Ratings

The value of a rating is dependent upon the quality of the entity issuing the rating. If you went to see a movie because a critic rated it a must see and found it to be horrible, would you place much value in the critics rating of the next movie? How about if the critic worked for the studio that produced the movie in the first place? Would you place much faith in the value of that critics rating?

The current economic crisis has many causes and is the result of myriad events, but I have yet to see a single analysis that didn’t at some point place a significant amount of responsibility on the quality of Credit Derivative Securities and the alphabet soup of related instruments. Today there is an article in the Wall St. Journal that calls into question the SEC’s oversight of the agencies who issue the ratings. Here’s a quote from the article:

The Securities and Exchange Commission’s internal watchdog criticized the SEC’s handling of credit-rating firms, saying some won federal approval despite slipshod applications and, in one case, suspicious financial data.

As we look back on the events of the last 2 yrs, we see the trail of broken companies, loss of personal wealth, and extreme economic turmoil, that will take years for us to recover from. What we don’t see is any consequences falling upon the entities directly responsible for the inaccurate, and in my opinion criminally inaccurate, inappropriate, and misleading ratings applied to the derivative securities, and the Federal Agencies tasked with their oversight.

The fact that Standard and Poors, Moody’s, and Fitch are still in the business of ratings, and still funded by the very issuers of the debt they rate, is mystifying. The fact that their ratings are given any credence whatsoever is beyond mystifying and resides in the realm of the surreal. These, for profit companies, are responsible for some of the most egregious violations of the public trust that have occurred in my lifetime, some of the worst destruction of wealth and economic harm in anyone’s memory, and quite possibly the most damage to the reputation of our financial system as a whole in history.

To add insult to injury, the SEC has done little if anything to reduce the problem, and as the WSJ article, and the SEC’s own internal watchdog, points out, have more than likely exacerbated it with their incompetence.

Where is the outrage? Where is the call for the heads of these companies? The anemic business media is intertwined with these companies (Moody’s owns Business Week, Mcgraw Hill owns S&P and Hearst is big Fitch holder) and they are largely held by institutions who count on the ratings they issue to be what they want them to be. These same institutions carry a lot of sway in the halls of Congress and on Wall St. thus the outrage is muted and the changes that should have taken place already are not even a topic of conversation.

So I’ll say it:

1) The ratings agencies should be called before the people to explain their actions under oath.

2) The SEC and any other federal body tasked with their oversight should likewise be called before the people.

3) Legislation should be put in place to prevent the conflicts of interest inherent in the ratings of securities by entities funded by the issuers of these securities, or by entities who rely on the ratings for marketing these securities.

These folks have done a tremendous disservice to all of us and should be subject to repercussions similar to anyone who violates the public trust, or damages the public well being. Millions of Americans have lost their jobs as a direct result of the actions of these individuals and organizations, and it’s time they were called on the carpet to answer for those actions.