June 26, 2012

Credit rating agencies are just only other weathermen

Sir, imagine the old Mark Twain banker, he who wants to lend you the umbrella when the sun shines but wants to take it back as soon as it seems like it is going to rain. That banker would clearly be taking notice of what the weathermen had to say, to set the interest rates, the amounts of the loan and the other terms.

But what would happen if the regulators also told the banker that if the weatherman spoke of sun his bank was required to hold little capital but, if of rain, it had to hold more capital?

Obviously that would doom the Twain banker to choke on sunny expectations (AAAs and infallible sovereigns), and avoid possible rains (small business and entrepreneurs) like the pest… only to find out, too late, that weather reports are not always accurate.

Patrick Jenkins writes “Rating agencies still so relevant they need regulating” June 26. If he had understood the horrible consequences of the excessive and outright unmerited relevance given to the credit ratings, when deciding the capital requirements for banks, he would not be arguing for regulating these agencies but on reducing their relevance. Is the weathermen regulated?