This ought to get McMegan and the Reasonoids excited:
Now that the job of implementing the financial reform bill has been handed over to regulators, the financial sector is going to do everything it can to loosen them. Yesterday, the ratings-agency cartel went on strike, refusing to rate bonds — this led to a substantial freeze in trading. While some see this as an economic consequence of the Dodd-Frank bill, that’s not really the case: This is a political maneuver, intended to fight back against new restrictions on business practices, and we had better hope that regulators don’t give in easily.
The ratings agencies, of course, are the d’Anconia/Rearden-style geniuses who powered our economy to a decade of unprecedented growth idiots who helped cause the financial crisis by giving AAA ratings to subprime-backed crap.
General Stuck
JUMP!!
You Fuckers
danimal
Stuck, I’m getting to the point where it’s time to say PUSH.
Silver
Can’t we do what American Jesus did and just summarily fire them all and replace them?
It’s not like they do anything important like co-ordinate the movements of commercial aviation…
Tom Hilton
So if the ratings agencies don’t rate anything, the people who buy bonds have to do the due diligence they should have been doing but didn’t because the ratings agencies told them everything was okay. And the downside is…?
El Cid
How can a free market system work if it isn’t based on falsely propped up investment values?
TenguPhule
We may have to shoot a few of the leaders before the rest get the new picture.
wilfred
Whoa. How about not giving in at all?
Already the weasel words of compromise.
Omnes Omnibus
@Tom Hilton: The ratings agencies get no fees. No, wait, that’s not really a problem either. OK, I’m stumped; what is the downside?
NickM
This is one time I’m happy to say bring on the scabs. If these bastards don’t want to rate bonds, there’s plenty of others who want the work.
mclaren
Goddamn right, Nick. How about this? The rating agencies won’t rate bonds? No problem, shut ’em down. Set up new rating agencies staffed by people who are willing to work for their money.
Davis X. Machina
@NickM: It should all be done by federal Work-Study students in the various business and finance majors. Not only can they perform a useful service, they can
make useful contacts for the futuregain valuable personal experience of regulatory capture as part of their undergraduate education.dmsilev
So, let me see if I understand this correctly: Under the previous regulatory environment, the ratings agency could say whatever they wanted about whatever piece of financial crap they were looking at, and nobody could sue them for “creative analysis” because of the First Amendment. One provision of the reform bill allows people to sue the ratings agencies if, in fact, it turns out that an AAA-rated bond had all the reliability of an 1864 Confederate war bond. And the rating agencies are reacting by collectively taking their ball and going home.
Remind me again why anyone trusts these agencies in the first place?
dms
Jay in Oregon
@NickM:
To me, “scabs” implies that there assholes are unionized.
I would highly doubt, so it’s time to clean house. As has been noted, there are probably people who would be happy to do their jobs at 1/10 the price.
catclub
@Tom Hilton:
It is not that simple, due to the previous rules, which either implicitly or explicitly required a rating (from (I think) one of the three top rating companies, not just any joe blow off the street). What happens if you don’t get rated by them? You can’t get various types of insurance, or your bond cannot be sold to various public entities – like municipal bonds.
Thus, there is much less point in bothering with due diligence
by the buyer – all that matters is a rating from the right company.
So this is government creating business for a selected few
businesses.
Why in the hell are they called rating _agencies_ rather than
rating companies?
Comrade Dread
Isn’t this something we can modernize and automate via computers? Or outsource to India?
Hell, I’m pretty sure a class of 1st graders could pull ratings out of thin air based on the company mascot or pretty colors and get this shit better than the pros did.
catclub
@dmsilev:
And there is still the implicit requirement to get your bond rated by one of the big three.
Having the law force business to them is not good enough.
Toast
But, if rating agencies don’t rate, then traders can’t trade! And if traders can’t trade, then… then… (thinking)… Wait, does Wall Street actually serve a useful function?
Sentient Puddle
@catclub:
Charter a new ratings agency that will do their fucking job?
NickM
@Jay in Oregon: Being businesses, the cartels the bond raters operate are not unions or unionized, of course. But insofar as the McMegans of the world might be inclined to view this as a Galtian “strike” of the oppressed ubermenschen, my reaction is to call for “scabs” to do the struck work.
Dave S.
@dmsilev: Trent Lott would say that we wouldn’t have had all those troubles with worthless Confederate war bonds if Strom had been in charge.
flounder
It appears the stock market is very happy with this development. /cnbc_style_analysis
ksmiami
I worked on a securitization and I can tell you from experience that the whole business is rotten to the core. I hope the agencies go galt forever. Our economy will be better for it and then we can actually move the job of regulatory affairs / ratings to a true goverment entity, not a bunch of whores for money
PeakVT
@Toast: Yes, but it would only take about 1/10 of the current workforce to accomplish it. The rest are grifters.
