A PAUSE IN THE DAY"S OCCUPATIONS...

The Childrens' Hour.  The grandkids arrived Wednesday practically unannounced and just departed.  They're almost five (triplets) and in fine fettle: I'm exhausted.  Put them down and they head off in four different directions.  But what a kick and they kept me from thinking about the ridiculous stuff swirling about such as Moody's bank downgrade of which Carter warned us the other day.

In thinking about this for a bit now I've come to the conclusion that some real good might come out of this after all as there appears to be an increased realiztion that for the most part the rating agencies are clueless and those that blindly follow their advice do so at their peril.  It is quite amazing that their position remains relatively unchanged after their performance of the last decade but there they are, by federal mandate,guardians of investors all over the globe, when it appears that they are even less competent than they were five years ago.  With the exception of one or even a few individual institutions I can find no basis for an industry wide call such as this one especially when there is clear evidence that the financial strength of major U.S. banking institutions is far greater than three years ago.  A simple example: since 2009 , Citigroup has shed itself of over $600 BILLION of non-essential assets (read, crap), a remarkable achievement unmatched in my mind.  Is there another global institution that has ever been capable of executing such a strategy?  I cannot think of one.  Had European institutions moved with such alacrity would we be looking at the same desperate situation we see today?  I think not.  But under the supposed theory that no good deed goes unpunished, Moody's knocks down Citigroup two slots thereby exacerbating any imagined difficulty by substantially increasing the company's cost of doing business.  Genius at work.

To say that J.P. Morgan's bit of a trading misunderstanding had nothing to do with this is to belie the obvious.  There's blood in the water and a perfect opportunity for a chasened player like Moody's to swim around and take a bite.  But the danger of course is that actions such as these with no real thought behind them other than a weak attempt to reestablish a reputation that was at best unwarrented  and a failure to distinguish the inherent differences between Morgan Stanley on one hand and Citigroup on the other, raises the stakes for all involved and increases the risk systemically.  If Morgan Stanley were to fail it would a tragedy for certain but would the system survive?  Almost certainly.  But Morgan Guaranty?  A downgrade of an entire sector vastly increases the risk of one or both occuring and to say that , "Well, we did differentiate, Stanley was down two grades and Guarantee just one," is a nonsense at best and a cynical attempt at butt-covering.  It is the headline that is read not the story.

These pages have always supported the view that the market should be allowed to work and institutions be allowed to fail but we have also suggested that artificial and often flawed credit analysis forced upon investors by government fiat adds to the risk of lousy risk management which in itself leads to systemic events.  If, as in 2007-08 a risk manager can simply say, "I believed the credit to be as Moody's said it was," provides a perfect excuse for laziness and shoddy work.  Remove the governmental imprematur from Moody's S & P, Fitch, and open the credit advisory business to all comers and two things are achieved:        

     1.  Far better performance on the part of such firms, and
     2.  Far greater attention paid to risk analysis on the part of investors as the "excuse" of  "Moody's said it was ok," disappears.

If the drafters of Dodd/Frank had been interested in real improvement other than to score political points actions like this would have been taken.  Incrediably, after the performance of the rating agencies over the past ten years nothing has changed.  One would have thought that in exchange for government backing management might have changed.  Nope.  Business as usual.  And now comes this.  Foolish in it's concept and beyond stupid in it's timing.  There's this place called Europe gentlemen.  Ever heard of it?  Probably not.  You had some place called Greece rated A+ 30 months ago.  Once again, genius at work.