Good Point, Merkel, But Rating Agencies Are Still to Blame

David Merkel makes some good points in (sort of) sticking up for the rating agencies:

The rating agencies typically did well rating asset sub-classes that had experienced significant failure at some point in the past. Ranking corporate bonds and corporate loans against each other — no one should argue that they did a bad job rating them in aggregate. Structured products are another matter, and the rating agencies, through their conflicts of interest, got sucked into the boom-bust cycle.

With that, I put it back to the regulators. You don’t want to depend on the rating agencies? Fine, create your own rating agency, and staff it with top talent. Wait, you can’t afford that? Okay, staff it with people that could work for the rating agencies. You can’t afford that either? Ugh. Well, at least, limit your goals, and tell those you regulate that they can’t invest in complex products that you can’t understand and rate. Wait, you’re getting pushback from politicians telling you that you’re killing those that you regulate? Tell them to jump of a cliff. Wait, they are suggesting the same to you?

Difficulties noted! Still, the agencies were at the root of the crackup. On top of that, they’ve subsequently made things even worse than they otherwise would have been, with their continuing random, harebrained downgrades. Is there nothing to be done to prevent a rerun? Of course there is.

P.S. Insurers and pension funds seem to have no problems putting together prudently built equity portfolios made up of stocks that have no rating agency imprimatur. . . .

Comments

[cgm205:]

I might be misunderstanding you but,

your P.S. " Insurers and pension funds seem to have no problems putting together prudently built equity portfolios made up of stocks..."
seems to be in conflict with your article.

If the ins and pen funds could put together a good equity portfolio, why the likes of AIG needing such a big bailout?

Jan 08 10:37 AM

[Mike in the...:]

Mr. Stichnotch, I clicked on your article with the expectation of reading an article not a comment. Your post belongs below Mr. Merkel's article in the "comments" section just like everyone else who doesn't have anything meaningful to say.

Jan 15 11:17 AM