Yesterday I attended a lunch-time briefing with the European Parliamentary Services Forum on the EU’s plans to regulate the Credit Ratings Agencies.
Of course the EU hates these agencies. Along with the bankers, they’re a convenient scapegoat for the €uro crisis. Heaven forefend that we should blame the real culprits — the politicians who set unrealistic targets for lending and home ownership (Jimmy Carter, Bill Clinton); the Central Bankers (Alan Greenspan), and their European counterparts, who kept interest rates far too low for far too long, figuring that if they controlled consumer price inflation, then asset inflation would sort it self out in due course. It did, in spectacular style. That’s the problem.
Most of all, Brussels doesn’t want any fingers pointing at the main underlying cause of Europe’s macro-economic disaster, but we all know what it is. It’s called the €uro. We predicted that it would all go spectacularly wrong, and we were fully vindicated by events.
Admittedly the ratings agencies are a soft target. They were hugely and publicly wrong on their assessment of structured financial products, the bonds that were made up of cut-and-diced junk mortgages, yet were rated AAA assets on the balance sheets of the banks. The agencies should hang their heads in shame. They were wrong, wrong, wrong.
But then, so were we all. A mere fraction of one percent of investors bet against those bonds — and made their fortunes. Anyone who had predicted ahead of time that AIG and Lehmans would go belly-up would have been dismissed as mad (rather like those of us who predicted disaster for the €uro). So yes, the agencies got it wrong, but they were in good company.
Besides, if you pay someone to predict the future, you have to recognise that they may get it wrong, and you have to make a judgement as to whether their advice is worth paying for, or not. In a free market, the client should choose whether to use the agencies, and which one to use.
We had a high-profile team of speakers in Brussels. Carol Sirou of Standard and Poor’s (above), plus BNP, JP Morgan, Santander, the European Commission and the European Assn of Corporate Treasurers. The general view of the industry was that while regulation was necessary, the Commission’s proposals (including “rotation” — a requirement for clients to change agencies every so often) did not help, and could make matters worse. It seemed to me that they presented solid arguments, not just special pleading. Yet again (in Christopher Booker’s immortal phrase) the Commission is using a sledgehammer to miss a nut.
Why the antagonism to the agencies from the Commission? Because they blew the whistle on the indebtedness of €uro member-states and (in the view of the Commission) exacerbated the crisis. But in fact they merely told us what we needed to know. The scale of the €uro crisis can’t be hidden by keeping quiet about it. The Commission is shooting the messenger, not addressing the message.
There was even a proposal to establish an official EU ratings agency. You can imagine just how credible that would be.
The Commission should stop dumping on the ratings agencies, and instead address the €uro currency itself, that vast bankruptcy machine that they have created as a misplaced political gesture. In a free society, clients must be free to buy advice wherever they choose, and agencies must be free to form an opinion and sell their advice. That’s fundamental to a market economy. It’s about free speech and intellectual property rights.