Sunday, September 20, 2009
Crack in the Firmament
"Shares in two companies that own credit-rating firms, Moody's Corp. and McGraw-Hill Cos., declined on Thursday in reaction to a court decision that rejected the companies' longtime claim that the First Amendment [FA] protected them from lawsuits. ... But US District Judge Shira Scheindlin ruled on Wednesday in a 68-page opinion that the ratings of certain securities--those that were distributed to a limited number of investors--don't deserve the same free-speech protection as more general ratings of corporate bonds that were widely disseminated. ... SIVs typically used short-term debt to buy long-term assets, largely residential mortgage-backed securities. The model broke down when these complex securites started to fall apart during the financial crisis, prompting lenders to shut off their supply of cheap short-term funding. Pieces of the SIVs sold to investors were rated AAA by leading ratings firms, meaning they were considered as safe as US Treasury bionds, only offering significantly better returns", Nathan Koppel, Andrew Edwards and Chad Bray at the WSJ, 4 September 2009, link: http://online.wsj.com/article/SB125201681110884761.html.
Judge Scheindlin's ruling is very narrow. Congress should strip the rating agencies of any FA protections. Think how absurd these SIVs were, they borrowed short and lent long. Mismatched maturities is a banker's prescription for disaster. I read a 1587 treatise on banking which warned against this. Apparently the raters did not know this. What fools. How could SIVs be "as safe as US Treasury bonds"? Do the SIVs have their own Fed to print money to prop them up? Or are the raters correct, T-bonds are junk paper?