4tehlulz
If they had any real balls, they would have downgraded U.S. debt to AA.
gex
So that’s it then? A handful of people have the power to just invalidate a democratically written law?
It seems clear to me that our experiment is much closer to the end than I feared. The rule of law is rapidly ceasing to apply.
ED: Time for some free marketing, bitchez. I imagine that there are financial analysts in India that would be willing to do a more honest job rating investments. But of course, financial work is the only work that Wall Street feels shouldn’t be outsourced. Let’s bring in some competition if they don’t want to do it.
sneezy
@catclub:
That’s generally correct. What you’re talking about are “Nationally Recognized Statistical Rating Organizations,” or NRSROs, of which there are ten. The “big three” are the names that most people tend to know: S&P, Moody’s, and Fitch.
The wikipedia article on this topic is pretty good, for anyone interested in more.
JenJen
@flounder:
Exactly! First thing I thought of when I read the initial “news stories” about Moody, Standard & Poor’s et al intentions that, by the way, may as well have been written by their PR agencies.
Snarki, child of Loki
So, they’re going to take their dartboards and go home?
Fuck ’em. Parasites.
russell
Take bond rating out of the private sector and make it a public regulatory function.
They don’t want to play? Fine. Take their bat and ball away.
Florida Cynic
@catclub: This. One of the fixes from the last banking collapse (S&Ls, anyone?), was the requirement that certain classes of investors can only buy “investment grade” instruments officially blessed as such Nationally Recognized Statistical Ratings Organizations. The fun part is that these NRSROs got to issue ratings as “opinions”, which makes it hard to sue them for screwing things up.
Short term, by refusing to allow the ratings to be included in regulatory filings and marketing materials, the agencies can gum up the works quite a bit. Longer term, this kind of petulance is going to backfire badly for them. FWIW, they appear to be mostly alarmed by the suddenness of the change. The language that removed their safe harbor got put in the act late, and they either weren’t aware it was there, or expected it to be stripped in conference. Of course, if they were doing their jobs in the first place, it wouldn’t matter.
DickSpudCouchPotatoDetective
True, but those bogus ratings were offset by tax cuts.
That was good news for investors!
Honestly Dougj, you don’t always have to shill for the liberal media.
Next up: The fatcatosphere explains how global warming is being offset by tax cuts.
Bob L
I’d say send the National Guard into Wall Street to make up AAA bond ratings for junk bonds and fire the socialists! It’s what Regan would have done.
Sentient Puddle
@Florida Cynic:
The suddenness?! Do they not realize that the economy crashed in ’08 on the backs of pieces of shit that they rated AAA? ‘Cause I think if a normal person was in charge, they’d see that situation and go “Y’know, there’s probably some hell coming our way over this.”
Ah, there we go…they decided to play a game of chicken with it, and thought they couldn’t lose. To be fair, this is Wall Street culture we’re talking about…
Yeah, that’s the bottom line (and so I don’t want you to think I’m directing all this to you). Of course, this just goes to show that, in absence of strong regulation, we can’t expect them to do their jobs in the first place.
And yes, I have heard moronic glibertarians say that everything was all hunky dory in the ratings business until the big bad government stepped in.
ThatLeftTurnInABQ
@russell:
Give the job to Paul the Octopus – we might as well have some real globe-spanning tentacles running our financial system.
Napoleon
If they are doing the ratings right, what do they have to worry about?
@4tehlulz:
Before the financial crisis I would have been willing to bet you that when the next Democratic administration came in that at least one credit rating agency would have done that. I did not save any link or have lost it at this point but there was a story from early in the 2nd Bush Admin where one of them started to make notice that something had to be done about the US fiscal situation or there was a potential rating downgrade in the future and therefore the gov. had to cut SS benefits. No mention of raising taxes, no mention of cutting defense or any other spending, just tossing grandma out on the street. I am 100% convinced that it was the opening salvo of a plan to turn it up to 11 when a Dem became President to force him (and not a Rep) to do the dirty work and one of the things they were going to use was a ratings downgrade to get their way. With the credit crisis suddenly they are looking at potential liability to a bunch of parties plus the US Gov stepping in with a bunch of new regulation so IMO they back burnerred it because suddenly a bunch of other parties had leverage over them they did not anticipate.
But the second they think that leverage is gone, whether because it dissipates of the US Gov pulls the trigger and uses it, they will be back with this plan.
ocean man
Half way through “The Big Short”. Rotten to the core about sums it up. The rating agencies were taught by Morgan Stanley’s and Goldman Sach’s “quants” how to rate the bonds. The rating agencys’ employees are looked down upon as hapless losers and trader wannabes. Banks originate loans and then sell loans (bank collects fee) to MS and GS(collect fee) who in turn package them in the thousands and sell them to dupe hedgefunds or other buyers. You mix in some good loans with tons of shit loans in a package of thousands and badda bing you have triple A rated tower of loans. We are all just a bunch of marks to them.
