As has been widely reported, Standard and Poor’s (S&P) credit rating agency is under criminal investigation for the “crime” of rating various financial instruments as low risk (“triple A”) when, in fact, these financial instruments were based on worthless mortgages (worthless as the original home loans were paid to people who had very little chance of ever paying them back).
No doubt S&P did not do their job of rating risk very well. After all S&P is part of a de facto government established cartel of ratings agencies (the vast level of regulation makes very difficult for new companies to compete in the credit rating business) and the government wanted its “affordable housing” policy to continue and part of that was for the original lenders (the banks and other such who had made loans to people who could not pay them back – partly to avoid legal action under the Community Reinvestment Act and partly because the Federal Reserve system was making lots and lots of cheap credit money available and it had to go somewhere) to be able to pass on the loans as securities and other financial products.
Also, of course, S&P (like the other ratings agencies) is paid by the people it is rating (not the people who want to check credit worthiness) so it has a perverted incentive to not look too closely at the financial products it rates – and the mortgage backed financial products (i.e. the pass-the-parcel-before-it-blows-up products) paid very well – especially as financial people (as financial people are apt to do) were using the mortgage based financial products as the basis for pyramid schemes – building vast constructions of debt upon them.
However, every single word of the above could be applied to the larger “Moody’s” Credit Ratings agency. For example, it was the credit rating enterprise that rated the (utterly demented) government backed (and government created) “Fannie Mae” and “Freddie Mac” (the organizations that own most American home loans) as perfectly safe.
Yet Moody’s is not under criminal investigation – why not?
By an odd coincidence S&P downgraded American government debt about a month ago – and (after observing the hostile reaction of the American government) Moody’s chose not to. Could this (as some have claimed) be the latest example of the “Chicago Way” where commercial “friends” get rewarded politically – and “enemies” get punished?
The existing regulations already gave the government (via such agencies as the SEC) vast (and, to a great extent, arbitrary) power. But the passing of “Dodd/Frank” (an Act of Congress named after, arguably, the most corrupt members of the Senate and the House of Representatives at the time) completed the process of turning the American financial system and markets it a political toy – totally under the control of the government. And presently it is a very corrupt government – dominated by Chicago Machine people (from the President down).
However, it is hard to have much sympathy for the financial companies and traders – they are, after all, addicted to government subsidies and have long stopped being anything to do with “free enterprise”.
For example, whenever a vast new government subsidy orgy is announced (such as a new round of funny money creation by the Federal Reserve – or a promise of a vast bailout for European banks) the markets go up not down. The long term is of no interest to most players on the market – they care only about the new money that government creates (from nothing) and their personal chances of getting some of it.
They (most of the financial elite) and the governments (for the other governments are much the same as the American one) are made for each other – it is just a shame that the rest of humanity has to live on the same planet as these people.