Sunday, April 18, 2010

It's the Ratings, Stupid!

Matt Taibbi has been raising a stink about Goldman Sachs and probably rightfully so, however, I don't see them as the big problem in the recent sub-prime housing bubble burst meltdown thingy.

He's getting a lot of coverage. (What is the new Internet word that means the same thing as the term coverage did in the days of print? Could it be links or clicks?) He's getting a lot of both links and clicks with the SEC saying the same thing he is, or investigating the same thing he is saying.

As bad as Goldman Sachs is, and I don't doubt much of what Taibbi writes, that is not the problem. They just took advantage of the problem. Good old American exploitation. What's wrong with that?

If only those sub-prime back investments had been rated to reflect their riskiness, much of what happen would not have occurred because the bubble would not have been funded to the bloated state it was. Much of the money would never have gone into such a risky investment instrument had investors been more wary of its way too good rating. It was the rating that was the problem.

When the new sub-prime loan backed bonds came out, the rating houses, Moody’s, Standard and Poor’s, and Fitch, wanted to be the ones that got the new business and if you want the banks producing these bonds to give you the business, you are not going to get it if you tend to rate their new product down. The banks claimed the bonds' diversity - or something like that - reduced their risk and the rating houses that were competing for the right to rate them, agreed.

The rating houses are working for the wrong people. They work for the seller. They should be working for the buyer, or at least the market. They should work for either the buyer or the market, but never the buyer unless you want what just happen. That's what needs to change.

Let Goldman Sachs do their dirty work as concerns like them have been doing and will continue to do. Just accurately rate their work for what it is, and then let the buyer beware.
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