Monday, April 6, 2009

Rating Agency SARBOX

"Credit-rating companies, widely assailed for their role in fueling the financial crisis with overly rosy debt ratings, stand to make a billion-dollar windfall in the government's latest attempt to heal the credit markets. ... Now the government is in the uncomfortable position of rewarding these same firms through a new program that will result in numerous companies issuing securities. If the rating companies are wrong this time around, the [Fed] and the Treasury--and therefore the taxpayers--will be on the hook for some losses. ... At a Senate hearing in Washington earlier this month, Fed Chairman Ben Bernanke said the central bank has looked at the models of the major rating companies as is 'comfortable' they can rate securities eligible for the new program 'in an appropriate way.' ... 'Until the rating firms bite the bullet and develop forward-looking signals and methods, it's going to be the same old, same old, and their models can be gamed,' says Ann Rutledge, principal of New York structured-finance advisory firm R&R Consulting and a former credit-rating analyst", Serena Ng and Liz Rappaport at the WSJ, 20 March 2009.

SARBOX 2! Sarbox was a Big 87654 windfall of increased audit fees. Assuming Zimbabwe Ben (ZB) knows this, I conclude the Fed is knowingly creating a rating agency (RA) windfall. Why? ZB is "comfortable", means the RAs will say what ZB tells them to say and ZB will use them to game the system! Like the Big 87654 did not "blow the whistle" on insolvent banks, apparently at Uncle Sam's behest, the RAs will pass on all kinds of financial garbage. I agree with Rutledge and think it's worse than she does. ZB (1590 SATs), is no fool. He knows the "models can be gamed" and will use them to protect the issuers of securities in the program!

6 comments:

Anonymous said...

It gets sadder and sadder how corrupt the Federal Reserve's actions are... raters are central to valuing collateral for all the programs the Fed is running and to determining bank solvency...

Hello... where is the SEC and Congress? Wake-up everyone...

I started to really think about CDS and the Fed regulating (not) it... Jamie Dimon sitting on the Board of the NY Fed Res and running the largest CDS scam around... ha ha ha... the giant CDS ponzi... GS is probably just a tool for JPM... how come JPM didn't get any payout in the AIG passthroughs?

Anonymous said...

where is the SEC and Congress?

Why would you expect Congress to be trying to solve the problems you see rather than the problem they see?

They see that a threat to their ability to spend money (they don't have).

Anything is worth it to them to continue
spending.

The SEC belongs to Congress, they created them and can change them as they will so there's no help for you there.

Same with the Fed.

Don't expect Congress to change until they can't continue spending. And perhaps not even then...

Anonymous said...

My problem is idealism... it's a chronic illness that I have...

I project my view of a rightly ordered world... ha ha ha... I'm learning... like Rome we go...

Ann Rutledge said...

There is a bright side to credit rating agency business, namely the role of the honest referee, but we haven't seen it in a decade.

The dark side of the SRO business model is blackmail. All borrowers in the capital markets fear the power of the downgrade and "make nice" to the agencies by letting them have their way. Clearly, in this matter the US Treasury is no exception.

Independent Accountant said...

AR:
You are saying the rating agency (RA) business is cleaner than the CPA business. The "classical agency" problem of the CPA business has been obvious for more than a decade. It was obvious to me in 1976.
I can't see Uncle Sam being afraid of a RA downgrade. Unc can always retaliate against the RAs. Unc can begin enforcing the anti-trust laws. I think Unc has co-opted the RAs which will say whatever they're told to say. Just like the Big 87654 CPAs. How KPMG could not have blown the whistle on an obviously insolvent Citigroup, for example, is beyond me. However, if you consider that KPMG was not indicted over its recent tax shelter troubles, the quid pro quo becomes clear. The Big 87654 and NRSROs are Unc's tools to conceal the true financial condition of large financial institutions from the public. I trust nothing coming from these organizations.

Ann Rutledge said...

SkepCPA:

Though I take your point, I believe the relationship is better characterized as an uneasy temporary alliance between two superpowers (as Thos Friedman put it) than one between captor and captive. Unc actually needs Moody's more than Moody's needs Unc. Wen Jiabao would not be pleased to hold $1 TN in AA debt by the US when the likely path for that AA would be the way of Pfizer and GE, from AA to A1 to ....