Eu Warns Credit Rating Agencies

[porca misèria]

Nobody forces you to listen to them, if you think they're wrong you can bet against them and make a fortune, plenty of people have done just that. Just because somebody labels something 'investment grade' doesn't mean you are forced to invest in it. Treat them the same way you treat meteorologists.

Um, if you're managing certain types of fund - notably annuities - then AIUI you are required by law to take notice of ratings. So you're hostage to a range of shenanigans.

[Guest sillybear2]

All such an EU ratings agency COULD do is keep the private ratings agencies in line with reality, if they give credible ratings. Providing it was credible the private companies couldn't falsely inflate/deflate ratings at the behest of their wall st customers as there would be an independent agency pointing out they had no clothes on !!

The politicos are bitching at the agencies for being 'nasty', whilst the reality is they've previously been overly kind, their new ratings simply reflect the new reality and the sort of spreads seen in the markets. It was EU bureaucracies like Eurostat that mislead the agencies with crooked statistics anyway.

Would investors buy Eurozone bonds if the EU's own ratings agency told the turth; that its shit stinks?

Um, if you're managing certain types of fund - notably annuities - then AIUI you are required by law to take notice of ratings. So you're hostage to a range of shenanigans.

Yes, you might be forced to sell if bonds lose their investment grade, but nobody forced you to buy them in the first place.

Edited May 5, 2010 by sillybear2

[TGP]

Would investors buy Eurozone bonds if the EU's own ratings agency told the turth; that its shit stinks?

No, thats the wrong question !

The RIGHT question is.....

Would investors listen to an EU rating agency if it lied; and said it sh*t smells of roses ?

The answer is NO. So any EU ratings agency CAN'T be the propoganda machine you seem to think it will be. If it is, investors will promptly ignore it. Ratings rely on investors finding them useful. If they do not.... then what you have isn't a ratings agency, it's an agency that shoves some paper and letters out that nobody ever reads.

The ONLY way it can have ANY efect on the market..... is IF investors come to regard it as a credible source for ratings. Thats it.

To do that, it has to rate fairly.... in fact, given the trust deficit it'd start with, it'd have to rate markedly more fairly than the private companies for a good period.

Yours,

TGP

[The Ayatollah Buggeri]

The only thing you need to regulate the ratings agencies is the free market, common sense and the principle of caveat emptor.

If the rating agencies' opinion of the the financial viability of companies and governments turns out to be wrong, do not buy or heed their opinions. They are commercial outfits that will presumably stand or fall on the veracity of the information they sell.

[TGP]

The only thing you need to regulate the ratings agencies is the free market, common sense and the principle of caveat emptor.

If the rating agencies' opinion of the the financial viability of companies and governments turns out to be wrong, do not buy or heed their opinions. They are commercial outfits that will presumably stand or fall on the veracity of the information they sell.

Thunk-Thunk-Thunk ~head hitting monitor~

It doesn't work like that. There are only 3 ratings agencies. They all do the same diddling. They are all (nevertheless) more accurate than not. In that circumstance.... the diddling can continue indefinitely.

Look..... lets do a simple example.... Lets say the "maximum possible accuracy" for ratings is 90%. There are 3 companies. BUT they ALL diddle 10% of their accounts.

Therfore their accuracies are all 80%, not 90%.

They are paid SO MUCH to do this by wall street that .... if one refused the cash.... and was 90% accurate instead of 80% the extra business he'd get would not make up for the lost wall st revenue ! He'd lose more in fees than he'd get from investors, because the MAJORITY of their fees come from Wall St. He'd lose ALL the Wall St 70% of his income to (at the theoretical maximum) triple the other 30%, LOSING 10% of his profits.

So they all do it... and they all have accuracy of 80%..... and they all get by very profitably like that. It's an oligopoly. All of them know it is in all their interests to keep the gravy train running. Investors can't switch away because they are still 80% accurate, and they need that information.

Along comes the govt. (doing it properly) and because they aren't in it for the money.... and because wall st isn't paying them off.... they get an accuracy of 90%. The cosy oligopoly is busted.

