SEC Bombs and Moody's Blasts

spy vs spy King of the Click Business Insider has alerted us all to an obscure comment on a proposed SEC rule for Nationally Recognized Statistical Rating Organizations. William J. Harrington, is a former Moody's Senior Vice President in the derivatives analyst group from 1999-2010. In Harrington's 80 page comment, he starts with this opening salvo:

Moody’s argues that RMBS committees could not have factored the collapse of real estate prices into their opinions, given that the scale of the collapse was both unprecedented and unforeseeable. This rationale is as unconvincing as it is disingenuous, for it pretends that Moody’s and other financial players were not designing and operating the conveyances that carried real estate prices to unsustainable levels in the first place. A roller coaster inexorably chugs up to stomach-turning heights before it hurtles downward, and both a carnival operator
and a thrill seeker understand the nature of the ride’s operations.

The rationale of “who could know?” is wholly undone through even a cursory examination of the actions of Moody’s and other financial players in the structured finance sector. Moody’s and other financial players took care to protect their earning should the real estate bubble that they were ushering into the world subsequently collapse.

Business Insider summarized and pulled out sections from the entire 80 page comment by Harrington to highlight what he is telling us.

Harrington blasts the proposed rules saying if they had been implemented before the start of the great housing derivatives bubble, they wouldn't have stopped it and worse, enabled Moody's intimidation and manipulation even further. One of Harrington's suggestions for the proposed SEC rules on credit rating agencies is this:

A single additional rule would improve the formation of Moody’s opinions immediately, and would be costless to implement. The Board of Moody’s Corporation, the parent company of Moody’s, should report the status of each analyst who has filed a complaint with the Compliance Department, has filed a complaint against the
Compliance Department or has commented on Moody’s website with respect to a methodology on an annual basis for five ensuing years.

Harrington literally calls the SEC proposed rules bass-ackwards. Nuf said!

Economist Michael Hudson gives a history of credit ratings agencies playing politics, as many speculate was the case in the U.S. downgrade by S&P. The real fiscal insanity is actually yet another privatization agenda.

To acquiescence in such economically destructive financial behavior is the opposite of fiscal responsibility. Cutting federal taxes and Social Security payments to obtain a more positive S&P “opinion” would give banks an ability to “pull the plug” and force privatization and anti-labor austerity plans by refraining from rolling over the U.S. debt

So, can we expect the SEC to actually modify the proposed rules to reform the credit ratings agencies? Considering the latest SEC whistleblower bombshell, as reported by Matt Taibbi, probably not:

A whistleblower claims that over the past two decades, the agency has destroyed records of thousands of investigations, whitewashing the files of some of the nation's worst financial criminals.

Wow. In response to this latest revelation, the national archives is blasting the SEC, saying the document destruction was not authorized.

Now the U.S. Department of Justice is now getting into the credit rating agencies investigation mix, yet the corruption of the credit agencies has been known for over three years. In spite of comments on proposed rules being made public, perhaps the real investigative target should be the SEC itself.

Comments

Dead men walking

Ever since the collapse of Enron, taking down the most reputable accounting firms, involving suicides, prison sentences and paper trails ending in Grand Cayman POBs for limited partnerships ... it's been obvious.

The old days when there were honorable giants such as A.P. Giannini active in financial circles, when there was still a creditable honor system, when at least life insurance firms invested into a future with a horizon of 50 years ... those days are long gone. (Well, except that we do have Warren Buffet, although Berkshire owns or controls Moody's.)

What we have today is a world system that is best briefly described as the WTO or finance-capitalism world-system of currency mercantilism, where mercantilism means that governments are involved in every business decision. Indeed, governmental action is at the heart of every business decision. And, accordingly, corruption is endemic, integrated like the rest of the global economy into a profits-over-all corporatist structure. It is puerile in this world to object to governmental regulation as such, as though on principle.

As for ratings agencies, the proof is in the pudding. They have always been based, and can only be based, on their performance records continuing over time as good as gold. Those agencies developed in another world, specifically a pre-computer world of big expensively bound books. What's the point today? They are being replaced as we speak. Do we really imagine that the U.S. committee at the People's Bank of China turns to a shelf and pulls out Moody's and S&P when considering what to do about US Treasuries?

When they fail to adhere to their own high standards, these credit agencies are done ... kaput ... finished. Somebody needs to start over from scratch. Many somebodies. And they are!

Berkshire is scrambling to keep Moody's alive. Maybe Moody's will survive. But for my 2¢ worth, what's the point? It's mostly become a defensive thing for Berkshire in the currency wars.

I am always afraid that some will think that when I use words such as "currency mercantilism," I am arguing for socialism or whatever. I do advocate monetary-financial reforms, but when I describe economic/financial conditions, I am really intending objective, not polemical, interpretation of every word that I use.