EKIP– Expert Club for Economics and Politics A Different Opinion
The world has been through all sorts of economic, political, and social turbulence over the past four years. It has certainly put the status quo and world order to the test, but was it all as spontaneous and unforeseen as it is being claimed?
If we assume that we are in a planned stage of a strategy to centralize global power, it is worth noting that the entire system is working flawlessly. Commercial banks, investment banks, consumers and... rating agencies - a major shaky link, which, however, often falls between the cracks when looking for those responsible for the global financial crisis.
By definition, a credit rating agency (CRA) is an institution whose mission is to assess the financial stability of companies and government entities, both domestically and internationally. Specifically, it assesses their ability to meet the interest and principal payments on bonds and other debts on time. In turn, rating agencies should carefully study the specific terms and conditions of each type of debt issuance. The rating itself is an assessment of the agency's confidence that the debt holder will be able to pay the principal and interest due on time. The rating for a particular debt may differ from the overall rating of the holder depending on the specific conditions.
The creation of agencies is a natural result of the economic process called securitization (replacing bank loans with securities, by setting up investment portfolios, whose shares investors purchase). This is also the connecting link between the work of commercial and investment banks. Mortgages and transactions of commercial banks, combined in investment portfolios, become excellent business material for investment banks. In reality, commercial banks stop being interested in risk management, because they are prepared to sell the concluded mortgage anyway. ACR ratings play a particularly important role in the placement of securities issued on the basis of purchased mortgages.
In essence, they simply express an opinion about the reliability of borrowers (rating). A vicious practice is developing in which investors do not try to assess the risk themselves, but trust entirely in the position of the rating agencies. A position that is itself subject to very lax regulation and which affects the psychology of the market to such an extent that it is capable of leading the entire system to collapse.
Even stranger is that it is these ratings that determine, for example, what the minimum reserve requirements of American banks should be. The regulators themselves use or allow the use of credit rating agency ratings as an objective assessment of risk.
What makes this invented system flawed is that investment banks and institutions are the ones who pay the rating agencies to determine risk, and quite often it turns out that they are simply buying a rating for a stable outlook.
Interestingly, one of the functions of these institutions since their inception has been to avoid a second Great Depression, to limit banks' trading in speculative capital, and to have a stable rating system in place to keep the market stable. This did not happen.
In the second part of the article, we will look at the three largest official agencies that largely dictate the rules of the market, and their influence on the development of the crisis in the US and the EU.
In principle, I believe that the best "rating agency" is the market. So, if there are people willing to buy these securitized loans at this price, then everything must be fine and the blame for failure lies with the participants... Nowadays, however, banks are protected like eggs by governments and are more or less semi-nationalized. First, there is a limit to what they can lend because the same state compensates depositors, and this immediately makes them indifferent to the bank's activities. Then, if the bankruptcy of a given bank is a threat to the financial system (the so-called too big to fail), it receives either a loan of last resort or is directly recapitalized with the participation of the state. In this system, as the article says, credit agencies play a decisive role, but in my opinion they cannot smooth out all the imperfections of the deviation from the free market.
Now, for example, the interest rate on Italian government bonds is soaring and two credit agencies are reviewing their rating. It is clear that if they lower it, it could cause big problems for the country with the third largest government debt, and for the EU as a whole, but the market already evaluates these securities as a riskier asset because it simply does not trust the current government. So, Fitch, Moody's and SNP have no choice but to lower their rating (knock on wood) as a kind of lagging indicator from the market. But it is much more interesting why the latter agency lowered the US rating a few months ago, given that the difference with French government bonds, which are among the highest rated, currently reaches about a hundred basis points in favor of Treasuries.
Stoyan
Kosyo, if I start with your last question. It was probably about politics, or in other words, the Republicans have a pretty strong lobby in Standard. The whole thing was (in my opinion and I think zerohedge) a pretty clever attack on Obama.
I completely agree with the other thing you said. The very intervention of the state in the banks makes the system quite distorted.
Bravo Stela, great analysis, amazing thinking :-):-):-):-):-):-)Stefan