Thursday, 29 October 2009

Selected Readings for a Thursday Morning

1. Under Attack, Credit Raters Turn to the First Amendment

First, a disclaimer on my recommendation for this Huffington Post investigation: a version of this story has been done before; it's not exactly anything new. To wit: Moody's and friends like to scurry behind the First Amendment when outraged investors seek recompense for losses after believing their inflated ratings.

I know the argument the credit raters are trying to make, but it always has offended me somewhat. You think of the great figures of American history who have invoked the First Amendment, and how it has been this core, unassailable principle that makes our democracy so powerful. And then Moody's ... well, subverts it to this end. I suppose my reaction is akin to the reaction you'd expect from a Fox commentator who discovered footage of a beatnik casually wiping his butt with the American flag.

For now the lesson we must learn is to treat the credit-rating agencies as untrustworthy, unfortunately, as they consider their ratings to be basically on par with an opinion column in a NAMBLA newsletter. It's all just free speech, right? But remember what motivates their "free speech." They can in effect "sell" good ratings, as they are paid by the company that issues the product they're rating.

Even if prostitution is deemed legal (as it is in some places), a whore is a whore is a whore. To some degree, credit-rating agencies will continue to be whores (or have pronounced whore-like tendencies, at the least) as long as they are paid by the people whose products they're judging. So investors, caveat emptor.

2. Naming Systemically Dangerous Firms

This guest post by David Moss at The Baseline Scenario left me clutching my head and moaning. Apparently the systemic risk legislation for the financial industry that's beginning to wend its way through Congress would identify "Too Big to Fail" institutions and then NOT make their names public. The stated reason: identifying them would encourage "moral hazard."

No. No. No. No. No. (Draw picture of me here, repeatedly banging my head against a brick wall.)

Sometimes I wonder what kind of chowderheads we have drafting laws in this country (actually, I should know by now: they're not the men and women we elected; they're the lobbyists that paid for their campaigns). Assuming that we decide to allow "Too Big to Fail" institutions to exist (believe me, there are many Americans who question the wisdom of this), why the hell should we keep their identities in the closet? Remember, one big pillar on which regulatory reform needs to be built:

Transparency.

One more time:

TRANSPARENCY.

The truth is, there will be enough leaking of this "Too Big to Fail" list that plenty of people will know who's on it. The market will make adjustments; you'll get your damn moral hazard anyway. What you may not get is the open and vigorous debate that we need about the TBTF's that appear on the list. Any bank that merits a Too Big to Fail should be regulated within an inch of its life, like a common utility. And it should be watched really, really closely, because when it blows up, it can blow a gaping hole in the side of the good ship the U.S. Economy.

And for all of us to be super-vigilant about these Too Big to Fails, we all need to know who they are.

"Too Big to Fail" shouldn't be some neat little merit badge you get at a moonlit ceremony in the heart of the dark woods. It needs to be a stamp, hopefully more akin to a scarlet letter, that gets planted on your forehead in full view of the public (which has to pay for your Too Big to Fail-ness, if you do screw up, so believe me, there's plenty of justice here).