I still don't understand who these credit rating agencies are or why they wield so much power.
X wants to borrow money from you. You are happy lending money but you recognise that it involves a risk. You decide to charge an interest rate based upon the level of risk: the more likely X is to default on his obligation to you, the higher the interest rate you charge. How big a risk is X? What is X's past history? What is X's current financial situation? What possible future events could have an impact on X's future financial situation? You could work all this out for yourself, or using your own team of analysts. Or you use a credit rating agency who has done all the work for you - they will give you a credit rating and you can decide what interest rate to charge based upon that rating.
If X is Joe Bloggs come to buy a TV from you on credit, then your CRA is likely to be Experian, or similar. If X is the USA come to find funding for an invasion of Iran, then your CRA is likely to be Moody's.
To what extent do credit agencies take into effect the credit ratings they give out having an effect on the economy of the country in question and thus it's credit worthiness?
To the greatest extent they can. They are performing large scale financial modelling and they will capture everything remotely possible that can be seen to have an impact.
And how subjective is this analysis?
A very good question. There are of course multiple credit rating agencies, and it pays to be aware of all of them. I am sure the academic financial journals are full of comparison articles and retrospective analyses.
These are the same ratings agencies that committing a multi-trillion-dollar fraud by rating as "AAA" various credit default swaps that were full of toxic mortgages, right? Because they were paid to do so by the sellers of those instruments?
Complete rubbish. The Credit Default Swaps, Mortgage Backed Assets, Credit Linked Notes, etc were all AAA rated as that was the rating of the issuer. And all those notes had written explicitly the nature of their default mechansim. Triple A is the highest level of rating, so if a AAA rated note states that in the event of X, that note is worth zero, you can depend your life on the fact that it is definitely worth zero. The credit rating agencies are probably guilty of not treating people as idiots.
This is an identical situation to the emerging market crisis of 1999. If your manager tells you that you are only allowed to buy AAA rated notes for your portfolio, then that is what you do. And if he is too dense to understand that the AAA rating tells you ABSOLUTELY FUCKING NOTHING about the actual value of the note, only about the credit worthiness of the issuer of the note, then we have a problem. And we have now had this problem twice - 1999 and this time around.
No, fact. A AAA rating has always been understood to mean "money safe."
Yes, Crash, as ever you know more than those of us in the industry I wrote god knows how many derivative notes - do you think that Moody's inspected each and every one? Was able to value it to work out its risk profile despite the fact that we made our money because at the time we were the only ones who could value it? And individually give each separate note a credit rating. For free? Just what the fuck do you think you are doing trying to look like you have a clue?
Every note I wrote was triple A rated because my institution was triple A rated. End of.
As the Federal Crisis Inquiry Commission found:
Yes, and they were woefully ignorant to write that. How stupid do you have to be to buy a note that explicitly explains its behaviour in the event of default, and then blame the ratings agency when it defaults
The ones to blame are those that bought the notes in full knowledge of their default potential, but were rewarded only on upside performance. As long as those notes were paying enormous returns, who the hell cared about risk of default, right? They were told they could only buy AAA and so they bought AAA. And those enormous returns - they weren't at all a FUCKING HUGE CLUE AS TO THE UNDERLYING RISK PROFILE.
No, in fact they're guilty of not actually having done what you claim they do - explicitly disclosed the nature of their default mechanism.
That mechanism is there to see on the note. That is what makes the default. A ratings agency can rate whetever the hell it likes, or whatever it is paid to rate. When the ratings agency is asked to rate a bunch of securities, you have to be very clear what is being rated.
In many cases ratings agencies misrepresented or even outright lied about the underlying default mechanisms and rates involved in these toxic securities.
If you are holding a note, here's a clue. Read the fucking thing. And if it refers to underlying securities, go and see how they are performing. And if you ask a credit rating agency what they think of the note, make sure you understand the note before interpreting their answer. And if you don't understand a note, here's another clue - don't buy the fucking thing.
In August 2004, Moody's Corp. unveiled a new credit-rating model that Wall Street banks used to sow the seeds of their own demise. The formula allowed securities firms to sell more top-rated, subprime mortgage-backed bonds than ever before.
If you don't understand it, don't buy it. You can't go wrong.
Let's just be very clear. The basic credit rating agency job is a "simple" one, and performs a very valuable function. That doesn't mean that the actual companies involved will not enter dubious business activity.
BUT the "blame the credit agencies" schtick is one big obfuscation to take the blame away from the banks and investment houses where it was simple greed and "blow the consequences, it won't affect me" attitude that drove the entire fiasco.
Is the scheme as mental as it first sounds or is it as genuinely viable as Crash is making it sound?
I'm no expert on the US monetary system, but it certainly isn't as strange as it sounds. The key point to Crash's scenario is not the fiat creation of "money" (this is done in various ways), it is that this is a way around the debt-ceiling without going through the Houses. The creation of the monetary value of the coin enables existing government debt to be bought back, thus erasing it. This is not so very different from the quantitative easing that has already been occuring. Yes, there is an inflationary danger, but as QE has shown, the risks seem to be small and well managed by the control of the extra money supply being kept strictly within the realms of government debt/obligation.
If $1 trillion of quantitative easing was announced, you wouldn't bat an eyelid. But the creation of a $1 trillion platinum coin which is then used to buy back debt seems like something out of cuckoo land. But they are essentially the same thing!
ABE: oh, fogot. Why isn't this being done if it's such a good idea? Again, I'm no expert - but it seems that this is only possible because of a loop-hole, and exercising that loop-hole would side-step some very fundemental safeguards set up around the Treasury, Fed, and Executive. It would possibly be seen to be very, very bad form.