STAFF NEWS & ANALYSIS
Prosecuting Ratings Agencies for Mortgage-Backed Failures Misses the Point
By Staff News & Analysis - June 19, 2013

Corrupted credit ratings: Standard & Poor's lawsuit and the evidence … In response to the civil lawsuit filed by the US Department of Justice in February 2013, Standard & Poor's affirms that its ratings were "objective, independent and uninfluenced by conflicts of interest". This column presents empirical evidence opposing this claim. The data suggests a systematic rating bias in favour of the agencies' largest issuer clients. − VoxEU.org

Dominant Social Theme: Okay, these ratings firms need to be more realistic!

Free-Market Analysis: US prosecutors are upset that Standard & Poor's apparently was "over-optimistic" about certain mortgage-backed securities in order to "grow its ratings share" and generate increased fees.

Supposedly, S&P and other ratings agencies should have been firm about market abuses and attempted to explain the reality of the pre-2008 mania surrounding these instruments.

But, of course, this was impossible. Austrian, free-market economics shows us quite clearly that when central banks print too much money, an uncontrollable boom erupts. Only when the market itself collapses do people get a sense of the damage that has been done.

But, of course, this was impossible. Austrian, free-market economics shows us quite clearly that when central banks print too much money, an uncontrollable boom erupts. Only when the market itself collapses do people get a sense of the damage that has been done.

In the case of the last great boom that really went from 1987 to 2007, the mania turned into a global recession/depression from which whole continents still haven't recovered.

It is ever thus. Manias have their own logic and greed will always overcome common sense. The most studious and level-headed will be ignored as the scramble for profits expands. This is why, despite widespread knowledge of Austrian economics, the boom/bust business cycle persists.

Nothing will stop it but a diminution of the power to print money. The power of monopoly central banks has to be diminished. Optimally, they would be shut down.

But that is not the conversation we are having, or not in the West anyway, and particularly not in the US. Once again, those who run the formal economic structure of the US are confusing the issue.

Instead of suing Alan Greenspan and Ben Bernanke for causing the greatest financial bubble since the Great Depression, they have decided to sue ratings agencies.

Here's more from the article:

In its civil lawsuit against Standard & Poor's, the US Department of Justice accuses the credit-rating agency to have defrauded federally insured financial institutions like Western Federal Corporate Credit Union: "Standard & Poor's, knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors in RMBS [residential mortgage-backed securities] and CDO [collateralised debt obligations] tranches …" (US Department of Justice 2013).

The US complaint alleges that Standard & Poor's presented overly optimistic credit ratings as objective and independent when, in truth, Standard & Poor's downplayed and disregarded the true extent of credit risk: "Large investment banks and others involved in the issuance of RMBS and CDOs who selected Standard & Poor's to provide credit ratings for those tranches" were the beneficiaries of Standard & Poor's partial rating practices (US Department of Justice 2013).

According to the plaintiff, Standard & Poor's catered rating favours in order to maintain and grow its market share and the fee income generated from structured debt ratings. In support of these allegations, the complaint lists internal emails in which Standard & Poor's analysts complain that analytical integrity is sacrificed in pursuit of rating favours for the issuer banks.

This article, actually a kind of white paper, is written by a pair of academics, and their conclusion, among others, is that more transparency is needed in the ratings industry. People need to understand better how S&P, et al., reach their conclusions.

But this is ludicrous. Ratings agencies entirely missed the 2008 collapse. The world's economic system seized up and almost every single large bank and financial firm would likely have gone bust if Ben Bernanke hadn't issued out something like US$15 trillion right away …

The problem begins and ends with central banking and the ability of a few to print the world's money, thus causing tremendous euphorias that turn into terrible recessions and depressions.

After Thoughts

Prosecuting S&P misses the point entirely. Or perhaps that IS the point …

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