Stop them from digging!

Sir, Paul Davies and Gillian Tett in “Moody’s talks of rating reform”, September 18 quote Brian Clarkson, the President and chief operating officer of Moody’s saying “One of the issues we are talking to regulators about is the possibility of creating tools to address liquidity and market issues”. 

And we can just pray for that the regulators understand the real meaning of “when in a hole, stop digging”.

Once again, I do not have anything against the credit rating agencies refining and improving their mostly already very good products. What I oppose though is that the regulators press the market to use these products, since such a bias will only guarantee the introduction of even more severe systemic risks than those that we have been discovering lately with the sub-primely awarded mortgages to subprime borrowers.

If there’s ever been a confession there you have it.

Sir Brian Clarkson, the President and chief operating officer of Moody’s Investors Service in “Transparency and trust must keep on driving rating agencies” September 18, makes a confession that illustrates exactly the risks of securitization, meaning the packaging the selling and the forgetting of an investment by putting it on someone else’s book, and of the real danger of an excessive systemic reliance in the credit rating agencies criteria. He says” There have been allegations of lax underwriting and misrepresentations in subprime mortgage originations. There is no sure way for a rating analyst who is not involved in the loan origination process to detect such shortcomings.” With such a confession do we need more? Of course if a credit rating agency is to award an AAA rating based on the accumulation of a thousand individual mortgage loans, the least one could expect is a closer examination of some of them through a sampling process.

Nonetheless the real value of the confession lies in showing us how fail prone a system is when we are forced to trust someone, as is much the case with the credit rating agencies