February 06, 2013
Sir I refer to the several writings in FT on Standard and Poor’s being sued by the US Department of Justice, February 6.
In a normal world one would name and shame the raters who got it so wrong, and their bosses. In this world the Department of Justice sues Standard and Poor’s which only means now that credit rating agencies will either stop giving ratings or that the cost of their opinions must increase, as a consequence of now having to carry insurance against the raters getting it so wrong again… something which we know will happen… sooner or later, they are only human.
In a normal world, our failed bank regulators would have been held accountable for what they did. Because much more interesting and relevant would be: Where can we sue bank regulators for recklessly having empowered the credit rating agencies too much?
Because what the regulators did was to empower the credit rating agencies to such an incredible extent that an AAA to AA rating issued by them, sufficed to allow banks to hold only 1.6 percent in capital and leverage their capital a mindboggling 62.5 times to 1.
And that created of course an insatiable demand for AAA to AA securities and the market, as a market normally does, if it runs out of good ratings, it delivers Potemkin ratings.
Sir, and do not start mentioning black swans or in any other ways try to excuse the regulators recklessness: They, by accepting to be bank regulators, should have known what was going to happen. Here are but 3 of my many warnings:
In the Financial Times, a letter I wrote in January 2003 states: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”
In a formal written statement delivered in April 2003 as an Executive Director of the World Bank I held: “Ages ago, when information was less available and moved at a slower pace, the market consisted of a myriad of individual agents acting on a limited information basis. Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as credit rating agencies. This will, almost by definition, introduce systemic risks in the market and we are already able to discern some of the victims, although they are just the tip of an iceberg.”
In an Op-Ed of May 2003 I wrote “In a world that preaches the worth of the invisible hands of the market, with its millions of mini-regulators, we find it so strange that the Basel Committee delegate, without any protest, so much responsibility in the hand of so very few and so very fallible credit rating agencies”
And please Sir, do not tell me that regulators had no inkling about weaknesses in many of the risk models being used to evaluate the credit worthiness of instruments. If even I who am not directly involved in financial risk manager, and again as an Executive Director of the World Bank, could in October 2004 formally warn that “much of the world’s financial markets are currently being dangerously overstretched, through an exaggerated reliance on intrinsically weak financial models, based on very short series of statistical evidence and very doubtful volatility assumptions” should not the regulators, paid for being regulators not have intervened.
Frankly to me the way regulators have managed to evade their responsibility to the extent of even being promoted, is the mother of all the lacks of accountability… and, for the time being, I am sorry to say that you Sir in FT are, knowingly or unwittingly, assisting them in the cover up.