Thursday, May 14, 2009

CT Attorney General: "It's Time To Shatter The Old Boys Club Of Rating Agencies"

For the few sane people who have been watching and recoiling with horror as Bernanke, Geithner and Bair implement their insidious "rich get richer" PPIP/TALF plan by relying exclusively on the AAA ratings of the very same rating agencies that were the primary cause of the current economic catastrophe (yes Steve Liesman, not the CDS market or CDS traders - the rating agencies) today was a glorious day. In what could potentially become yet another voice for rationality and for the common people, Connecticut Attorney General Richard Blumenthal has joined his NY colleague in pursuing the crusade against the phenomenal conservative Wall Street-D.C. cronyism that is another key reason for today's sad predicament.

In a letter released today by the CT AG, Bernanke has acquiesced that even he may be forced to change his dogmatic view, if put under sufficient pressure. Blumenthal, after months of pushing to prevent the big three rating agencies (Moody's, S&P and Fitch) from being the main determinants on which assets are eligible for the Private-Public partnership programs, may have finally gotten his wish.

Some background: Blumenthal last month wrote Bernanke to complain about the TALF program (which Zero Hedge has discussed in excruciating detail in the past). The Fed mandated that for securities to be eligible for government support they must be rated by two or more “major” NRSROs (another name for the three horsemen of conflict of interest doom: S&P, Fitch and Moody's). Paradoxically, neither Bernanke, nor Geithner, nor Bair, saw any problem with instituting the very same agencies that brought the credit system to the verge of total anihilation, as the same ones which should complete the destruction they attempted through the housing bubble. Luckily, Blumenthal has seen through this idiocy and has had enough.

I present Blumenthal's full letter below as it is exactly the type of activism that public should expect out of its elected officials, who lately only care about channeling populist anger at all the wrong places (for the right places they should be looking in the mirror), and padding their bank accounts through special interest lobbies and budgetary inefficiencies.
Attorney General Writes To U.S. Treasury Secretary Geithner Calling On Fed To Stop Steering $400 Million To Credit Rating Agencies That Enabled Economic Meltdown

May 14, 2009

Attorney General Richard Blumenthal today released a letter calling on the U.S. Department of Treasury to intervene in a Federal Reserve bailout program that could unfairly steer up to $400 million to the Big Three credit rating agencies who enabled the economic meltdown by overrating risky securities.

In a recent letter to Treasury Secretary Timothy F. Geithner, Blumenthal urged that Geithner contact the Federal Reserve and request that it reverse its wrong-headed policy.

"It's time to shatter the Old Boys Club of rating agencies," Blumenthal said. "This senseless restriction rewards the same rating agencies who are at the center of our current financial crisis and whose shortcomings made these bailout programs necessary in the first place."

Blumenthal contacted Geithner after Federal Reserve Chairman Ben S. Bernanke wrote to Blumenthal reiterating his refusal to stop giving the Big Three credit rating agencies -- Moody's Investors Service, Fitch Ratings and Standard & Poor's - the exclusive right to rate securities eligible for the Federal Reserve's $1 trillion Term Asset-Backed Securities Loan Facility (TALF), while cutting out smaller competitors who can also do the work.

TALF, which is intended to restart consumer lending, requires financial institutions to have new securities rated by two or more "major nationally recognized statistical rating agencies (NRSROs)."

Because the Federal Reserve Board deems that only Moody's, Fitch and Standard & Poor's are considered "major," the requirement effectively shuts out their seven competitors who are approved by the U.S. Securities and Exchange Commission to do the work.

Blumenthal said these rules undermine recent federal legislation intended to encourage competition in the credit rating market by breaking the Big Three's longstanding stranglehold on the market.

"The Federal Reserve's policy is short sighted because it virtually guarantees a concentrated, non-competitive market in structured security credit ratings for the foreseeable future by shutting out other qualified rating agencies that stand ready to compete for TALF work," Blumenthal said. "Overdependence on the Big Three credit raters is exactly what led to the current financial debacle."

Bernanke, responding to an April 6 letter from Blumenthal, said the Federal Reserve limited ratings to the Big Three in order to protect the Treasury and the U.S. taxpayer.

