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You are here: Home / Economics / Free Markets Solve Everything / Standard and Galt

Standard and Galt

by DougJ|  July 22, 201012:56 pm| 52 Comments

This post is in: Free Markets Solve Everything, Going Galt

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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.

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52Comments

  1. 1.

    General Stuck

    July 22, 2010 at 12:57 pm

    JUMP!!

    You Fuckers

  2. 2.

    danimal

    July 22, 2010 at 1:02 pm

    Stuck, I’m getting to the point where it’s time to say PUSH.

  3. 3.

    Silver

    July 22, 2010 at 1:02 pm

    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…

  4. 4.

    Tom Hilton

    July 22, 2010 at 1:03 pm

    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…?

  5. 5.

    El Cid

    July 22, 2010 at 1:05 pm

    How can a free market system work if it isn’t based on falsely propped up investment values?

  6. 6.

    TenguPhule

    July 22, 2010 at 1:07 pm

    We may have to shoot a few of the leaders before the rest get the new picture.

  7. 7.

    wilfred

    July 22, 2010 at 1:07 pm

    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.

    Whoa. How about not giving in at all?

    Already the weasel words of compromise.

  8. 8.

    Omnes Omnibus

    July 22, 2010 at 1:07 pm

    @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?

  9. 9.

    NickM

    July 22, 2010 at 1:10 pm

    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.

  10. 10.

    mclaren

    July 22, 2010 at 1:12 pm

    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.

  11. 11.

    Davis X. Machina

    July 22, 2010 at 1:14 pm

    @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 future gain valuable personal experience of regulatory capture as part of their undergraduate education.

  12. 12.

    dmsilev

    July 22, 2010 at 1:20 pm

    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

  13. 13.

    Jay in Oregon

    July 22, 2010 at 1:21 pm

    @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.

  14. 14.

    catclub

    July 22, 2010 at 1:21 pm

    @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?

  15. 15.

    Comrade Dread

    July 22, 2010 at 1:22 pm

    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.

  16. 16.

    catclub

    July 22, 2010 at 1:23 pm

    @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.

  17. 17.

    Toast

    July 22, 2010 at 1:26 pm

    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?

  18. 18.

    Sentient Puddle

    July 22, 2010 at 1:27 pm

    @catclub:

    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?

    Charter a new ratings agency that will do their fucking job?

  19. 19.

    NickM

    July 22, 2010 at 1:27 pm

    @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.

  20. 20.

    Dave S.

    July 22, 2010 at 1:28 pm

    @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.

  21. 21.

    flounder

    July 22, 2010 at 1:28 pm

    It appears the stock market is very happy with this development. /cnbc_style_analysis

  22. 22.

    ksmiami

    July 22, 2010 at 1:29 pm

    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

  23. 23.

    PeakVT

    July 22, 2010 at 1:30 pm

    @Toast: Yes, but it would only take about 1/10 of the current workforce to accomplish it. The rest are grifters.

  24. 24.

    4tehlulz

    July 22, 2010 at 1:31 pm

    If they had any real balls, they would have downgraded U.S. debt to AA.

  25. 25.

    gex

    July 22, 2010 at 1:33 pm

    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.

  26. 26.

    sneezy

    July 22, 2010 at 1:33 pm

    @catclub:

    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).

    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.

  27. 27.

    JenJen

    July 22, 2010 at 1:35 pm

    @flounder:

    According to free market principles, some resourceful individual will start his own ratings agency if the current market players are not fulfilling the needs of the market.

    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.

  28. 28.

    Snarki, child of Loki

    July 22, 2010 at 1:47 pm

    So, they’re going to take their dartboards and go home?

    Fuck ’em. Parasites.

  29. 29.

    russell

    July 22, 2010 at 1:55 pm

    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.

  30. 30.

    Florida Cynic

    July 22, 2010 at 1:56 pm

    @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.

  31. 31.

    DickSpudCouchPotatoDetective

    July 22, 2010 at 2:02 pm

    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.

    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.

  32. 32.

    Bob L

    July 22, 2010 at 2:09 pm

    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.

  33. 33.

    Sentient Puddle

    July 22, 2010 at 2:11 pm

    @Florida Cynic:

    FWIW, they appear to be mostly alarmed by the suddenness of the change.

    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.”

    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.

    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…

    Of course, if they were doing their jobs in the first place, it wouldn’t matter.

    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.

  34. 34.

    ThatLeftTurnInABQ

    July 22, 2010 at 2:19 pm

    @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.

    Give the job to Paul the Octopus – we might as well have some real globe-spanning tentacles running our financial system.

  35. 35.

    Napoleon

    July 22, 2010 at 2:29 pm

    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.

  36. 36.

    ocean man

    July 22, 2010 at 2:39 pm

    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.

  37. 37.

    Florida Cynic

    July 22, 2010 at 2:44 pm

    @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.

  38. 38.

    Sentient Puddle

    July 22, 2010 at 2:45 pm

    @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):

    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.

    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.

  39. 39.

    Chad S

    July 22, 2010 at 2:47 pm

    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.

  40. 40.

    Napoleon

    July 22, 2010 at 2:56 pm

    @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”.

  41. 41.

    flounder

    July 22, 2010 at 3:04 pm

    @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.

  42. 42.

    ocean man

    July 22, 2010 at 3:04 pm

    @Sentient Puddle:The thought “how is this legal” is also repeatedly expressed throughout book by several people. Where the F@#k is our fourth estate?

  43. 43.

    Roger Moore

    July 22, 2010 at 3:23 pm

    @Sentient Puddle:

    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.

    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.

  44. 44.

    Chad S

    July 22, 2010 at 3:27 pm

    @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.

  45. 45.

    Napoleon

    July 22, 2010 at 3:43 pm

    @Chad S:

    . . . for starting a new ratings agency and get it operational.

    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.

  46. 46.

    Florida Cynic

    July 22, 2010 at 4:15 pm

    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.

  47. 47.

    Napoleon

    July 22, 2010 at 4:29 pm

    @Florida Cynic:

    That is good news and means ultimately their “strike” will be broken.

  48. 48.

    JenJen

    July 22, 2010 at 4:45 pm

    @flounder: I liked your post a lot better the first time. :-)

  49. 49.

    Dr. Morpheus

    July 22, 2010 at 5:44 pm

    My immediate two thoughts on this:

    Wow! It’s already working!

    and:

    That’s not a bug, it’s a feature!

  50. 50.

    Platonicspoof

    July 22, 2010 at 8:36 pm

    From a William K. Black article in Feb., 2009 at Huff. Post:

    We know that the rating agencies attained their lucrative profits because they gave AAA ratings to nonprime financial derivatives exposed to staggering default risk. A graph of their profits in this era rises like a stairway to heaven [PDF].

  51. 51.

    Kyle

    July 22, 2010 at 8:57 pm

    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.

  52. 52.

    mclaren

    July 22, 2010 at 10:53 pm

    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.

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