A symbiote’s life is not a happy one: Part 5, why rating agencies?
[Continued from yesterday’s Part 4 and the previous Part 1, Part 2, and Part 3.]
When two symbiotic organisms differ vastly in scale, the smaller’s survival depends on the health (or at least survivability) of the host. Self-aware smaller symbiotes may thus root for their host’s prosperity, particularly if they are fed from nutrients captured by the larger, more mobile host.
We give our heart and
In the subprime residential lending sector, the Wall Street Journal’s lengthy article has documented how the rating agencies, who have taken in several billion dollars’ worth of fees over the last five years for providing risk assessments of complex financial instruments, may have become too cozy with their host – the capital markets. Yet their viability as agencies –the thing that gives them brand value, hence ability to charge fees – rests in their reputation for salutary independence.
He’s fully independent … aren’t you, poopsie?
If the large capital markets come down with a severe case of food poisoning, they’re going violently to expel their symbiotes that persuaded them to consume the food that made them so sick.
Arthur Andersen disappeared, not because it was convicted of anything but rather because its brand was sullied and there was a surplus of big accounting firms. The market decided that N – 1 global accounting firms was enough.
What is the intrinsic reason for three rating agencies? Might not two be good enough?
Showing a commendable barn-locking orientation, Moody’s in August issued this stirring announcement:
Chinese wall, firewall, or mere ravelin?
If the profits flow upward to the same stock ticker, that may make no difference. Something more is needed.
The NBA is suffering through a scandal of epic proportions: a referee who’s pled guilty to influencing the course of games – and possibly even the most recent NBA championship – by the way he called fouls to manipulate the over/ under line.
Could one man bring down a league?
NBA referees are paid a tiny fraction of the money the athletes make, and an even smaller fraction of the money the NBA owners (their employers) make. Placing that much responsibility in the same hands as that much temptation is a risky proposition. Precisely the same scaling/ temptation dynamics apply to the agencies, the investment bankers they referee, and the capital markets who profit from their refereeing.
Sports leagues are closed networks of entities that collaborate on network health even as they compete with each other for prizes within the network. If the network’s brand value drops, all the competitors suffer too. The capital markets and structured-finance investment banking worlds are a league of professionals who compete on many levels but collaborate on others, including the health of the financial ecosystem and the free flow of ample liquidity.
So it should be no surprise that when a league’s integrity is threatened, the league takes steps to restore its impartiality. The NBA is now struggling to do that in the wake of Donaghy; 88 years ago, major league baseball did it after the Black Sox Scandal.
Players and their lawyers … first in a century-long trend
Back in 1919, the owners – a rogue’s club if ever there was one – searched out a person of unquestionable public integrity (Judge Kenesaw Mountain Landis) and appointed him Commissioner of Baseball, with sweeping powers.
I’m the commissioner, and I’m nobody’s friend
Landis’s reign – and the immense popularity of live-ball and Babe Ruth – gradually brought baseball back from its depths.
Who then is the Commissioner of Rating Agencies? Not the NYSE – its chairman Richard Grasso, himself was tarnished for having received a gargantuan pay packet.
Surprisingly, there is none. Long-time market investor John Mauldin (whose readership dwarfs mine) nominates one, and makes a very plausible case for his candidate:
Second, the rating agencies need to restore their credibility. Warren Buffett’s Berkshire Hathaway owns about 19% of Moody’s. I would suggest that Mr. Buffett step in take over the company (much as he did with Salomon years ago) and put his not inconsiderable credibility on the line for all future ratings and the inevitable re-ratings that are going to be done.
The Panic of 1907 was solved by the credibility of one man, J. P. Morgan, who stepped in to provide liquidity.
When you’re rich, you both need and can provide liquidity
The Panic of 2007 is not a problem caused by lack of liquidity. It is a problem caused by lack of credibility. Morgan could (and did) provide liquidity. Buffett can (and should) provide credibility.
The markets will come back. So will the concept of rating securities. But not necessarily every agency within that niche. Mauldin adds a cautionary postscript:
And someone of similar stature needs to step in at S&P and Fitch. (Can Volcker be summoned into the trenches yet one more time?)
If not – well, the world can function perfectly well with only two rating agencies instead of three.
UPDATE: AHI gets results? As reported by CNN:
The company said Corbet, 47, stepped down to pursue other opportunities. She had worked for S&P for three years.
The change comes as credit-rating agencies are facing increased criticism that they failed to accurately assess and warn investors about risks in mortgage investments that have led to recent problems in the credit markets. However, the company did not indicate that was a factor in Corbet’s departure.
Corbet will be replaced by Deven Sharma, 51, who has served as executive vice president of investment services and global sales for Standard & Poor’s since November. In his new position, Sharma will report to McGraw-Hill Chairman, President and Chief Executive Harold McGraw III.
As part of our corporate reorganization, we’re reducing head count
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