In an article by Louise Story in the New York Times- U.S. Inquiry Eyes S.&P. Ratings of Mortgages (http://www.nytimes.com/2011/08/18/business/us-inquiry-said-to-focus-on-s-p-ratings.html?_r=1&nl=todaysheadlines&emc=tha2) the mishandling of the rating of mortgage securities by Standard & Poor’s is outlined like it’s breaking news. The fact that the ratings agencies had a major part in the financial collapse seems to have gone unnoticed in the media glare of the fall of some of the US’s biggest banks and their overlords. In fact the spotlight has even been directed away from the ratings agencies to some extent as the US Federal Government continues to hound banks in the courts for misrepresenting the value or quality of their mortgage bundles in order to get government insurance. All of that seems to have changed now that S&P’s have downgraded the US credit rating from AAA to AA+ and now the Federal Government is no longer friends with the ratings agencies so I imagine that Moody’s and Fitch will soon be in the government’s sights for a grilling too.
To put it in a nutshell, now that we have the benefit of hindsight it has come to light that the ratings agencies may have overlooked the high number of unsustainable mortgages in bundles of mortgages that were used to back securities that got the AAA stamp of approval. This meant that investment firms like superannuation companies poured their money into these securitized bonds under the impression that they were rock solid investments. When the bad mortgages began to tank in significant numbers the value of these bonds disappeared and the investors lost their shirts. The whole sordid business is lucidly explained in Michael Lewis’ book The Big Short in far greater depth than I can give it here but this leads me on to my next point- the questionable ratings must have been known about over a year ago by the government so why is it news now? And, how much value is there in these ratings anyway?
The only reason that these ratings agencies have acquired so much power and influence in the first place is because of the way that money is created from debt. In order to give currency a semblance of value the bonds that are issued by central banks are rated for their quality as an investment. AAA bonds supposedly offering the safest and most lucrative investment. How these ratings are arrived at exactly is a “secret” that is closely guarded by the agencies but seems likely to come under much closer scrutiny into the near future. Essentially though, these agencies are in a very close relationship with the banks for their income stream, whilst the banks rely on the ratings agencies for their stamp of financial approval. This means that the issuance of loans and their rating as a viable investment are controlled by two exclusive institutions that are keen to be mutually beneficial to one another- almost the dictionary definition of a cartel.
The world’s money problems aren’t going to be fixed by throwing a bunch of accountants and bankers in jail for fraud (even though we all might feel a bit better for it) but it is a good enough place to start. More important than a witch hunt through the worlds of high finance to find those responsible for the last collapse is to look at what we did to get into such a mess in the first place. Whilst the inquisition is looking for those guilty of taking us down this road to financial ruin perhaps they should look at the politicians that spent the money that they didn’t have in the first place. Maybe our debt backed currency has finally shown itself not to be worth the paper its printed on. I fear though, that as usual, all that will happen will be another round of court appearances before we return to business as normal.