Case Study #1
From the EU Observer, June 3, 2010:
Brussels Sets Out Plans to Regulate Credit Rating Agencies
BRUSSELS — The European Commission has come forward with a list of amendments to revise EU rules on credit rating agencies, aiming to boost transparency and centralise supervision at the European level.
Under the proposals, the European Securities and Markets Authority (ESMA) — a new body whose legislation is currently being negotiated by member states and the European Parliament — will take over the supervision of rating agencies in Europe from national authorities.
Case Study #2
From today’s Multicultural Newsline:
GENEVA —Early last month he United Nations Council for Law and the Environment (UNCLE) released a report that confirms what many people have long suspected: the effects of barometric pressure are not distributed equally among various ethnic groups, especially in Europe and North America. UNCLE’s research reveals that extreme barometric conditions — both hyperbaric (high pressure) and hypobaric (low pressure) — are more likely to have adverse effects on non-whites than whites, and are also more deleterious to women, the disabled, gays, lesbians, bisexuals, and the trangendered.
This phenomenon has long been known to climate ethnologists, who call it DICE — the “Disparate Impact of Climate on Ethnicities”. Minority groups are 27% more likely to suffer from illness or death due to extreme barometric readings.
Yesterday another United Nations body, the Special Commission for the Revival and Enforcement of Western Enlightenment and Diversity (UNSCREWED) announced its action recommendations based on the UNCLE report. At a special press conference on the DICE problem, the chair of UNSCREWED, Dr. Luisa B. Gunweiller, blamed the inaccuracy of measuring instruments. “A large part of the problem is due to unreliable barometers,” she said. “Member states find themselves unable to respond effectively to the needs of minorities during climatological emergencies because barometric readings are so imprecise.”
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Dr. Gunweiller proposes the scrapping of the traditional barometer and the implementation of new ethnically calibrated instrumentation, which will be designed and run by United Nations employees stationed in Ethnically Rich Zones (ERZs).
“I think you will see a dramatic reduction in the adverse effects of weather on minorities in the ERZs once the barometer is no longer in use,” said Dr. Gunweiller. “Employees who are specially trained to be sensitive to both climatic effects and the needs of ethnic groups can be more effective than barometers in the alleviation of DICE.”
UNSCREWED has forwarded a resolution to the General Assembly which prescribes the exact reforms to be imposed on member states, and a timetable for their implementation. The resolution is expected to reach a floor vote later this month.
Special UN correspondents Flobrunk Ebermajian and Dankwalder Clostrum contributed to this report.
OK, I admit it: I made up Case Study #2. But still…
The point is that tinkering with the rating agencies or — worse yet — putting them under full governmental control will not solve the debt crisis that triggered the current financial meltdown.
Once upon a time, the three major bond rating agencies — Moody’s, Fitch, and Standard and Poor’s, the same ones the EU now objects to — charged a fee to potential customers for rating bond offerings and other forms of debt. It was a sensible, rational market-based system: when a lender — the buyer of a bond — needed professional advice on the riskiness of a particular debt instrument, he hired one of the rating agencies to do the job. The agencies competed with each other, so the accuracy of their ratings was the guarantor of return business.
All that changed with the automation of financial systems, especially after the Internet was established. The buyer could now find the information and rate the bonds himself — or at least have his in-house staff do the job — and save the fees paid to the rating agencies.
The agencies stayed in business by selling their “seal of approval” to the bond issuers, i.e. the borrowers themselves. This created a classic conflict of interest — a large financial house was more likely to use the agency that gave its debt instruments favorable ratings, so a rating agency had a vested interest in overlooking the shaky or shady aspects of bonds it rated.
This is how the sub-prime derivatives got their AAA ratings when the debt they were based on should have been rated ZZZ or lower. Everyone involved in the process had an incentive to be less than truthful about what he was doing, so the entire system careened towards the abyss into which we are now falling.
At every stage of the financial crisis, governments have consistently taken exactly the wrong actions, and an attempt to control the rating agencies is just one of them. Picking out scapegoats — bankers, CEOs, rating agencies — is easy to do, but the real issue is and always has been government meddling in banking and the financial markets. Every stage of the current catastrophe was marked by the passage of laws and regulations designed to control the financial markets, and every law and regulation was then exploited by savvy and unscrupulous operators who made a killing in those same financial markets.
Government control can only guarantee even more devastating results. Corruption is inevitable when the government runs markets; it is inherent in the system. Meddling with the flow of real information to ensure only desired results guarantees that the undesired results — which have merely been postponed, not eliminated — will do that much more damage when they finally arrive.
The United States and the European Union are making the same bad decisions — more government interference, more regulation, more central control — when it comes to fiscal matters. They see bad weather and a damaged barometer, and conclude that the only way to improve the weather is to destroy the barometer completely.
None of this will stop the gathering storm.
It’s no go my honey love, it’s no go my poppet;
Work your hands from day to day, the winds will blow the profit.
The glass is falling hour by hour, the glass will fall for ever,
But if you break the bloody glass you won’t hold up the weather.
— Louis MacNeice, from “Bagpipe Music”