Robert Smith at nakedcapitalism.com points us to a rather strange development in the rating world. They're afraid to take responsibility for doing do their job.
It turns out that the new financial regulation legislation that's about to land on President Obama's desk has a new liability clause. It says investors can sue ratings agencies "for a knowing or reckless failure to conduct a reasonable investigation" of the market instruments that they grade.
In a few words, a ratings agency does research on bonds and other market securities (like ABSs, CDOs, etc.) to determine whether they're risky or solid investments. If they're solid investments they will get a Triple A rating. Market players like AAA ratings because it makes it easier to sell their products (bonds, securities, etc.). Undeserved favorable ratings are what allowed America's financial institutions to sell securities that were backed by toxic mortgages.
Under the proposed legislation the ratings agencies who blew it big time before the 2008 market collapse - because they handed out AAA ratings on virtually anything the financial institutions threw out there - are now subject to “expert liability” claims if they jump into bed with their Wall Street patrons, again. They don't like it.
Here's my question. At what point does the concept of taking responsibility for doing your job return to the Wall Street? Diligence, integrity, and honesty should not be a one way street, traveled on only by the American taxpayer.
Seriously, the proposed legislation only mandates that companies in the ratings world - who make millions of dollars for being "experts" - not "knowingly" or "recklessly" do a poor job. It doesn't prevent them from doing a poor job. It just says don't do a poor job on purpose ... no more regulatory subsidies. Pretty simple if you ask me.
At the end of the day, if Wall Street's ratings agency can't find a degree of security, or a loophole, in a weak performance bar that says don't let us catch you becoming incompetent, or negligent, on purpose we're screwed.
- Mark
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