Skilling wants outta the slammer now and is suspected to not call the regulating judge an asshole, but this is probably just a matter of paying the right person to look the other way and call Enron shareholder assholes?? Pardon me for my French… Sorta fits the MO of rating agencies though and the lack of integrity that these top notch snake oil crooks live by!

Blueprint For Reform
http://www.futuresindustry.org/fi-magazine-home.asp?v=p&a=1224
NFA, the futures industry’s self-regulatory organization, emphasized the historical and cultural differences between the CFTC and the SEC. The CFTC’s primary mission is to protect the price discovery and risk management functions of the markets, NFA said. Futures markets have mostly institutional participants, and the CFTC’s philosophy and internal culture encourage innovation and competition. In contrast, the SEC’s primary mission is to protect investors, and its internal culture tends to be more risk adverse. One telling example of the differences in their outlook is in their views regarding short sales, NFA said. “To the SEC, ‘short sales’ must be restricted, while to the CFTC they are the very life blood that ensures [that] futures prices mirror prices in the cash markets. To the SEC, ‘speculation’ has a negative connotation, while to the CFTC it provides the liquidity that makes futures markets run.” Given the differences in their histories, philosophies, and markets, the two agencies are simply “incompatible,” NFA concluded.

This type of un-regulated collusion did provide the perfect storm and one can only hope that just as in the Perfect Storm movie, these derivative fisherman that stuffed their boats beyond capacity, hit the tsunami waves of reality and sink to the deepest depths of the dark sea from whince they came! And if God is out there, ake along the Bush conspirators in the hull and all the politicians that bought tickets in this un-sinkable voyage to chaos! A pox on them all!

[1] At the request (i.e., lobbying) of the I-banks the government loosened the criteria for financing residential real estate.

[2] The I-banks gradually became overwhelmed by the amount of MBS, CMBS, etc. that they were able to securitize and send into outer space (read: pension funds, insurance companies, non-US banks), and thus needed a way to get a broaden the investor base for this garbage. This huge unexpected increase in volume is directly the result of Greenspunk keeping rates too low for too long — but again, this was at the request of the I-banks.

[3] The I-banks approached the rating agencies and coluded with them to force the monolines to “wrap this crap.” The I-banks needed a “ultimate bagholder” for the residual risk should this crap start to blow-up (note: this is where we are now).

[4] The rating agencies then put the hammer to the monolines who were eventually all too happy to comply given the increase in seemingly risk free revenue and profits.

But like all ponzi finance schemes the jig is up once there are no new patsies to be had…once the subprime begin to implode, that was the end of this financial circle jerk.

I have worked both in the structured finance side of a rating agency, and in strategy at a financial guaranty company (bond insurer). (All in the 90s, before all this nonsense began).

I can certainly confirm that A) for a monoline, maintaining the AAA is the highest priority, and the threat of losing it trumps all other business considerations. B) The rating agencies certainly encouraged a diversified book of business, although in my experience they tended to view any new business with considerable skepticism, and needed considerable evidence that the insurer had the skills to assess different sorts of risk.

Further more, I can also say that in my experience, there was little contact between the side of the rating agency providing ratings on monlines, and the side rating the structured financings. The insurance group would tell us how to calculate a capital charge as it related to insured pools of assets, but I think that suggestions of active collusion with the goal of generating more structured finance business is far fetched.

Just my two cents, and worth about that much.

As Yves says, the Rating Agencies were naive in their view of the structured finance business. One can “cynically wonder” if they were influenced by the fees they were earning in that business. At this point though, all anyone is doing is wondering cynically. Its just as probable, if not more so, that the agencies were just naive.

The threat of removing the AAA rating might be construed to be like extortion/blackmail.

Is this grounds for a lawsuit against the agencies?

Can the bond insurers sue the rating agencies?

Or does the agencies’ teflon shield (”free speech”) still remain intact?