Even in defending these rules Bernanke acknowledged to Blumenthal that, "the rating methods employed by major NRSROs for asset backed securities have exhibited significant shortcomings."

Blumenthal said, "I strongly disagree that shutting out competition and relying only on rating agencies that helped create our economic meltdown protects the U.S. taxpayer.

"The Federal Reserve's stated reason for favoring the Big Three that it has 'customarily employed,' perpetuates the Old Boy's Club mentality that has been condoned for too long. The policy seems hardly likely to instill the sort of confidence in the due diligence undertaken by the Federal Reserve that U.S. taxpayers deserve and the markets merit.

"Just as the Federal Reserve must perform its own due diligence on this issue, the Treasury Department should require the Federal Reserve to publicly explain what due diligence was undertaken and why, as a result of this due diligence, only the three major credit rating agencies should be entrusted with rating the securities issued as part of the TALF. Otherwise taxpayers and investors remain unable to accurately assess the credit risk of asset-backed securities.

"If our financial system is going to continue to look to credit ratings for guidance in the world of structured finance, investors and the public in general need to have reason to believe that the credit rating agencies can accurately assess credit risk for these securities. The way to instill this belief is not by further entrenching the comfortable oligopoly of the past that generated such questionable work product."
Zero Hedge salutes Mr. Blumenthal, and together with Mr. Cuomo, hopes that the two gentlemen run for office. Absent either of the two committing some Spitzeresque blunder, both have a clear road to the presidency, as long as they continue fighting what is so plainly and evidently a huge ploy by a select few to abuse the general population's lack of understanding of the credit system, and in the process, as Richard says "entrench the comfortable oligopoly" of the rich. Zero Hedge will assist in this fight as much as it can.

In the meantime, in order to demonstrate to our readers just how much "less protected the U.S. taxpayer would be," yet how much more correct and efficient the proper determination of risk would become if Bernanke actually were to allow a respectable rating agency such as Egan-Jones to conduct the relevant credit evaluations, I present the chart below, which demonstrates the credit ratings by Egan-Jones and Bernanke darling Standard & Poors, of a name that everyone is all too familiar with: General Motors. The chart really needs no commentary.

It is exactly this kind of "headless chicken" optimism that avoided dealing with the critical matter at hand until it was too late that has gotten us into this mess. It is the same "terminal optimism" that CNBC and other MSM conduits are spewing forth in order to generate an artificial feeling of calm with their counterfactual theories of green shoots, mustard seeds and other vivid and flawed floral analogies. It is no wonder, of course, that Bernanke and other members of the administration have every interest in perpetuating the optimistic fallacy as long as they can - why, just look at that U of Michigan consumer sentiment number: all is good - it only takes a massive short squeeze orchestrated by several select parties to get people to part with their hard earned money, to believe inflation is here, and to load up on their credit cards and take out a third mortgage, which would be fine and dandy with Obama, the Treasury and the Fed. And in the meantime, the unemployed among us multiply, the consumers' purchasing power evaporates, malls are half full (and on their way to empty), formerly performing assets are barely generating cash, and the only houses sold are those in foreclosures or short sales. Enough with this insanity.

But i digress.

Any chance of fixing the system will have to come from an improvement within, first. As such Moody's, S&P and Fitch must be, if not expelled, then certainly relegated to the periphery of agencies that make decisions about the creditworthiness of assets that will be ultimately purchased involuntarily by U.S. taxpayers under the guise of the TALF and the PPIP (for the benefit of PIMCO and Blackrock). Zero Hedge stands 100% behind Mr. Blumenthal's effort and beckons our readers to do the same.

If there is to be any hope of fixing the system, which may already be terminally broken and so any efforts could, for practical purposes, be too late, it has to come from an honest desire to improve things, not to lever up the U.S. population for the second, and most certainly final, round of the great and suicidal credit bubble. ZH pleads with all powers that be in high up places to reconsider their ways before it is indeed too late. And if not, more people like the CT Attorney General will emerge, only to gradually regain control of a runaway system that is, at least for now, dead set on a certain course of destruction. Sphere: Related Content
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