Ratings Revolution?

Last weekend, I wrote about the Ratings Agencies, and how they were getting a partially bum rap.  Specifically, when your job is to use history to measure the present, it seems a bit much to condemn you for not throwing out history.

On the other hand, the power of the ratings has been magnified to the point that uneconomic behavior can be the result.

This is not uncommon – regulatory arbitrage is one of Wall Street’s favorite permanent money makers. For a Wall Street dealmaker, nothing works better than having different types of investors who have different sets of capital reserve requirements.  The investor type with the lowest capital requirement will have a higher bid than the others, pretty much no matter what the actual risks may be.

It was with some amusement that I read the Press Release from the NAIC (National Association of Insurance Commisioners) about their decision to replace traditional rating agencies when it comes to projecting losses on residential mortgage holdings.

My amusement stems from the NAIC moving to undermine the stranglehold the Ratings Agencies have over our debt capital markets just when the NAIC itself is being threatened with irrelevance.

Here’s what I mean:

Besides being the first time the ratings from the traditional ratings agencies is being rejected by a major group of regulators, this is also a move being made by the last standing non-Federal regulators with real power.  The question in my mind is how long the NAIC will have its core strength as primary regulators for the insurance industry.

It’s been a favorite slogan of the anti-insurance reform crowd to claim that “buying insurance across state lines” will solve all our monopolistic ills in health insurance, so it’s ironic that exactly the same people who want that result are the ones who don’t want a “Federal takeover” of health insurance.

What, pray tell, is it when you pass a Federal law that removes state supervision of insurance companies and moves that control to a Federal regulator?

The last time this happened was during the Savings and Loan crisis of the 80’s.  I was among those who thought that Congress was singing one tune and dancing to another when it defenestrated state banking regulators that covered most thrifts, and replaced them with a single Federal regulator called the Office of Thrift Supervision (OTS), reporting to the White House through the Secretary of the Treasury.

For those that came in after the movie began, the OTS was the hapless “regulator” charged with overseeing AIGFP, the most expensive lapse in supervision yet seen in world capitalism.

Are we really ready to take another huge chunk of our economy and move it under a new regulator, only to suffer the same risk that the staff of that regulator will know without being told that their path to maximize personal reward is to do whatever the companies they regulate want them to do?

At least under state regulation, it’s hard for companies to control all fifty regulators.  With just one national office, let’s stop and consider how well it worked with the SEC or the Interior Department.



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