Will There Be Life After Rating Agencies?

May.10.10 | About: Moody's Corporation (MCO)

There is a sobering paper (.pdf) just released by the Bank of International Settlements (BIS) on public sector debt.

Putting aside the irony that it was the abject failure of the Basel Accord to protect the world financial system, and that many of the issues that are raised have been common knowledge for some time, notably (a) the size of un-funded public liabilities and (b) the shenanigans that popular governments have gotten up to hiding the true extent of the problem - and passing the buck onto the next guy, whilst spending public money to bribe the electorate.

With Greece providing a perfect example.

Greece got found out, but only at the moment that the penny dropped that there was an imminent danger of default.

It’s also ironic that the paper did not mention the credit ratings of the countries they were discussing, once.

Not even once.

That’s interesting, since the whole of Basel II relies on working out the risk weighting that you use to calculate your capital adequacy on:

(a) Valuation of the underlying assets (hard to do for a country), but in any case, when you use Monty Python Valuation Standards that is a bit of an exercise in futility…unless of course Basel II is just a big joke.

(b) The credit rating of the bond (which, if you are buying public debt, is the credit rating of the country in question).

I thought that the credit rating of a country was a “carefully worked out valuation opinion", based on years of experience, tireless due-diligence, sophisticated computer programs and algorithms, secretly prepared (for their secrets are so valuable), by legions of genius economists, toiling through the night, to “protect the very heart of the world financial system”.

Err…well perhaps not.

Perhaps as Bill Gross says in his recent monthly broadside, rating agencies are now irrelevant.

And it looks like the BIS agrees with him. Perhaps it’s something to do with the fact that they were unable to look under the elaborate tablecloths that were spread out to hide the truth of public-sector debt, just as they were unable to look beneath the elaborate scams that created the credit crunch, and they were revealed in their true light as just a bunch of (highly paid) mumbling buffoons.

The only people who believe rating agencies these days are the regulators and the BIS, and that’s becoming more and more like a case of “The King has No Clothes”.

So will there be life after rating agencies?

Perhaps the yield you pay will be left to those pesky Credit Default Swaps (CDS). That’s unless Angela Merkel wins her crusade against the dirty-rabble of the market-place.

Good luck Angela.

And talking about Germans, anyone up for a long position on a CDO tied to Greek Debt? Or to put it another way - "I wanna go short - where are those bastards from Goldman Sachs (NYSE:GS) when you need em?"

I can’t help thinking that the whole business of financial wizardry that supposedly created so much “economic value” in the recent past (evidenced by the bonuses – we shan't talk about the bailouts…those were “Black Swan Acts of God”), is coming to a close.

I have the impression that life is about to get a lot simpler…cash will be king, and the smart money will be in companies that make things (or provide services other people can buy with cash (or cows)).

Which makes one wonder - was there any point in the public sectors of the USA, UK and Germany (in particular) getting further into debt "saving" the "Too Big To Fail Buffoons" if they are unable to work their magic and figure a way out of this mess?

Now what was the brand of those Donuts that Warren Buffett is so keen on?

Disclosure: No positions