Saturday, May 22, 2010

Flowing Downhill

In Reason magazine, Tim Cavanaugh says the "Rater Haters Finally Find a Reason to Turn On Moody's, and It's a Bad Reason":
Olli Rehn, European Commissioner for Economic and Financial Affairs, says the agencies were "behind the curve and reinforced the curve." That sounds a little like grabbing yourself by the hair and holding yourself at arm's length, and it's typical of the illogical complaints being made by European leaders against Fitch and Standard & Poor's for their rapid downgrading of Greece's sovereign debt.

On this side of the pond, the Securities and Exchange Commission is putting pressure on Moody's, and Sen. Al Franken (D-Minnesota) is introducing regulation of rating agencies into the stalled finance bill.

Note that the rating agencies are not getting dinged in response to their legitimate failures -- the famously too-high ratings awarded to Enron, Lehman Brothers and the universe of junk debt instruments. They're being punished for doing the right thing: sounding the alarm on Europe's manifest sovereign debt crisis and America's looming one. By coincidence, Moody's recently issued a widely publicized warning that the U.S. could be looking at a serious public debt emergency by 2013. No wonder Franken wants to rein in the raters that were considered jim-dandy back when President Obama first introduced his financial regulation bill. The agencies have gotten themselves into trouble by trespassing on government property.
See also Nihil Kumar in the Independent (U.K.):
The agencies weren't responsible for Lehman's investment decisions, nor did they pile all this debt on Greece's balance sheet. But how is it that despite being criticised in the recent past, a piece of research from one of their ilk triggers such worry in both dealing rooms and the corridors of power? The answer, many argue, is that the agencies are often backed up by the same governments they can unsettle by shuffling their ratings.
There's certainly something wrong with rating agencies--so perhaps we should deregulate them entirely.

(via Instapundit)

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