View 624 May 24 - 30, 2010 (original) (raw)
Monday, May 24, 2010
It's a front page Wall Street Journal story: 'Ratings Shopping' Lives as Congress Debates a Fix . The headline pretty well tells the story: companies are bundling junk bonds into packages, then shopping for firms that will give them a AAA rating on the packaged junk -- and getting that rating. That's the same rating as Treasury Bonds. The WSJ article continues:
The fate of ratings-shopping now hangs in the balance. The financial-regulation overhaul bill passed by the Senate on Thursday would limit the ability of bond issuers to pick firms to rate their securities. But the House version of the bill contains no such provision, and some key lawmakers have raised concerns about the idea. It remains to be seen whether the proposal will survive as the two chambers begin efforts Monday to reconcile their differences.
Critics say the system for providing critical information to bond investors continues to be compromised by a big conflict of interest: Bond issuers pay ratings firms, so raters have an incentive to give inflated grades to attract or maintain business. Investors who rely on ratings to assess a bond's risk usually aren't told if other raters were shown deals but didn't end up rating them.
Note that the House version of the huge financial grab does nothing to correct this; the Senate version doesn't really change things. The notion that I pay you to give me a good rating is inherently wrong, we all know it, yet it's written into public law that you must choose one of those hucksters to get a rating before you can issue bonds. The ratings companies have lobbyists. Oh boy, do they! And the beat goes on.
I am no great fan of conspiracy theories, but this situation, which has endured for decades, makes no sense. We've known since before the real estate collapse that rating mortgage based securities based on bundles of junk is just plain more risky than Treasury Bonds. They are not blue chips and can't be under any stretch of the imagination; the collapse showed that the ratings houses had not a clue as to the value of those AAA rated bonds (I am ascribing their actions to incompetence, not malice). Yet the beat goes on, and brokerages sell this stuff to pension funds and insurance companies as conservative, blue chip investments.
Much of the coming public debt for cities and states is caused by overly aggressive investments by pension fund managers and boards; they bought risky stuff and their losses must be made up by the public. However, some of those pension outfits acted in what they though was a responsible manner, buying only AAA related investments. The result was toxic assets. The practice continues.
We have a new financial reform act coming, and it doesn't do anything to address the fundamental problem. The big ratings companies continue to rate bundled junk as AAA, and are paid well to do it. Making companies disclose that they shopped around for their ratings may help some investors decide to look elsewhere, but the fact remains that ratings companies continue to have incentives to hand out the highest ratings, and no one in Congress is anxious to change that. One might wonder why.
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The Hawaii election continues the trend. The Democrats lost a seat they have held for forty years, this is the district in which Obama was born. In Pennsylvania the Democrat ran against Obama. In Hawaii only the Republican ran against him. The Democrats are confident they will be able to reclaim the seat next November. Perhaps.
I note also that some Republicans of the big government establishment are nervous about the immigration issue and want to run away from it. I also note that in California the two Republican candidates are trying to out-do each other on their steadfastness to immigration enforcement and opposition to amnesty. They at least have caught on.
Next November will be, I think, a real anti-establishment election. In 2008 the voters thought they were getting "hope and change". They were disgusted with the Republican Creeps, and did not yet understand that individual Democrat candidates' positions were irrelevant: the Nuts were in charge, and there was no such thing as a "pro-life Democrat", or a "Blue Dog Democrat", or what used to be described as a "conservative Democrat." When push came to shove the leadership of the Democratic party was in the hands of the Nuts, and people like Pelosi with safe seats and big war chests controlled Congress to the point of being able to ram through measures clearly opposed by a majority of the populace.
The "Reagan Democrats" are not a new phenomenon. We understood who they were in the Reagan era. I have registered people to vote as Republicans who simply could not say the word Republican, being a Democrat was so fundamental a part of their internal makeup. "That other Party" was as close as they could come to saying they wanted to register as Republicans so they could vote for Reagan in a primary.
Conservative Democrats are vanishing due to the grinding of the Nut establishment, but perhaps they will come back. They are marked by politics as usual on certain matters: their Congressman is expected to bring home the bacon, with tidy little earmark projects like a local library, or a "demonstration" public transport project, a road or a court house. They tend to be in favor of measures like minimum wages. Yes, I can demonstrate that a minimum wage either has no effect -- someone was willing to pay that much anyway -- or to eliminate the job -- if I have to pay that much to get my yard mowed, I'll make my teen age kid do it or what the hell, I'll do it myself I can use the exercise anyway. Doesn't matter. There are people who simply believe that minimum wages drive wages up and thus affect their pay.
I could write a long essay on what Conservative Democrats believe; the point is that while I tend to disagree with them on many points, they tend to favor transparency and subsidiarity as principles, and there is basis for a position most conservatives can accept. After all, the neo-conservatives with their big government and overseas adventurism, big Federal initiatives and enormous expansion of spending were hardly more conservative than the voter who simply wants funding for a local library to be named for a deceased Senator or Congressman, or a "research" project that tends to promote the production and buying of blueberries or some other local crop.
The best thing we can hope for next Fall is that not only will there be a change in which party holds a majority in one or the other house (or, thrillingly but unlikely both) but that there is a change in the internal leadership of those parties. This may be a chance to turn the rascal Creeps and Nuts into minorities not only in Congress but in their own Parties. Well, I can dream, can't I?
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On the oil spill:
Whose fault is it? Who can we blame? How can we blackguard Bush, or Obama, as the oil comes ashore?
Which is all silly. In 1967 I proposed to Reagan that California create an oil spill recovery service, something like a fire department, to be financed by separation taxes from the oil industry. I later proposed it as a National Service, possibly a branch of the Coast Guard or Civil Defense. It would have a corps of professionals whose job was to learn all that was known about oil spill containment and cleanup, and others who would do research into what we don't but ought to know: what chemical detergents will aid in dispersing the oil with the least damage to the environment? Under what circumstances are we better off simply setting fire to the sea -- possibly by adding an accelerant to what's floating? Burning it off in marshes (marshes do burn naturally and recover).
What facilities and accessories are needed? What local resources can help? Is there an inventory of sea going vessels public and private in each region? What is the cost of commandeering them for an emergency? Do we need to stockpile booms and nets, and what other containment equipment would be useful? Does it exist and if so where is it?
I could go on for a while, but surely the point is made? My original briefing which was prepared by Pepperdine art students on VuGraph (overhead projectors have pretty well vanished now that we have PowerPoint and computer screen projectors, but that used to be the format for all briefings). It has long since vanished, but it wouldn't take a lot of work to create a better one: we know more now, having gone through the Santa Barbara oil spill in 1969 and the Exxon Valdez disaster twenty years later. We learned something from those: but we didn't apparently learn enough.
There will be oil spills, as there will be coal mine accidents. We need to deal with the current spill now, but we also need to prepare for the next one. Time enough to assess blame after the disaster is contained; but it's more important to look past this spill to the next. What are we going to do next time?
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