Though Cowards Flinch

After this post, I hadn’t expected to return to the murky and corrupt world of credit rating agencies quite so soon, but this article from FT Alphaville is so astonishing I just have to.

You will remember from the previous post that the House Committee on Oversight and Government Reform has been investigating the way the credit rating agencies have, for the last thirty five years, been tailoring their credit ratings to maximise income from the very people whose financial products they are rating. 

That is, they have been acting corruptly.

Now that they’ve caught with their big fat fingers in the enormous till, they are belatedly trying to cover their tracks, and have been rating some of the bonds issued, especially Collateralised Debt Obligations, a bit more ‘realistically’.

The downside of this is that the ‘investment community’ also profits from their corrupt rating processes when things are booming, and they are now getting very upset about any move away from corruption.

The latest highly influential ‘HCM Market Letter’, issued by Harch Capital Management inc., says this of the changes to its ratings introduced by Standard & Poor’s (and with my translation added):

‘With these revisions S&P unilaterally changed the rules governing hundreds of billions of dollars of Collateralized Loan Obligations that were issued over the past few years. It did so without giving investors in these transactions any right of appeal, or any recourse to recover their potential losses. Investments were made based on earlier ratings which arguably constituted an implied promise by the ratings agencies to maintain the original set of assumptions underlying their ratings. By unilaterally changing these assumptions to account for the first time for Black Swans, S&P has broken its compact with the entire financial world that came to rely on its ratings.’

Translation: We liked it the way it was before, when the credit rating agencies didn’t tell the truth about the creditworthiness of highly complex financial products, because the whole secret ’compact’ thing between bond issuers, investors and the rating agencies meant we could make fat profits by conveniently ignoring the reality that the whole things would eventually collapse like a house of cards, remaining safe in the knowledge that it wouldn’t be us that’d have to pay for the consequences of any financial crisis.

‘Moreover, it is compounding those errors by making changes to its ratings assumptions that fly in the face of current data that suggests that corporate credit conditions are improving, rendering its heightened default scenarios highly unlikely to occur and unsuitable for application to these structured credit products.’

Translation:  We really thought we were through this slightly troublesome time, now that the worldwide poor is beginning to pick up the huge national debts incurred by our greed, and that we could happily move on to our next credit bubble now that the whole financial system has got its confidence back.  It’s just not fair that the credit rating agencies are still being a bit too nervous about regulatory oversight, and are not joining us again on our merry-ro-round of corruption and greed.  They should know perfectly well that the government won’t do anything serious about the corruption we’re all up to our necks in, because they’re involved too.

(Hat tip to Duncan for the FT Alphaville link)