Once upon a time, when I was a young boy one of the first stories I have read was
about the Cinderella…
First I got into my hands the version of Grimm Brothers. In their story the name of Cinderella was the Aschenputtel…
So this lovely young lady
met the Prince of her dreams, but had to rush away and left only one trace
behind. A shoe…
The Prince fell in love in her from the first
sight and ordered his people to find the young women who fit the shoe…
Aschenputtel had a terrible step-mum and 3 awful step-sisters. The three ugly girls tried to trick
the Prince, but when he noticed the blood on their foot, he realised what
those were are about to.
The Prince later found the beautiful Aschenputtel, so they have decided to marry.
On the wedding day the three ugly girls
appeared, but upon the order of Aschenputtel her pigeons and doves attacked her
stepsisters and they have destroyed their faces, torn out their eyes, so they got punished for a lifetime for their bad behaviour;
But let us put ourselves into wild-wild
west. The time, when one in three Americans were involved in this or that way
in infrastructure development, especially in building of the rail. That was the time when the three
ugly sisters were born;
Fitch as a publishing house and
inventor of the magic AAA to D rating systems;
Moody, who started to analyse the
investment possibilities and Standard & Poor (I am wondering why no one
dare to call them as “the Poor Standard”), so the Standard and Poor (S&P) were joining statistical effort with publishing.
In general terms, these three ugly
girls were giving some advices, issuing publications, but all in all were
sitting behind the curtains. They could never predict any bigger financial
crisis; they also could not really save any investor from the effects of any economic crisis. However it is also true, that they gave some nice advices and some useful information during “peace time”…
And where is our Prince and the lovely
Aschenputtel?
After the Second World War America
developed into a super power. They also developed into a financial centre of the
World.
At the early seventies it was necessary
to implement some “modernisation” in the financial sector.
The Securities and
Exchange Commission (SEC)
modified its minimum capital requirements in 1975 for broker-dealers to base their requirements on credit
ratings by a “nationally
recognized statistical rating organization” (NRSRO); which at the time, was one of the big three —
Moody’s, S&P, or Fitch. There are now about 9 of them, but this 3 are my
favourite and will serve well for our fairy tail.
So in
our case the SEC is our Prince – he wants to put in order the things. But in fact for our observation it would be better if our Prince would be the existing Government as the SEC was also acting upon the same will of the Government.
From
now on the main hub of finance can only use someone “reliable”… But the one not only provides
information, but also can get money for this service from the act of rating a company.
On
the other hand a company which is not rated, cannot be listed on the stock
exchange… So up till a certain moment the 3 sisters were running after the
companies, now the story has been changed…
What
this also means? Depending on the rating of the 3 sisters, you as a company get
cheaper or more expensive credits. Your debt is valued more or less expensive…
And in return what you have to do? You
have to let this guys sniff around your company and you even have to pay for
that…
At 2001 – the American government gives
even more power to the three ugly ones; they included credit ratings into
banking regulations;
At the same time they start to rate not
only companies, but Banks, and Sovereign Governments. And our Prince is giving them more and more powers and less and less control....
Great!
And anyone has checked what these three
girls are doing? Anyone told, how they themselves should do their job?
No…..
In fact the idea sounds very good.
Let’s find some independent agency (or more of them) to have independent
evaluations.
Based on those we can regulate the
financial activity of different fields. That was the original idea of SEC (the
Prince in our fairy tail)
But there is one big BUT!!!!
The point is in the independence!
The ugly sisters get money from the
company, business, municipality, government or in other words, anyone they
evaluate – big money…
They are in fact interested in the
evaluation of someone for one reason, to make money. On the other hand the one they evaluate is interested to get some nice picture...
What will happen, if you say – my dear
ugly sister – I do not want you, I want Aschenputtel!
The sister you just sent away will give
you a rating based on her anger… And that rating will be bad – definitely bad…
What else happens? Some strong boys (mainly banks) buy themselves into the ugly sisters....
But let's stay with our original story... So what happens to you, if you refuse the ugly sister?
What else happens? Some strong boys (mainly banks) buy themselves into the ugly sisters....
But let's stay with our original story... So what happens to you, if you refuse the ugly sister?
You will have a loss – big loss!
And from this moment we can speak about
monster prostitutes. At one moment she wants to jump into your bed and discover
all your secrets and if you refuse her, she shall become a monster, who will do
her best to destroy you.
This would not be a problem, in case
this would all remain within the borders of the United States of America let them abuse each other financially and sexually:-))
But since our XXIst Century the matter
become a Global problem
– ruled by nice Made in USA girls!
