Saturday, Aug 14, 2010
..."where have all the cuts gone"
Greg Pytel: Irish lesson
The Irish made all the savings and cuts in the public spending. Austerity measures it's all there. And... Moody downgraded their rating. What does it mean for the UK? We should learn the lesson.
Posted by ant @ 01:05 PM (1789 views) Add Comment
18 Comments
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1. drewster said...
Ratings agencies are always 12-18 months behind. They rated Lehman Brothers as grade-A right up until the week before it collapsed. They didn't downgrade Enron until four days before it filed for what was then the largest-ever U.S. bankruptcy. They didn't downgrade Greece until long after it was in the news. Frankly it's no surprise that they've taken this long to get round to Ireland. Next year they'll probably downgrade Britain, and in 2012-13 they'll downgrade the USA.
2. ant said...
You may call it "behind" (and it may well be a timing thus far) but the game is to make money. So if being "ahead" or "sideways" will make them money, they will be "ahead" or "sideways".
3. Bigbadbob said...
George Osborne held Ireland up as the way forward in defending his own stance on cuts. I wonder why he's gone quiet now?
4. drewster said...
The ratings agencies make money because they have a government-granted licence; it's an oligopoly. They aren't rewarded for being ahead, merely for existing. There's a wonderful explanation here:
"Suppose I was opening a salad bar and wanted to convince people of the high quality of my salads. I could pay Moody's for a rating. In theory Moody's knows that it maximizes revenue by only giving the AAA-rating to really good salads. If Moody’s engaged in some giant salad screw-up, salad-eaters would lose faith in Moody’s-rated salad shops and reputable salad vendors would start shifting their business to other salad raters.
"The real question about the ratings agencies is why this kind of process doesn’t work. To understand the answer, you need to learn the term “Nationally Recognized Statistical Rating Organizations”. What’s an NRSRO? In short, it’s a ratings agency. But NRSRO isn’t just the name of a line of work, it’s the name of a special regulatory status. To be an NRSRO you need to be certified as one by the Securities and Exchange Commission. And becoming an NRSRO isn’t just a matter of having a fancy label, it’s embedded in a web of other regulations. For example, regulatory assessment of bank and insurance company capital reserves requires assets posted as reserves to have an NRSRO-certified rating. NRSRO-certified ratings are also relevant to regulations about money market funds and some pension funds.
"The consequence is that it undermines buyer-side incentives for ratings to be accurate. In many cases you care less about actual risk than about how your risk plays for regulatory purposes. It’s as if you’re not actually planning to eat the salad, you just need to tell someone else that you bought an AAA-certified tasty salad. You don't care about the actual quality, only the rating, since you aren't the one who has to eat it."
5. ant said...
@drewster: I agree on that. But it is a part of the picture. The rest is that their ratings do not reflect the reality.
6. rumble said...
So the salad eaters need someone who isn't eating the salad, to tell them what the salad tastes like?
7. icarus said...
When the ratings agencies aren't competing with each other for business by giving the best ratings to their banker clients (yes, clients) they can produce brilliant analyses. From the Irish Times article referred to: in this piece
"(Moodys) said it expects economic growth (for Ireland) to be below historical trend over the next three to five years due to the weak banking and real estate sectors, and the fall in private sector credit. If the GDP growth trend were to exceed Moody’s expectations - with a quick resumption of domestic credit flow and a supportive global economic environment — then the government’s debt metrics could stabilise earlier than is currently being assumed"
Now not a lot of people know that.
8. clockslinger said...
A more pertinent question is what criteria are applied by the Securites and Exchange Commission to NRSROs. I suspect if five economics PhDs, two international banking lawyers, a couple of support staff and I raise say 300k capital and try to set up an ageccy that will tell you "what the salad really tastes like", we will not be granted NRSRO status.
9. icarus said...
clockslinger @7 - A fat lot of good it would do you even if you got that status. Following criticism of the oligarchic status of the Big Three the SEC granted a handful of other credit agencies NRSRO status in 2003, but the Three continued to dominate the market. As the Wall Street Journal complained in April 2009, “To this day, the Fed will accept assets as collateral only if they carry high ratings from S&P, Moody's and Fitch.”
The ratings agencies’ means of compensation switched over time from investors who paid for their services to the corporations whose securities they were rating. This created competition among the Three for market share from the corporations paying them. Obviously they became much less concerned with the integrity of their ratings than the goodwill of their banker clients, e.g. in May 2006 a UBS banker threatened a Standard & Poor’s employee that he would take his business to S&P's competitors: “Heard you guys are revising your residential mbs rating methodology - getting very punitive… heard your ratings could be 5 notches back of mo[o]dys equivalent. gonoa (sic) kill your resi biz. may force us to do moodyfitch only cdos!”
So even with NRSRO status you wouldn't get into the game.
10. Stevie Dee said...
Astrologically speaking, i believe the irish were wise. The euphoria or upward trend in stocks, house prices etc, was saturn opposite uranus and jupiter. But recently pluto squared jupiter, jupiter represents joy and pluto authority and deep thinking, it uncovers lies. With saturn due to square pluto and oppose jupiter after opposing uranus (revolutionary), any bullsh!t merchants beware. The hindenburg omen imo was not a false red flag. The t-cross is about realism, the financial system as we know it is broken. Quoting Greenspan, and back in the day when he spoke the markets moved. He warned of high inflation, and tough times. We in the uk have been cushioned by such adversities, nhs, social security, etc, etc. And iran with it's first nuclear power station, no need for oil. Money is in my imo the false god. The United Kingdom is riddled with fraudsters, drugs, and general lack of morality. It was new labour social engineering. Adam Smith's wealth of nations book is really referring to astrology when he talks about the invisible hand. And interdependence is merely our energy reacting to one another whilst reacting to the current planetary positioning. This information has been known about since the cradle of civilization. The babylonian's knew of this energy. Karl Popper's theory of falsification is quite apt. As the paradigm will never truly be the exact same. Wake up and smell the coffee. A change is coming.
11. rumble said...
So who pays attention to these salad raters that anyone should bother paying them? Only the central banks? Even though they know it's bs?
12. This comment has been removed as it was found to be in breach of our Blog Policies.
13. ant said...
@rumble: ratings are enshrined in many legal contracts for credit (they legally determine costs of credit)
14. rumble said...
So all of a sudden markets aren't good enough?
15. ant said...
What do you mean by "markets"? Would any market rigger be considered by you as "markets"? If yes, he is definitely not only "good enough", but is a crook.
16. rumble said...
What I meant was, the industry's based on markets then all of a sudden you have a triumvirate of authority dictating value. Oh well. Hemorrhoids and hurricanes anyway. I've had supper I'm returning to the bar. The gorgeous spanish girl is more interesting than moodys. Well, I'm sure she would be if she spoke english.
17. ant said...
agree:-)
18. drewster said...
rumble,
If it was just a simple restaurant, diners would read their AA or RAC restaurant guide, find the good ones, and eat there. Bad restaurants would get no stars and would go out of business. Bad ratings agencies would go out of business too.
The reality is more like a coach party on holiday. The coach is only allowed to stop for lunch at restaurants rated three-stars or higher. This is written into the tour operators contract, and the guests have paid in advance for what the brochure described as a three-star holiday. The ratings are provided by an official government-approved ratings agency; although the restaurant actually pays the agency to receive certification.
The coach party arrives at a restaurant. The driver says: "Look, it has a three-star rating, it must be a good restaurant, why don't you all eat here?" Meanwhile, the driver has brought a packed lunch.