Sean Egan: Solving the Credit Crisis

No surprise, Sean Egan, founding partner of Egan-Jones Ratings Service, thinks a big part of solving the credit crisis is switching from an issuer-pay to an investor-pay credit rating system, which is how his firm is structured. But the fact that he’s talking his own book doesn’t make him wrong. Aligning incentives will go a long way towards cleaning up the mess in credit markets.

But there’s a catch: credible credit ratings start with exposing the naked truth, that many corporate credits are a lot worse than most admit. In the short-run, exposing that truth could lead to severe deleveraging. But because it implies massive debt deflation, deleveraging is precisely what Bernanke, Geithner & Co. are desperately trying to avoid.

You can’t deal with a problem until you admit you have one. U.S. policy-makers remain in denial over the size of the credit bubble and the continuing threat it poses to long-run standards of living…

Egan has interesting comments at the beginning of the interview about causes of the crisis, and at the end about how this crisis compares to the Depression.

Egan Interview

Comments

[Tom Armistead:]

Some good points by Sean Egan:

1) the securitization market is broken and credit will not flow smoothly until it is fixed. The securitization market (shadow banking system) is huge, regular banking market is 5 to 10% of it.

2) a suggestion that a system similar to 10-Qs and 10-Ks be set up for Structured Finance. An investor would have access to quarterly documents filed with the SEC for MBS or CDOs, as an example, and would be able to do due diligence.

3) And the point: that trust has been broken; how to restore trust. Investor pays vs. issuer pays for ratings is one possible solution but there are others, availability of information to investors is key.

May 12 08:02 AM

[CJJ:]

NEWSPAPERS are beyond fixing - they are dead. Banking is broken, not dead. Consumers are not broken, not dead. Vehicles are broken, not dead.

These people who are telling everyone banks are not going to make money in the future, that consumers are never going to spend again and that cars or other vehicles will not return to record sales in the next 5 years are blind. Problems can be fixed and are fixed all the time. I caution people putting all their eggs betting against humankind's ability to act. When push comes to shove humankind moves forward. But hey, keep rooting for the downfall.

May 12 10:57 PM