The Flag Theory of Credit Ratings Post author By Philip Lane Post date January 19, 2012 Courtesy of Broadsheet.ie, this looks convincing. Categories In Uncategorized 13 Comments on The Flag Theory of Credit Ratings ← Job Opportunity at IIEA → Commercial sensitivity 13 replies on “The Flag Theory of Credit Ratings” Well Greece has both a cross and horizontal lines so it should be Triple-A (plus). Olli Rehn’s dept referred to ratings as “so-called clairvoyance” last year, so obviously all the ratings agencies have their own Gypsy Rose Lees, and that’s how it’s done. Banks are amongst the most complex economic entities in our modern world – much of their product is tied into the fate of the overall economy. Sovereigns are about the only thing more complex. Yet ratings agencies feel free to grade both with certainty ! It reminds me of pre teens how enamoured I was with Hari Seldon’s “psychohistory” – such beautiful descriptive and predictive power. Then I twigged that commies were loons, who sold beautiful narritives – which had insufficient complexity to ever describe the riches of the real world. Ratings agencies are similar charlatans – and whilst they are preferable to politician’s puffing – I’ve little idea how they keep a straight face ! If it is easily measured and in a computer database then it can be sliced and diced until the cows come home. Ireland’s deposit taking and lending institutions were not taken down by modern methods of gambling in near money markets in CDO, MBS, SPV, SIV. They were taken down using the methods that have been in place since the 14th century, double entry book keeping. It does not get simpler than that. Our Gov’t, God bless them did not gamble in dodgy markets they made the terrible mistake of assuming that Irish bankers understood double entry book keeping. Housing bubbles have been ongoing for centuries and are well understood. Not just how they grow but what happens in the aftermath of a collapse. Unfortunately, our Gov’t, Central Bank, Financial Regulator and the banks themselves did not have the foggiest notion that building booms are followed by busts. What has been done to prevent another debacle 25 years down the road. The Regulator no longer reports to and is not subservient to the Head of the Central Bank ? Deputy and Assistant Deputy Ministers in the DOF have been given the one month course on bubbles. I am not talking about the bubbles that comprise the foam on a pint of Guinness. Wolfgang Munchau of FT in Der Spiegel (Google translate). We are fighting the wrong crisis. http://www.spiegel.de/wirtschaft/unternehmen/0,1518,809769,00.html @ All Love ’em or hate ’em, governments are stuck with them! Rating agencies, that is. Der Spiegel ran two interesting articles on the reaction in Germany by an establishement that clearly feared a German downgrade and still see it as a possibility. http://www.spiegel.de/international/europe/0,1518,809601,00.html http://www.spiegel.de/international/europe/0,1518,809696,00.html On the Anglo-American “conspiracy theory”, one is reminded of the old joke that the fact that one is not paranoid does not mean that they are not out to get you. As the debate on the topping-up of the IMF will reveal, it would be naive in the extreme to think that sovereign nations have suddenly changed their spots. @ Dsesmond Brennan ‘Ratings agencies are similar charlatans – and whilst they are preferable to politician’s puffing – I’ve little idea how they keep a straight face’ I trust you are not suggesting that polticians are the only, or even the worst puffers. My understanding also is that puffing and spinning were around for a long time before communist regimes, and were particularly well developed in the Christian churches. In fact the communists’s puffing and spinning was childishly crude compared to the really clever, almost subliminal stuff which drives the consumer society. Market share isn’t just about producing a good product at the right price. It’s also about convincing people that life without your product/service really isn’t worth living. That’s why world classs film directors are hired to make the commercials, and why product placement in central to Hollywood movies. As Sammy Davis Jnr said ‘Sincerity is everything. If you can fake that, you got it made’ I recall that the reason offered for the Cooley sale was that the marketing investment to conquer the US ‘status whiskey drinker’ market was just big for anyone except a Good Ol Boy to contemplate. That’s a hell of a puff you got. @mickey Hickey “Housing bubbles have been ongoing for centuries and are well understood. Not just how they grow but what happens in the aftermath of a collapse. Unfortunately, our Gov’t, Central Bank, Financial Regulator and the banks themselves did not have the foggiest notion that building booms are followed by busts.” Is it better elsewhere ? Switzerland is in the middle of its own house boom. Bond yields at 0.68% over 10 years are great for house purchases. This time is different. Fundamentals are solid. Anyone who disagrees should commit suicide. Here is an article from Berliner Zeitung on nationalisation of German banks. As part of the debate on forced increasing of reserves leading to nationalisation. Germany is not as solid as most foreigners assume. http://www.berliner-zeitung.de/wirtschaft/system-debatte–alle-banken-teilverstaatlichen-,10808230,11465380.html @Seafoid My main interest is to disabuse people of the notion that Ireland was a helpless victim of EZ low interest rates. Canada at the moment is drowning under a deluge of cash seeking a safe haven. Not only from Europe and the US but China, Korea and other countries. Five year mortgagee rates currently 2.99% with ten year rates at 3.84 to 3.99% these are historic lows. The big 5 Canadian banks have come out and publicly asked the Gov’t to impose curbs on mortgages. Already the banks themselves have imposed a minimum 25 year amortisation period, affordability tightening and increased minimum down payments. They have also asked the Gov’t to impose these tightened standards across the board. These will probably take effect in an expected March budget. There are very few countries that let things slide to the extent that Ireland has. @ Mickey Hickey Something has got to give! http://blog.zeit.de/herdentrieb/2012/01/16/bankenkrise-eskaliert-wieder_4094#more-4094 This is an excellent article by Ha-Joon Chang http://www.guardian.co.uk/commentisfree/2012/jan/15/dont-blame-ratings-euro-turmoil @paul quigley yes as such my quibble is that ratings agencies project themselves as having objective empirical models….I’d view such an accomplishment as en par with “world peace and prosperity” @ desmond Agreed. They are objective empirical models in the same way as the banks VaR models. Infinitely malleable in the right hands 🙂 Comments are closed.