.comment-link {margin-left:.6em;}

Generic Confusion

When you leave, my blog just fades to grey
Nu ma nu ma iei, nu ma nu ma nu ma iei


News? Check. Politics? Check. Music? Check. Random thoughts about life? Check. Readership? Ummm.... let me get back to you on that. Updated when I feel like I have something to say, and remember to post it.

Tuesday, August 09, 2011

Standard & Poor's downgrade: Think about this

They have the authority they do because the government says so.

The one thing the US could do to punish Standard & Poor's is to no longer allow their ratings to have any regulatory value. If a company has to have assets of a certain quality, the judgment of S&P is no longer valid in determining whether or not you meet that requirement. (I have no idea on the legality of that, or whether or not it's a good idea.)

But think about this: In a free market, S&P should have gone out of business, since they so badly handled ratings of collateralized mortgage obligations. They gave a AAA rating to something that collapsed in value and security with a housing market downturn. They gave these ratings despite widespread thought that we were in a housing bubble. They didn't do one single sensitivity test?

Without the official recognition of government being involved, a competitor could have arisen, promising a more robust model for complex securities like CMOs. Instead, there's a practically insurmountable barrier to entry.

0 Comments:

Post a Comment

Links to this post:

Create a Link

<< Home