Monday, October 13, 2008

The Financial Stability Forum has read and learned from Il Gattopardo!

In the best traditions of what Giuseppe Tomasi di Lampedusa’s says in Il Gattopardo about that "Everything must change in order to remain the same" the Financial Stability Forum in their Report on Enhancing Markets and Institutional Resilience, dated October 10, announces “Changes in the role and uses of credit ratings”, only to proceed digging us even deeper in the hole we are in.

FSF spells out these changes to be:

1. On the quality of the rating process… presumably meaning the CRAs will be better in the future… allowing the markets to trust the credit rating agencies even more.

2. Differentiated ratings and expanded information on structured products… presumably meaning that the CRAs will in the future provide the markets with more precise and tailor made information… allowing the markets to trust the credit agencies even more.

3. An enhanced assessment of underlying data quality… presumably meaning that in the future the CRAs will make sure they work with more relevant data… allowing the markets to trust the credit agencies even more.

4. Telling investors to address their over-reliance on ratings…meaning that investors associations should consider developing standards of due diligence for CRAs… allowing the markets to trust the credit agencies even more… while preparing the terrain for an “I told you to do it!”

5. And finally that the authorities will review their use of ratings in the regulatory and supervisory framework to address the excessive reliance on credit ratings… by launching the stocktaking of the uses of ratings in legislation, regulations and supervisory guidance by its member authorities in the banking, securities and insurance sectors… as if they already should not know that.

From what we read the FSF says, and the so little said about the credit rating agencies during the IMF/World Bank meetings, it would seem that the only ones who really had their institutional resilience strengthen these last weeks were the credit rating agencies… Why? How come?


I do not know of anyone who knows anyone who knows anyone that has lost a single dollar giving a subprime mortgage on too generous or outright stupid terms to anyone who classifies as belonging to a subprime sector. Neither do you, I bet.

But I do know of many persons or institutions that have lost fortunes investing in securities collateralized with mortgages just because these securities were rated AAA by one two or even three of the only three credit rating agencies that are to be used by all of us, including by the financial regulators. And so do you, I bet.

Therefore, without any doubt, this crisis is a direct result of the credit rating agencies issuing the wrong ratings, and since these agencies were so much followed because they were excessively empowered by the financial regulators, we should have even less doubts about whom we really should blame.

The Axis of the credit rating agencies and the financial regulators has already cost the world trillions of dollars.