Gradually, over years, the market starts to use the govt ratings as they are 10% more accurate and the passage of the years proves that additional accuracy. In that circumstance the 3 ratings agencies HAVE to move before they lose all their business to the new, more accurate, agency. Including the business that allows them to charge Wall St the huge premium to diddle 10% of their ratings.

One private company on it's own couldn't do it..... because it's shareholders would scream about he massive loss of revenue compared to it's competitors as wall st paid them, but not it, and the "honest" CEO would lose his job in a year or two to be replaced by one who "knew how to play the game".

But an independent rater.... who is not dependent on making maximum profits can do it.

Introducing the independent option.....IF IT IS CREDIBLE... and.... IF THERE IS PRIVATE DIDDLING WITH RATINGS....... will make the market more efficient.

OTOH if the govt. ratings agency diddles IT'S figures to perhaps 80% or even 70% accuracy... it makes no difference, as people stick with the private firms as the govt. one is no better (so no harm done).

OTOH, if there is no ratings diddling (and 80% accuracy is the true maximum) it will make no difference (so no harm done).

So whats wrong with trying it out ? There is no downside.... and if the RA's are diddling there is a big upside in forcing them back towards accuracy.

We all suspect the ratings agencies of some such diddling.... this is a very efficient way of rooting that out.... if a private professional company CAN'T be more accurate than a govt. enterprise, then there is clearly something wrong with that private companies procedures !!!

Yours,

TGP

[Guest sillybear2]

80% accuracy on moving targets is mind blowing compared to forecasts from HM Treasury or the BoE's infamous fan charts, they can't even predict what comes after the number 1 except to say it might be 2,3,4 or 5. Given that the ONS also publish highly dubious inflation indexes, and have admitted defeat in measuring real population levels, I wouldn't trust any public body to do much better either.

As for Greece, given that the market and ratings agencies were previous fooled by crooked official government statistics, with the help of Goldman, I think you're placing a little too much faith in the honesty of government bureaucracies. What magic sauce would they have compared to a specialised private agency? And if the government are so good at everything why don't we just nationalise everything? You wouldn't even need to rate bonds any more as the technocrats are infallible.

Edited May 5, 2010 by sillybear2

[TGP]

80% accuracy on moving targets is mind blowing compared to forecasts from HM Treasury or the BoE's infamous fan charts, they can't even predict what comes after the number 1 except to say it might be 2,3,4 or 5. Given that the ONS also publish highly dubious inflation indexes, and have admitted defeat in measuring real population levels, I wouldn't trust any public body to do much better either.

As for Greece, given that the market and ratings agencies were previous fooled by crooked official government statistics, with the help of Goldman, I think you're placing a little too much faith in the honesty of government bureaucracies.

I wasn't stating that they are 80% accurate. That was just an "example figure" to use in the example.

It doesn't matter what the actual figure is so long as it's enough better than 50% (tossing a coin) that investors will pay for it..... and that they are sacrificing the maximum possible in order to diddle a few accounts.

I see no reason that a govt. department couldn;t be just as accurate as the private companies here. They'll have the same data and do the same sums... it'll only become significant IF the private companies really ARE diddling a non-negligable amount of ratings.

And, as I say, if the govt. is worse at this.... we haven't really lost anything. The market will continue entirely unaltered. Given the (IMHO) the liklihood of the private companies diddling (I don;t think anyone seriously tries to deny they at least DID this recently) then it seems an appropriate response.

Yours,

TGP

[Guest sillybear2]

The markets should look after themselves, if they want more accurate ratings they can pay for them, the axeman will soon visit nearly every government department so I think we have more pressing matters than protecting daft fund managers that cannot do their own homework.

[Bloo Loo]

And plenty of pension funds didn't buy shitty CDO's because they were professionally managed by people who take into account various other factors, caveat emptor.

snip

lets hope so.

Mine did...from its ultra safe Sterling fund....Standard Life...they were told to make up all the losses with cash.

[Guest sillybear2]

lets hope so.

Mine did...from its ultra safe Sterling fund....Standard Life...they were told to make up all the losses with cash.

The BoE pension fund is invested in inflation protected gilts, so that tells you all you need to know. I only hope they're hoisted by their own petard when they continue to let the money supply rip and the ONS cooks the inflation figures Argentinian style.

