[ExI] AIG Bail out

[Lee Corbin]

Brian Atkins points to a post written a year ago (September 27, 2007)

http://globaleconomicanalysis.blogspot.com/2007/09/time-to-break-up-credit-rating-cartel.html

that helps explain a lot of what has been going on.

    The SEC is Investigating Conflict of Interest Charges at US Credit Ratings
    Agencies.

        Credit ratings agencies need to separate their rating and advisory
        functions because of conflicts of interest in their relationship with
        Wall Street, the newly appointed head of a high-level government advisory
        panel said on Wednesday.

        "I do not think that the market can discipline ratings agencies
        sufficiently," said Mr Mindich, chief executive of Eton Park Capital and
        a former colleague of Hank Paulson, the Treasury secretary, at Goldman
        Sachs, the investment bank.

        Christopher Cox, chairman of the Securities and Exchange Commission, told
        the Senate panel his agency was investigating whether companies such as
        Standard & Poor's and Moody's were "unduly influenced" by issuers and
        underwriters that paid for credit ratings.

and continues a bit further down

    At the heart of the controversy is the fact that the Wall Street banks
    pay the agencies to rate the new products. One after another, Senators
    accused the agencies of giving artificially high ratings to ensure that the
    business did not go to their rivals.

    Senator Jim Bunning, a Republican from Kentucky, described the process as
    "like a movie studio paying a critic to review a movie and then using a quote
    from his review in the commercials". A Democrat, Robert Menendez, said the
    agencies were "playing both coach and referee".

    But Vickie Tillman of Standard & Poor's credit market services said that the
    agencies took every care to try to ensure accurate ratings, and that no
    analyst was ever paid according to the amount of business he or she
    generated, or the types of ratings given. "S&P does not and will not issue
    higher ratings in order to garner additional business," she said.

and finally 

    [The 1975 government] Establishment of the NRSRO did three things (all bad):

        1) It made it extremely difficult to become "nationally recognized"
            as a rating agency when all debt had to be rated by someone
            who was already nationally recognized.

        2) In effect it created a nice monopoly for those in the designated group.

        3) It turned upside down the model of who had to pay.
            Previously debt buyers would go to the ratings companies
            to know what they were buying. The new model was issuers
            of debt had to pay to get it rated or they couldn't sell it. Of
            course this led to shopping around to see who would give
            the debt the highest rating.

So Brian's additional comments certainly seem well-founded to me. (See below.)

Lee

> Government interference in the ratings business is actually at the root of the 
> problem. If you look into the history of the ratings agencies business you will 
> find they effectively operate as a cartel/monopoly enforced by the SEC since 
> 1975. There is no way such poor ratings performance would be tolerated
> in a free market without this enforced lack of competition.
> 
> If you want good ratings you need to abolish this government-enforced cartel 
> system and also go back to the way it was prior to 1975 where BUYERS of debt 
> paid for the ratings instead of today's system where SELLERS of debt purchase 
> ratings (and obviously apply pressure for a higher rating for their money spent).
> 
> So anyway we can put this all down to government interference too, unintended 
> side effects, etc.