Wall Street

Credit Rating Agencies: Can't Live With 'Em, Can't Live Without 'Em

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This summer's overhaul of the nation's financial regulations left far too much room for regulators to make up rules sometime in the future, meaning no one really knows how the law will work. But it turns out that a number of the provisions we do know something about aren't very feasible either:

The implementation of the sweeping financial overhaul got off to a rocky start on Tuesday, when a series of top regulators suggested Congress might have to make changes less than three weeks after President Barack Obama signed the bill into law.

Regulators meeting at the Federal Deposit Insurance Corp. expressed concern about a provision restricting the use of private credit ratings. In particular, the requirement has forced agencies to put on hold efforts to craft new capital standards for thousands of banks, particularly smaller institutions, which will likely prolong uncertainty over the rules of the road for at least a year.

FDIC Chairman Sheila Bair said poor credit ratings were a "key contributing factor" to the financial crisis but defended ratings as an effective way to evaluate the quality of investments such as corporate debt. "I think we will also find that some of the more likely replacements…are far from perfect," she said at the meeting.

Any time Washington decides to rewire a system as complex as the U.S. financial services industry based on not much more than a few months of blowhard rhetoric and a reel of cable news reports, you can pretty much count on an immediate short circuit. At this point, it's a pattern: Politicians decide it's time to "fix the system," but legislators, who tend to have minimal or no direct experience with these specialized industries, don't actually understand how the system they're overhauling works, or what's really wrong with it. So their fixes end up causing new problems, which then require new legislation, and new fixes, and new fixes for those fixes—wash, rinse, repeat, etc. When does it end? Who can say? The Journal reports only that "banks of all sizes will likely see a period of confusion with regulatory expectations in flux."

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  1. I am hearing more and more that what is keeping the economy anemic are the enormous new regulatory burdens and uncertainties spewing from every orifice in DC. Let’s hope this is a meme that catches on.

    Unfortunately, I’m not hearing it from very many Republicans. And, of course, not from a single Democrat.

    If a politician needs a message to ride the zeitgeist into office, how about this:

    Our fiscal problem is, fundamentally, that government growth outpaces economic growth. We need to attack this problem from both sides:

    (1) Government growth is spending growth. Raising taxes to cut the deficit doesn’t solve the problem; it makes it worse. We have to “bend the government cost curve” by cutting spending.

    (2) We can’t cut the governmental burden on the economy while we are borrowing money. So, for now, tax cuts are out. Tax simplification, however, is in, because simpler taxes distort the economy less, and help it grow.

    (3) What’s holding our economy back is the massive regulatory state ensconced in Washington. Its time to roll back the regulatory state, to lower deadweight costs on the economy and remove uncertainty and risk from people who want to open and grow businesses.

    1. Maybe you should run….

    2. (1) Government growth is spending growth. Raising taxes to cut the deficit doesn’t solve the problem; it makes it worse. We have to “bend the government cost curve” by cutting spending.

      Non-starter. Democrats universally call this mode of thinking “Starve the Beast”.

    3. (2) We can’t cut the governmental burden on the economy while we are borrowing money. So, for now, tax cuts are out. Tax simplification, however, is in, because simpler taxes distort the economy less, and help it grow.

      Non-starter. The tax code is a useful tool for setting policy. Simplification merely hobbles progressive policies.

    4. (3) What’s holding our economy back is the massive regulatory state ensconced in Washington. Its time to roll back the regulatory state, to lower deadweight costs on the economy and remove uncertainty and risk from people who want to open and grow businesses.

      Non-starter. Deregulation is responsible for this mess in the first place. We’re not returning to a time of politics-as-usual.

      1. “Deregulation is responsible for this mess in the first place.”

        Bullshit.

        1. You realize he’s simply playing devil’s advocate (or strawman builder, depending on your view), not necessarily stating his own position, right? The first two responses should make this clear.

    5. “The only thing we need to regulate is government.”

    6. Paul, I realize that this platform isn’t going to get any Democratic votes.

      1. Sorry, RC, I couldn’t resist channeling the talking points.

  2. The funny thing is that the credit rating agencies exist only because of a previous round of government regulation. [From the New Deal era.]

    And the thing that people are pissed off about the most – their role in the securitization of mortgage debt – was something that became important because of a different round of regulation. [The rules for risk-based capital ratios put in place after the S&L debacle rewarded banks for investing in MBS rather than in owning their own loan portfolio.]

    So now, because the credit agencies created by regulation fucked up and our financial institutions overinvested in a class of security favored by regulation, we need another layer of…regulation!

    Kunstlerism at its finest.

    1. So now, because the credit agencies created by regulation fucked up and our financial institutions overinvested in a class of security favored by regulation, we need another layer of…regulation!

      And then were forced (by law) to dump those securities, en masse, onto the market because the agencies dropped the rating from AAA to AA…etc. etc.

  3. [The rules for risk-based capital ratios put in place after the S&L debacle rewarded banks for investing in MBS rather than in owning their own loan portfolio.]

    But- you can’t go wrong if you diversify!

  4. simpler taxes distort the economy less, and help it grow.

    But, without the social engineers in Congress’ topiary skills, it might grow in the wrong direction. It’ll be all unruly and ugly and unpredictable.

  5. Smoot-Hawley II: Electric Boogaloo

    Smoot-Hawley II: The Clensing

    Smoot-Hawley II: Nancy’s Revenge

  6. “”Any time Washington decides to rewire a system as complex as the U.S. financial services industry based on not much more than a few months of blowhard rhetoric and a reel of cable news reports, you can pretty much count on an immediate short circuit. “”

    Get approval first, figure it out later has been a key strategy of the Obama admin and this Congress.

    1. Like Bush’s tarp? Pretty sure it was approved for one thing then used for another.

      Not agreeing with it but this just isn’t common with thew current government but is more of a tradition in our congress and white house.

  7. The health care law will have very similar problems.

  8. So their fixes end up causing new problems, which then require new legislation, and new fixes, and new fixes for those fixes?wash, rinse, repeat, etc. When does it end?

    November.

    At least for the financial deformation efforts.

    1. OK, January.

  9. Bad law begets bad law. The concept of doing a root cause analysis and undoing some of the original idiocy and pruning back some unintended consequences never occurs to anybody.

  10. How, exactly, does “a period of confusion with regulatory expectations in flux” help create jobs?

    Does Obama realize that we are looking at 7%+ unemployment heading in to the 2012 election? Can he be that dense?

  11. When does it end?

    With any justice, it will end with me.

  12. Something else to think about… is all of putting an end to competition by pushing out the small firms – Tabb Forum had an interesting discussion: http://tabbforum.com/videos/fi…..-beginning

  13. enen,you can find whatever watch you want on my name

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