[Bloo Loo]

The BoE pension fund is invested in inflation protected gilts, so that tells you all you need to know. I only hope they're hoisted by their own petard when they continue to let the money supply rip and the ONS cooks the inflation figures Argentinian style.

how does one buy inflation protected gilts?

[Guest sillybear2]

how does one buy inflation protected gilts?

Find a good dealer, the government flogged £1bn in 2032 inflation-protected gilts last Tuesday.

Edited May 5, 2010 by sillybear2

[Bloo Loo]

Find a good dealer, the government flogged £1bn in 2032 inflation-protected gilts last Tuesday.

which inflation are they using. £1bn might be pushing the budget in the Loo household though.

[Guest sillybear2]

which inflation are they using. £1bn might be pushing the budget in the Loo household though.

RPI.

NS&I repackage these for us plebs I believe.

[MississippiJohnHurt]

Oi Vey,

But just what is wrong with the EU rating EU members debt (and other investment instruments) ?

If they dick with their own ratings or collosally screw them up in some manner .... no-one would listen to their rating agency. They would be ignored.

You don't HAVE to listen to ratings. Therefore any EU rater would have to be credible to have an influence. If it were not credible (if it kept all EU debt as AAA no matter what) no one would listen to their AAA ratings !!! They wouldn;t be worth the paper they were printed on.

All such an EU ratings agency COULD do is keep the private ratings agencies in line with reality, if they give credible ratings. Providing it was credible the private companies couldn't falsely inflate/deflate ratings at the behest of their wall st customers as there would be an independent agency pointing out they had no clothes on !!

As such... an EU ratings agency could do no harm (false ratings would be ignored)..... and might do a bit of good (good ratings would force the private agencies to stop dicking with their figures) and all the paranoics on here could ignore their ratings whichever it was in favour of working it all out with a slide-rule (can't trust those govternment approved new fangled computers don'cher'know).

Look, ratings agencies are like bookmakers who "rate" the odds of a horse winning. Currently, they have a business model in which the horse owners are paying them to set the odds on their horses so they can clean up on the betting.

If another "govt bookmakers" started, and offered odds on liklihood of winning...... either they'd **** it up, and punters wouldn't bet with them..... or they'd do better, and force the private bookmakers to start offering proper odds as the punters started ignoring their dodgy odds for the better ones

It's a no lose proposition for the punters.

(and I realise there are problems with this analogy... but it's just a seat of the pants thing).

Considering the howls and screams around here givent he CDO's AAA rating I just don't understand why this is an issue..... an independent govt. ratings agency (along with the transparency) is one of a few measures short of forcing a new business model on the RA's that might actually work, and as long as people aren't compelled to use the govt. rating it can do no harm.

By all means, if you are one of the "govt. statistics are always crooked" crowd ignore them.

Yours,

TGP

yes I'm quite aware of how a ratings agency works and agree there are some very important conflict of interest issues that need sorting, but to suggest , as Barnier seems to do , that their "power" should be "limited" on a fundamental/legislative basis seems to miss the point somewhat - that is, these are just analysts, the power behind their views comes from the amount of people listening to them. For an official body to try and change that seems wrong headed, the people who shd change it are those who lose their shirts by following incorrect calls from an agency.

So basically you and I are saying the same thing - that the market shd find a solution. Perhaps there's a gap in the market. Perhaps in 30 years the very idea of rating agencies will be laughable. Perhaps management and regulators of individual entities should be asking more questions about level of reliance on external analysis in making investment decisions. But whatever happens, the long term solution isn't people (esp Governments) rating their own or related parties' interests.

Re government sponsored statistics always being crooked, personally I wouldn't subscribe to such a black and white view, but surely you would agree that a body which releases statistics about itself has an inherent incentive to massage those stats to suit its purposes ? That's certainly my working assumption and I can't see any good counter arguments to it. Healthy cynicism isn't the same as paranoia.....

[Georgia O'Keeffe]

No, thats the wrong question !

The RIGHT question is.....

Would investors listen to an EU rating agency if it lied; and said it sh*t smells of roses ?

