Thursday, October 23, 2008

Credit Rating Agencies Overhaul: A Way Forward for the US Economy?

Blamed by everyone in the financial world as the instigators of the global credit crunch. Will a credit rating agency reform revive the ailing US economy and possibly the rest of the world?

By: Ringo Bones

As of October 22, 2008, America’s three leading credit rating agencies – namely Moody’s, S&P, Fitch – had their respective CEO s testifying on Capitol Hill on the future stake of the credit rating industry. Credit rating agencies came under fire recently due to their dubiously unsound – and sometimes – illegal practices in order to gain competitive edge on their dealings. While forgetting what their respective companies are there for in the first place – managing financial risks.

As the US Congress’ House Oversight Committee grill the respective CEO s of the three leading credit rating agencies after the state of Connecticut sued them for illegal practices and credit rating abuse. The lawsuit was put forth by Connecticut Attorney General Richard Blumenthal after the US Securities and Exchange Commission (SEC) failed to pursue legal action against the three leading credit rating agencies during the last few years citing lack of resources for the failure to better regulate the credit rating industry.

Various credit rating “sins” scrutinized by the Congressional House Oversight Committee include the practice of notching on rating subprime mortgage backed securities citing the non-competitive nature of such a practice. The quality versus quantity nature of credit ratings – which companies pay on a per-deal approval basis – has come under fire. Especially on how the SEC, investors, the US banking industry and the major players of the global financial system’s perception of such practices as of late. Credit rating agencies are about managing financial risks, not overpaying executives for approving deals. Plus the long-term effects of such dubious practices by the three leading US-based credit rating agencies on accurate financial risk assessment. Will better government regulation of the credit rating industry be the best solution?

Wall Street insiders had been wary about the unsound credit rating practices of Moody’s, S&P, and Fitch in the few years leading up to the global credit crunch. The three leading credit rating agencies dubious practices had colored their credit rating judgement. Some financial insiders even accuse Moody’s of “drinking the Kool Aid” thus endangering millions of dollars circulating in the credit market system.

It’s about time that the US Government reign-in on the excesses and the unsound noncompetitive rating practices of credit rating agencies – especially on notching - because the current financial crisis has banks increasingly de-leveraging – i.e. lending less money to other banks. A practice that could spell financial disaster to our modern credit based economy if allowed to go on for too long. Maybe this overhaul of the credit rating industry will create a thaw on the global credit market to speed up the global economy which as of late is dangerously slowing down into a deep economic recession. For the sake not only of Wall Street but also of Main street as well.

Monday, October 20, 2008

On Bank Executives’ Extent of Accountability

The powers-that-be, the media and everyone had been demanding banking executives to be more accountable in their day-to-day dealings, but does this really work in practice?

By: Ringo Bones

Despite the powers-that-be and the media demanding bank executives to be more accountable of their financial / fiscal decisions and actions, we – the average investor – seems not to have any say on the matter. Why? , Because first and foremost bank executives are not placed in their positions by us citizens / voters. A case in point is what if Société Générale clients knew in advance of this year’s most famous rogue trader – Jérôme Kerviel’s intent. Can Société Générale clients threaten the banking board that if they won’t fire Mr. Kerviel, they will take their business – namely their cash deposits, portfolios and other investment instruments – elsewhere? Most likely it is a question of can’t rather than won’t. Like the recent shenanigans at Wall Street that lead to the downfall of Lehman Brothers and the US Government bailout of America's two largest equity loans provider - namely Fannie Mae and Freddie Mac.

Shouldn’t bank executives’ track records – from their C.V. s to their fiscal hits and misses - be made available for public scrutiny so that potential bank clients, investors and depositors can have a semblance of an informed choice – let alone arbitrage - on who will be handling their investment portfolios? Unless you belong to the top echelons of the Saudi Royal Household or if you happen to own a multi-million dollar portfolio forget about it. If it hardly works on our politicians running for public office, then one must try to reacquaint his or herself with the meaning of the words caveat emptor if they ever hope to maintain the economic viability of their respective portfolios during this hard economic times. Because in the real world, accountability ultimately starts and ends with you, the potential client.

Command Socialist Economy: Wall Street Reinvented?

Will the Bush Administration’s 700 billion US dollar bailout plan forever change the US economy from a free market economy to a tightly government controlled command socialist economy?

By: Ringo Bones

Ever since the eventual approval by the US Congress of the 700 billion dollar economic bail out plan to shore up America’s ailing economy in the wake of the failure of the country’s two largest equity loans provider – namely Fannie Mae and Freddie Mac. Many an opinion of the US Government’s 700 billion dollar economic rescue plan range from comparisons to the Bush Administration’s March 2003 invasion of Iraq - which could eventually result in a “Financial Abu Ghraib”. To the very radical transformation of the fundamental sociological / religious / ideological underpinnings of Wall Street’s perception of what free market capitalism should be.

Ever since Wall Street became a global financial powerhouse, the values that made it work are grounded not only in economist Adam Smith’s idealized version of capitalism. Capitalism that is not only centered on the fundamentals of a free market or laissez-faire economy, but also of the Protestant Work Ethic in which many a filthy-rich American patriot ascribes to the reason why the United States defeated the Soviet Union during the Cold War.

The bad news about free market / laissez-faire capitalism is that unlike Friedrich Nietzsche’s “warrior-poets with enlightened self-interests” of yore - who happen to be very good at self-policing / self-regulating. A laissez-faire economy appears to be unable to regulate itself. That’s why every economist from John Maynard Keynes onwards adopted a policy of government involvement in regulating the fundamentals of the free market economy to avoid it from cycling between the extremes of financial / economic bubbles that will eventually lead into a deep economic depression.

But regulation can also be taken so far. Like the idea of the Socialist Command Economy where only a few people – especially political party cronies – can get very rich. A case in point is one economist visiting the post March 2003 invasion of Iraq had labeled the country’s Saddam Hussein-era economy as a Socialist Command Economy, which – according to him - should be retooled as soon as possible for the good of the country. Though I wonder why Iraq’s crude oil rich neighbor Kuwait had lend 300 billion dollars to Saddam Hussein to fund their war with Iran during the 1980’s given that Socialist Command Economies tend to be given a low credit rating by the world’s leading credit rating agencies.

But isn’t the lack of regulation the root cause of our global financial crisis? Sadly the answer is yes because banks and other financial institutions are prone to adventurism when it comes to making money – i.e. the least effort for the greatest amount of profit. Which eventually is an anathema to the Protestant Work Ethic that everyone at Wall Street embraced in the first place. The easy money in which those who bought in early on credit default swaps, collaterized debt obligations, mortgage backed securities and other very complex financial instruments’ speculative bubble. Financial instruments whose sheer complexity supposedly will generously generate profits on it’s own accord (?), now increasingly looks like a multi-billion dollar pyramid scheme that ran our fragile global economy to the ground. Looks like we now badly need government leadership with the wisdom to distinguish between John Maynard Keynes and Karl Marx.