Tuesday, January 6, 2009

Why Isn't S&P Political Roadkill Yet?

As much as we should be blaming the greed and stupidity of investment banking for a lot of our financial problems, we also should be blaming the hell out of Standard and Poor's who rated a lot of these atrocious investments incorrectly. So far I've only seen a couple of good analysis of this problem, the first by Robert Rosenkranz at the WSJ in which he notes that regulators have used the bond ratings by S&P to measure how much capital insurers needed to cover their policies. The problem, obviously, was that none of the agencies got the sub-prime stuff rated properly, no one had the proper capital needed, and now we're staring at tons of defaults that are not adequately insured.

Arnold Kling over at EconLog argues that no matter how you set up the rules of capital requirements, someone will figure out a way to game the system. Instead he argues for punitive punishment for CEO's who cheat - serious prison time.

From my perspective a lot of individual investors and state and local governments used the bond ratings as a way of judging risk. Prices are part of the information we use to judge the quality and risk in something, but ratings also matter. So why hasn't more of the spotlight turned to S&P? I can't find any serious links between S&P and politicians, but some smart ambitious politician (Andrew Cuomo?) will eventually see this, hold hearings, and heads will roll. It's just too easy and obvious.

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