings agencies, they would reduce business for the monopolies. Hence, the bill contains no significant changes required of ratings agencies, which are encouraged to continue pimping their ratings.
Perhaps this lawsuit signals a chance. In any case, it is time to wean the private financial markets off these agencies by eliminating their role as gatekeepers to the thousands of financial products on which they provide in their Papal-like declarations. It's time to leave it to individual institutions themselves to do their own credit analysis. We should go further and simply make them illegal, and mandate that all financial institutions with access to the Fed’s lending as well as any financial institution with Treasury guarantees on liabilities (such as FDIC insurance) would be prohibited from selling or buying any derivatives. All assets would be carried on bank books through maturity -- with full exposure to interest rate, currency and default risk. That provides the correct incentives to protected lending institutions as opposed to relying on some flimsy rationale provided by a highly conflicted rating agency.
If our pension funds, and financial fiduciaries truly think they need an objective third-party agency to rate Wall Street paper, then at a minimum Congress and the President should be required to purchase ratings services from arms-length professionals, with the top three monopolists specifically excluded because they have demonstrated their inability to provide unbiased ratings. Furthermore, make ratings agencies liable for improper ratings, imposing a fiduciary responsibility to actually evaluate any instruments that are rated.