Florida Cynic
@Sentient Puddle: By suddenness, I was referring to the fact that some inhouse counsel probably dropped a load in his expensive shorts when he realized that the rule change goes into effect immediately. These things usually have a cut-over period of some sort. I’m sure the NRSROs knew something had to be coming, they just figured that they’d either be able to dilute it in the rules making period, or get something snuck into a later bill.
I’ve never been able to reconcile the idea that instruments have to be “blessed” by an officially sanctioned organization, and yet that organization has no real liability if they get it wrong. The change is probably one of the best things in the financial reform bill.
Sentient Puddle
@ocean man: Roughly at the same point in the book as you, but one thing I’d highlight and expand on here (also from the book):
The shit loans were obviously shit, but the “good” loans weren’t necessarily much better. They had a stack of thin files on people who had good credit scores because they had just started out and made a payment or two on time. These were used to average out the shit loans and get the AAA rating, giving you security-level CDOs, where half the CDO was outright shit, and the other half was likely to go shit.
Chad S
Ironically, the free market will stop this crap. Someone will jump into the vacuum created by these guys to rate bonds if they keep it up.
Napoleon
@Chad S:
I don’t know about that.
I would love to see how the rules read that require their blessing because if they are anything like what I use to see that applied to attorneys when I would do some bond work the rules almost work like membership in a midevil guild. They read something like only law firms that were nationally recognized as qualified could do x, y and z in a transaction, which naturally meant that you had to get experience as some point doing x, y and z to become recognized nationally (as a law firm). So basically it was all but impossible to break into the club. I bet that however the rules read it basically works out to “only these three can do it”.
flounder
@JenJen: Sorry, a bit confusing. I wrote that and about ten seconds later decided I wanted to comment about how the stock market is up 200 point in response to the news. Didn’t think anyone would see my comment before I “edited” it.
You are quick on the trigger.
ocean man
@Sentient Puddle:The thought “how is this legal” is also repeatedly expressed throughout book by several people. Where the [email protected]#k is our fourth estate?
Roger Moore
@Sentient Puddle:
I don’t know about that. Being sued for malfeasance is the standard rules of the road for the rest of the world; applying that as a minimum standard for the ratings agencies hardly seems like strong regulation. They’re just bitching because they’re not used to any regulation at all, even in the (normally libertarian approved) form of lawsuits for screwing up.
Chad S
@Napoleon: There’s too much money in it for SP and Moody’s to keep striking over the new regulations. Sooner or later some company in the business will dust off and update their plans for starting a new ratings agency and get it operational.
Napoleon
@Chad S:
So if the regulations or rules say that you must use a nationally recogninzed ratings agency who is going to hire someone who is new in the business? I don’t doubt that there would be those that wish to do that, just that it is difficult to do.
By the way, I can to some extent answer the question for you. In the legal field there are not just 3 law firms recognized in the field of public bond work, so right there the monopoly is nothing like ratings agencies. I can think of 2 instances where a firm managed to get over the barrier to entry into the field, both of which are exceptions to the rule that would basically prove it wouldn’t work in the ratings field.
In one case it was two Cincinnati firms, one of which basically all but hired away nearly the entry bond department of another big firm and was then qualified. There is one big caveat to thinking that would work in a ratings agency. In Ohio it is illegal for attorneys to be bound by a non-compete, but I bet not only is it not illegal with a ratings agency but that I bet every one of their employees are parties to one.
The second was the firm I was at, which was very tied in politically and managed to get hired (who knows how!) by public entities to partner with nationally recognized bond firms to assist in the work until one day they had enough experience that they qualified as nationally recognized. But your average client is not going to be willing to pay a firm that is not nationally recognized just to give them the experience.
Florida Cynic
Just as a point of reference, there are currently 10 NRSROs. If Moody’s and S&P start holding up production, that may be the kick in the pants the bond issuers need to take their business to the other players.
Napoleon
@Florida Cynic:
That is good news and means ultimately their “strike” will be broken.
JenJen
@flounder: I liked your post a lot better the first time. :-)
Dr. Morpheus
My immediate two thoughts on this:
Wow! It’s already working!
and:
That’s not a bug, it’s a feature!
Platonicspoof
From a William K. Black article in Feb., 2009 at Huff. Post:
Kyle
In other horrifying news, a seller of rancid mislabeled meat threw a fit and shut down for a day, depriving the economy of the benefits of vomit-inducing poison.
mclaren
You know, here’s an idea…crowdsource bond ratings. Pay nothing. Like Michael Coreleone’s offer to the senator in GODFATHER II: “Here is my offer to you: nothing. I will pay nothing.”
Crowdsource the ratings. Probably be 50x better than the private ratings anyway.