“The argument, which has held up so far in court, is that the rating agencies are just providing an opinion on credit quality, not a recommendation to buy. The courts have held they have no fiduciary duty. Whether that’s appropriate is another matter.”

This is an eye-opener to me. I used to practice medicine and I was asked to provide an opinion every day on health and disease. The thing is, i had an “obligation of means” (do your best to guarantee a professional-grade effort and diligence) and a fiduciary duty to my patients.

The courts have always held that health care professionals have a fiduciary duty, and rightly so. If the courts consider that rating agencies have no fiduciary duty in a line of work that can cost billions in investors AND taxpayers’ money, they are full of shit!

Why Congress hasn’t addressed this blatant lunacy proves Mark Twain famous quote:
“Say you are a member of Congress. Suppose also you were an idiot. But I repeat myself.”

Felix and I frequently disagree.

The two agencies are merely making different statements about the same practice. S&P is trying to maintain the ratings are consistent, when they aren’t; Moody’s is being more candid, but putting a spin on it.

I’ve seen tables, but I can’t recall the sources, which show the default rates across issuers and they are very similar for Moody’s & S&P. The articles in question (this long before the muni issue was hot) commented at some length about the highly inconsistent default results across issuers over prolonged periods. The agencies have been using strikingly tougher grading for munis, and lax standards for structured products, even before the recent problems.

And of course, both those patterns are consistent with what served them financially.

Aside from the fact that this had been their well-established policy, the reason that the agencies should have consistent marks across issuers is that in many cases, what credit quality of debt investors hold is restricted, either by regulation (capital charges, investment restrictions) or for fund managers, by their agreement with the investors), and those restrictions are defined in terms of rating agency ratings. Thus it’s important that an AAA (or BBB, same concept applies) mean the same thing across product, that’s been the regulatory assumption behind these rules.

Why? Well, look what happened with structured products. If you have ratings that are too high, you create an incentive for investors to buy those products, It’s permitted under their charter, but will carry extra yield, because that AAA really ought to be an AA or A, so it carries a higher yield. Again, before the credit mess got acute, many structured products were carrying big spreads over Treasuries for their AAA tranche (I heard 270 bp last May, which is massive). You don’t get free lunches on AAA paper. The market knew bloody well this paper wasn’t what the rating agencies said it was.

http://norris.blogs.nytimes.com/2008/03/03/a-dysfunctional-credit-market/

Parts of the credit market remained largely dysfunctional, with asset-backed issuance volumes down, high-yield bond markets effectively closed, and large backlogs of leveraged loan deals still awaiting financing. Against this background, bank balance sheets continued to be under pressure and financial sector spreads saw renewed widening from mid-January, adding to perceptions of systemic risk.”

QUICK: We also have talked an awful lot about what’s been happening with the bond insurers. You made a deal that you brought up on our air a couple of weeks ago, where you said you would take over the municipal bond portfolios for Ambac, for MBIA, for FGIC if they came to you. Did you hear from any of them? Did any of them take you up on that deal?

BUFFETT: Well, we heard from them, but we tossed our hat in the ring, and they tossed the hat back. But fortunately–it’s been fortunate for us, because we’ve been writing business that they insured, and we’re getting a far better rate than we offered to take it over from them. So here–we’ve written 206 transactions in the last three weeks, and we have been paid an average of 3 1/2 percent to take on business that they wrote at 1 percent. But we don’t pay until they go broke. So in effect, the municipality has to quit paying, and over here I’ve got the bond insurers. And it’s just–it’s the three you named plus a few others. And they have to go broke, and then we pay. So we’re getting paid 3 1/2 percent to be in a secondary position when we offered to do it for 1 1/2 percent in a primary position.

http://www.cnbc.com/id/23449591

Felix Salmon has a different explanation for some of the contradictions, http://www.portfolio.com/views/blogs/market-movers/2008/03/03/municipal-ratings-sp-and-moodys-diverge.

Moody’s and S&P don’t have the same approach. He also asks: Why, then, are their ratings almost always the same?

SPRINGFIELD, Mo. — The Freedom Financial Group, a subprime auto finance company that primarily purchases contracts via independent dealers, recently announced it has signed a $15 million, two-year, revolving credit facility with ReMark Capital Group, which is an affiliate of the Goldman Sachs Group.

According to officials, the facility is secured by auto receivables originated by Freedom Financial.

Basically, Freedom Financial specializes in the acquisition, collection and servicing of subprime auto loans that are purchased primarily from independent dealers.

“We serve as an alternative credit source of financing for dealers who sell vehicles to customers who have past credit problems or might not be able to secure financing from traditional sources,” Fenstermaker indicated.

Quote from today’s Bloomberg story about Muni ratings.

http://www.bloomberg.com/apps/news?pid=20601009&sid=axNgJki.D7xc&refer=bond

The Lauter family changed their surname to “Lauder” in the late 1930s. Her older son, Leonard Lauder, was chief executive of Estée Lauder and is now chairman of the board. Her younger son, Ronald Lauder, is a prominent philanthropist, a Republican political appointee in the Reagan administration, and developer of property in Berlin, among other endeavors.

Example of trickle down economics as we await hyperinflation):

Fed Nominees Pressed on Political Ties
Questions Raised Over Their Service in Administration, but Confirmation Is Likely
By Nell Henderson
Washington Post Staff Writer
Wednesday, February 15, 2006; Page D03

http://www.washingtonpost.com/wp-dyn/content/article/2006/02/14/AR2006021401909.html

President Bush’s decision to elevate three former administration economic advisers to the Federal Reserve Board prompted questions yesterday about whether they would be able to steer the economy independently of the White House they have served.
“This is inevitably going to create the impression that the board is more political than in the past,” Schlesinger said. “This creates more of a burden on Bernanke and company to prove they’re not taking their cues from [White House Deputy Chief of Staff] Karl Rove.”
Warsh, 35, who has served on Bush’s National Economic Council for the past four years, is a special assistant to the president for economic policy.

See Also: Jane Lauder is joining the migration of the well-heeled from their traditional breeding ground east of Central Park to the treeless precincts of Lower Manhattan.

She plans to occupy a newly purchased $12.63 million penthouse triplex with a terrace in a recently converted building in NoLIta.

Ms. Lauder, 31, the daughter of Ronald Lauder and the granddaughter of the cosmetics pioneer Estée Lauder, is vice president for marketing for the Estée Lauder brands American Beauty and Flirt! She is married to Kevin M. Warsh, 35, who works in the White House as a special assistant to the president for economic policy. Mr. Warsh has his primary residence in Washington, according to the White House press office.


DISGUSTING THAT WE HAVE THIS KATRINA DESTROYING AMERICA!!!

Wmt and the big boxes have helped set a tone for discretionary abuses of local policy, so dont be too fast to think that local small town manipulators will be less greedy than someone with a larger market share.

The only good thing about distribution at a small scale, is that voters can now address this abuse by looking at the accounting and staying on top of local accounting, budgets and the issue of bonds, which may the way this is solved!!!