Daily Lessons from Life 24 April 2010 - Pressure led to high ratings: US credit rating execs - April 24, 2010

"April 24, 2010, 9.30 am (Singapore time) Associated Press - Pressure led to high ratings: US credit rating execs

WASHINGTON - Former credit rating industry executives told a Senate panel on Friday that competitive pressures and poor internal communications led their analysts to award safe ratings to risky investments.

The highly rated investments turned out to be toxic, contributing to the financial crisis.

The chairman of a panel investigating the industry proposed on Friday that Congress should address a conflict of interest that arises from credit rating agencies being paid by the same banks whose bonds they rate.

'It's like one of the parties in court paying the judge's salary,' said Senator Carl Levin, a Michigan Democrat.

When analysts 'show the benefits of higher-quality rating criteria, and they come back and say, 'Revenues will go down,' you either (drop the issue and) continue to work there, or you quit,' said former Standard & Poor's managing director Frank Raiter.

The Securities and Exchange Commission is prohibited by law from overseeing credit rating agencies. The agencies have escaped legal liability by claiming their ratings are protected by the First Amendment right to free speech."

I lost ALL respect for the 'brilliant and innovative and world-leading' financial brains of the world in the USA when the whole crisis triggered by the sub-prime mortgage collapse, and the subsequent revelation of incredibly 'stupid' (with hindsight) and 'greedy' (obvious from the start BUT tolerated by MOST, if NOT ALL, as they ALL benefited!) behaviors by them.

Had it not being they are the USA. The Americans would have had to give us money to take US$!! As it is, the mess get messier before it can get better. So, trillions of debts were created by Uncle Sam and bought or supported, reluctantly, or almost at ransom with a loaded gun pointing at their heads - China, Russia, Japan, and the rest just keep buying! Singapore included.

Lessons for me are:

1. the 'conflict of interests' phenomenon is NOT NEW! Everyone in the industry KNEW about this absurdity. Yet, the 'brightest' people tolerated it. To put it bluntly, many have 'prostituted' themselves to earn the fees in an 'extremely competitive' rating market dominated by 3 USA-based companies!;

2. Those who had the sense of righteousness, like Mr. Raiter, ex-Standard & Poor, had to quit as they COULD NO LONGER go against their conscience and professional integrity to 'lie' to the users of their rating suffered then with no mercy shown from the 'management' who earned big, I am sure, bonus from gaining business from giving good rating to 'honestly risky investment instrument'! I hope that the 'management' get punished severely for ruining good people's livelihood for doing the right thing!;

3. that t the 'pretext' or the 'protection which the rating agencies is hiding from legal agencies' scrutiny' is 'the 1st Amendment - Freedom of Speech' showed HOW twisted and SICKED the Americans had become in forsaking the reason path. Freedom of Speech cannot possibly include 'lying' to investment public who rely upon the credit rating as one of the factors to make their investment decision. If this really hold truth, I think the Americans had done a great disservice to their forefathers' original intention of creating this 1st Amendment. BUT then again, this is an American cultural issue that I should not knock too much. I am sure there are Americans who think it is ridiculous to use the 1st Amendment to escape legal liability!

Leaders need to take charge here. Leaders with personal integrity and whose actions are based on ETHICAL ground. Otherwise, it will happen again as 'it is hard to keep the cats from reaching for the fish when YOU asked them to look after the fish!'.

May President Obama's financial reform bill get a strong support from the American people and hopefully, the lawmakers too. It will change the face of finance as we know it. Not more super profit from out-size gambling bets from the 'blue ribbon' banks? No more super bonus in the billions for the 'skilled (or lucky) traders' who masqurade as 'bankers' like in Goldman Sach, etc...?