They rate everything that matters in
the financial world, countries, banks, institutions, municipalities and
companies. And they are manipulating and being manipulated...
It is not only a huge business, but also
a powerful weapon.
Where it get even more dangerous? The
same Monster Prostitute announces, that you did not satisfy her enough… So she
will give you her “recommendations”. If you are a good boy to follow, than you
will get better ratings – if not, she will again ruin your life…
And what can you do?
In fact you can do absolutely nothing!
You have very few choices:
1/. You can satisfy her 100% - you may
gain with this, but you might lose as well.
One thing you definitely shall lose –
your choice of independent decision!
2/. You ignore her – you might face
immediate consequences – she will try to destroy you and it will be very
painful for you;
3/. And what the majority does? They
play a double game. Try to satisfy her and to find some compromises with her.
And there is one more way out - you marry her... (sounds logical right?)
And there is one more way out - you marry her... (sounds logical right?)
And what happens if something goes
wrong despite all the efforts?
The consequences are all yours!
As this nice sisters do not take any
kind of responsibility for anything.
When the Prince noticed the bleeding
foot?
Right in the middle of the last
financial crisis!
“You
did have to be kind of an idiot to actually believe that its ratings meant
anything. Everybody has long known, or should have known, that the rating
agencies were conflicted. The conflict is built right into their business
model, because they are paid by the banks that produce the bonds that they
rate. And that applied to all of the big agencies, not just to S&P, which
is why S&P is understandably confused as to why the government is suing it
alone.
This
conflict was a problem before the crisis, and it remains a problem now. And
though regulators have made loud noises about doing something about this
problem, they have not done much in the way of solving it.
Which
means that we could once again be in a situation in which a rating agency's
ratings turn out to be woefully wrong. By that point, nobody will have any
excuse for being surprised.”
There is only one question remained.
Where is Aschenputtel?
How this story will end?
We actually do not know.
The Prince sent out to search
for her. They were searching and there were some reports, that they might found
something. But the Prince is BLIND!
Like John of Bohemia...
The search team found Mr. Liability. But not in the
USA, no! They found him in a small town in Australia…
“IMF's latest legal action follows last November's landmark
ruling in Australia's Federal Court that found S&Ps responsible for
multi-million dollar losses suffered by 12 Australian councils who claimed they
were misled when they were sold complicated financial products which turned
toxic.
The
products were given premium AAA investment ratings by the credit agencies.”
But making them liable or responsible
not yet enough…
The US legal system looks extremely hesitant
about liability. And even more hesitant in doing radical changes. Still they are lack of the most primitive control over this institutions... And until this happening, the shadow of the next crisis will
hang over us…
What have the EU found?
- They found a lot of trouble in a form of:
- non-transparent
sovereign ratings;
- - investors'
over-reliance on ratings:
- - conflicts of interest
threaten independence of CRAs and high market concentration; (CRA means Credit Rating Agency)
- - (absence of)
liability of CRAs:
What are the measures to correct this?
1.
Reduce over-reliance on credit ratings;
2.
Improve quality of ratings of sovereign
debt of EU Member States;
3.
Make credit rating agencies more
accountable for their actions
4.
Reduce conflicts of interests due to
the issuer pays remuneration model and encourage the entrance of more players
on to the credit rating market;
5.
Publication of ratings on European
Rating Platform;
Sounds better, than nothing… But
But you would ask – but hey! Where is
Aschenputtel?
She is somewhere out there, looks a bit shaken by the beast...
And yes, in fact she is somewhere out
there, in a form of
- -- totally independent;
- -- financially non corrupted;
- - scientifically prepared;
- - if not fully, but at least partially liable and reliable;
National and global
institution(s);
Formed by joint effort and confidence.... Of the participants;
And if you are a private person, or a company member or a national, international decision maker, you should never ever get you yourself or anyone else surrounding you into such structures, especially not your company, bank or country... And you definitely should not allow the big American Brother to dig in your closets day and night and after that giving you guidances, which lead you into total disaster in the form of credit rating agencies... Never!
And it seems like we
have to work to raise our own Aschenputtel and then to let the Prince find her.
Hopefully on the day of their wedding, there will be pigeons and doves which will destroy those ugly faces,
tear out their eyes, so they disappear forever;
Some of you may ask: do you really
think those "rating guys" had triggered the latest financial crisis?
My answer would be – unfortunately the
situation is far worst. They not only triggered it, but made it more painful as we would ever imagine.
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