The answer is NO. So any EU ratings agency CAN'T be the propoganda machine you seem to think it will be. If it is, investors will promptly ignore it. Ratings rely on investors finding them useful. If they do not.... then what you have isn't a ratings agency, it's an agency that shoves some paper and letters out that nobody ever reads.

The ONLY way it can have ANY efect on the market..... is IF investors come to regard it as a credible source for ratings. Thats it.

To do that, it has to rate fairly.... in fact, given the trust deficit it'd start with, it'd have to rate markedly more fairly than the private companies for a good period.

Yours,

TGP

lol, you seem to think govts tell the truth, how quaint.

It was only a week ago the greek PM was out warning how shorters were wrong. Govts the world over continue to lie about the depth of this crisis and how recovery is being locked in, and thaey will allthe way to the bottom. No govt agency would ever be detrimental to themselves. What they could do however is introduce laws forcing EU companies to follow said Govt Agency ratings, so your idea of being able to ignore it is laughable.

If you want to do something about the honesty, close the rating agency ad follow credit insurer/guaranty ratings or similar, they rate both commercial and Political risk and most importantly 'they have skin in the game'

Your govt idea is laughable, Govts are no less corrupt than the bankers, they just happen to be a bit thicker

Edited May 5, 2010 by Tamara De Lempicka

[scepticus]

Your govt idea is laughable, Govts are no less corrupt than the bankers bankers, market makers, stock brokers, mutual fund managers and fortune 500 CEOs, they just happen to be a bit thicker

there, I added some much needed balance for you.

So, who exactly do you propose we place our trust in?

[Jason]

Nobody forces you to listen to them

Don't the UK government force pension funds to hold a proportion of 'safe' (AAA) assets, which recently has increased (the proportion that is), and of which includes government bonds, where a huge amount are currently being sold.

More transparency yes. But I don't doubt for a minute the UK government, and other countries, would do everything in their power to prevent them losing AAA status.

[Georgia O'Keeffe]

there, I added some much needed balance for you.

So, who exactly do you propose we place our trust in?

True, people are corrupt and self serving given the chance full stop. My trust would be placed in the market as always, that will tell me truth before any other entity gets a sniff, but the most important factor is having skin in the game, Insurers do, rating agencies clearly dont, not perfect but far superior.

[TGP]

lol, you seem to think govts tell the truth, how quaint.

It was only a week ago the greek PM was out warning how shorters were wrong. Govts the world over continue to lie about the depth of this crisis and how recovery is being locked in, and thaey will allthe way to the bottom. No govt agency would ever be detrimental to themselves. What they could do however is introduce laws forcing EU companies to follow said Govt Agency ratings, so your idea of being able to ignore it is laughable.

If you want to do something about the honesty, close the rating agency ad follow credit insurer/guaranty ratings or similar, they rate both commercial and Political risk and most importantly 'they have skin in the game'

Your govt idea is laughable, Govts are no less corrupt than the bankers, they just happen to be a bit thicker

But the point IS.. if they lie it has no effect.

If they start a rating agency tommorrow..... and it rates Greece as AAA.... then they haven't created a ratings agency. Just a shuffler of paper everyone will ignore. Ratings agencies RELY on people trusting their ratings. Period.

It's NOT that I trust governments to tell the truth.... it is that, in this circumstance, if they lie they will have no effect.... and if they tell the truth, they may have some effect. There is no downside. I can regard it as 99% likely they will lie, and still say it's a reasonable policy based on it only having an effect if they don't (and I'd say that they know this perfectly well, and so are far less likely to lie).

So ... there is no downside to their creating an agency. It's like a bet that returns your stake if you lose, and pays 2:1 if you win. It doesn't matter HOW LIKELY I think it is that the bet will lose, I may as well make it. Even if I consider the horse to be a 100:1 outsider I may as well make the bet under those terms.

In order to have any effect on the market whatsoever a govt. rating agency would have to prove.... over a period of years... that it was either as accurate, or (more likely given inherent distrust) prove that it is more accurate than the alternatives, in order to get people to listen to their ratings.

This isn't some propoganda enterprise where they can sway "low information voters".... it's a rating agency. By definition it's target market are "high information consumers" who have a ready alternative in the 3 established, private, ratings agencies. They simply can't get away with falsely inflating ratings, if they DID do so... the ratings agency would have no effect on the market whatsoever.

I'm not sure how much clearer I can make it.

Yours,

TGP

[interestrateripoff]

True, people are corrupt and self serving given the chance full stop. My trust would be placed in the market as always, that will tell me truth before any other entity gets a sniff, but the most important factor is having skin in the game, Insurers do, rating agencies clearly dont, not perfect but far superior.

Does the market tell the truth when the bubble is inflating?

[Guest sillybear2]

Don't the UK government force pension funds to hold a proportion of 'safe' (AAA) assets, which recently has increased (the proportion that is), and of which includes government bonds, where a huge amount are currently being sold.

More transparency yes. But I don't doubt for a minute the UK government, and other countries, would do everything in their power to prevent them losing AAA status.

So they just change the regulations to explicitly force them to buy UK gilts regardless of the rating.

[Georgia O'Keeffe]

But the point IS.. if they lie it has no effect.

If they start a rating agency tommorrow..... and it rates Greece as AAA.... then they haven't created a ratings agency. Just a shuffler of paper everyone will ignore. Ratings agencies RELY on people trusting their ratings. Period.

It's NOT that I trust governments to tell the truth.... it is that, in this circumstance, if they lie they will have no effect.... and if they tell the truth, they may have some effect. There is no downside. I can regard it as 99% likely they will lie, and still say it's a reasonable policy based on it only having an effect if they don't (and I'd say that they know this perfectly well, and so are far less likely to lie).

So ... there is no downside to their creating an agency. It's like a bet that returns your stake if you lose, and pays 2:1 if you win. It doesn't matter HOW LIKELY I think it is that the bet will lose, I may as well make it. Even if I consider the horse to be a 100:1 outsider I may as well make the bet under those terms.

In order to have any effect on the market whatsoever a govt. rating agency would have to prove.... over a period of years... that it was either as accurate, or (more likely given inherent distrust) prove that it is more accurate than the alternatives, in order to get people to listen to their ratings.

This isn't some propoganda enterprise where they can sway "low information voters".... it's a rating agency. By definition it's target market are "high information consumers" who have a ready alternative in the 3 established, private, ratings agencies. They simply can't get away with falsely inflating ratings, if they DID do so... the ratings agency would have no effect on the market whatsoever.

I'm not sure how much clearer I can make it.

Yours,

TGP

Edited May 5, 2010 by Tamara De Lempicka

[Georgia O'Keeffe]

Does the market tell the truth when the bubble is inflating?

yes it tells you to buy

[Georgia O'Keeffe]

But the point IS.. if they lie it has no effect.

If they start a rating agency tommorrow..... and it rates Greece as AAA.... then they haven't created a ratings agency. Just a shuffler of paper everyone will ignore. Ratings agencies RELY on people trusting their ratings. Period.

It's NOT that I trust governments to tell the truth.... it is that, in this circumstance, if they lie they will have no effect.... and if they tell the truth, they may have some effect. There is no downside. I can regard it as 99% likely they will lie, and still say it's a reasonable policy based on it only having an effect if they don't (and I'd say that they know this perfectly well, and so are far less likely to lie).

So ... there is no downside to their creating an agency. It's like a bet that returns your stake if you lose, and pays 2:1 if you win. It doesn't matter HOW LIKELY I think it is that the bet will lose, I may as well make it. Even if I consider the horse to be a 100:1 outsider I may as well make the bet under those terms.

In order to have any effect on the market whatsoever a govt. rating agency would have to prove.... over a period of years... that it was either as accurate, or (more likely given inherent distrust) prove that it is more accurate than the alternatives, in order to get people to listen to their ratings.

This isn't some propoganda enterprise where they can sway "low information voters".... it's a rating agency. By definition it's target market are "high information consumers" who have a ready alternative in the 3 established, private, ratings agencies. They simply can't get away with falsely inflating ratings, if they DID do so... the ratings agency would have no effect on the market whatsoever.

I'm not sure how much clearer I can make it.

Yours,

TGP

It clearly will if they pass laws forcing companies under their jurisdiction to follow these ratings which is inevitable if everyone ignores them.

I am not sure how much clearer i can make it