LeMieux Amendment Passed
Robert Waldmann
I completely missed this.
From the final House Bill, click through (I can’t direct link) or find in the pdf “SEC. 6009. REMOVAL OF STATUTORY REFERENCES TO CREDIT RATINGS.” This removes the references to NRSRO from federal agencies and the law.
The LeMieux amendment is the language of SEC. 6009 from the House moved over, language which was missing in the Senate bill.
That is all statutary references to NRSROs are removed by both bills now being merged in the conference committee. Conference committees can do what they want, so the NRSRSOs aren’t deposed yet, but this is huge news and I completely missed it.
Update: Robert beat me to it. See LeMieux-Cantwell
Does this mean that the plan is to replace a crappy estimate of the quality of the assets that banks hold as their reserves with NO estimate? Because that couldn’t possibly cause problems.
I certainly can’t figure out a good solution to the central conumdrum here. Since governmental agencies (FDIC PBGC etc) guarantee a variety of financial institutions, they have a vested interest in the amount and quality of the assets of thos institutions. Wimpy’s promise of two hamburgers Wednesday in exchange for a hamburger Monday doesn’t cut it if I am the ultimate backstop to that promise. We need to be sure that the assets being held are good or we’re going to end up paying more when those institutions go belly up. We don’t really want the government deciding what assets are “good enough” and what their value is. One only needs to review the actions of the Fed buying up MBS securities from banks to see what political pressure can do, and that this is probably not what we want.
Unless you’re the sort of doctrinaire free market theorist who advocates getting rid of the FDIC etc., there simply is no easy answer.
@Jim
The main role of an NRSRO in existing law is to permit streamlined regulation of public offerings of investment grade debt, which amounts to less disclosure in connection with that debt. Much of the value of an investment grade rating is that it reduces the cost of securing capital from the public.
But, if regulators and investors both piggy back in NRSRO ratings (as they have done historically, and not without cause, as NRSRO ratings are usually accurate and the failure this time around was in a whole class of securities, not in their relative merit), then the only market participant putting information on credit risk into the system is the NRSRO and that information is very thin (a letter rating). This deprives the market of its biggest virtue which is the wisdom of crowds.
I agree that there is no easy answer. My proposed solution is different from sen LeMieux’s. I think the rule should be if you rate then you write CDS on 0.1% of the stuff you rated. Also the premium you charge for that CDS must be the average premium for instruments with that rating. In this case, if I think the rating is too high, I think I can take money (in expected value) from the ratings agency. So greed is enlisted to keep them honest. http://tinyurl.com/379b9ch
I think the idea is to have the FDIC etc set the standards rather than outsourcing to the NRSROs. This definitely means a government agency deciding which assets are good enough and what their value is. I agree that this is a bad solution, but I think it is not as bad as trusting the NRSROs whose money isn’t at stake and whose average reputation doesn’t matter. Moody’s has to be seen as about as good as S&P, but that’s it so long as NRSRO is written into laws.
I think there is a real benefit from decisions being made by theoretically independent bodies like the Fed and FDIC. They are not immune to political pressure but they do resist it some. In particular, the FDIC is fairly independent so long as it doesn’t blow its trust fund. If the kitty is empty, the head of the FDIC has to go begging to Congress. This is not a pleasant experience.
This explains my disagreement with Paul Krugman and Joseph Stiglitz over the PPIP where I think I can safely say that I was right and they were wrong wrong wrong http://tinyurl.com/yhwx74w. They are smart guys, but they discussed the leaked PPIP, not the actual PPIP, and confused two parts. One of them involved non recourse loans from the FDIC for 85% of the purchases. Another involved giving main Treasury great flexibility to make deals with investors. There was no program where main Treasury decided and the FDIC got stuck with the bill for losses beyond 15%. The FDIC had to approve deals in which FDIC money was at risk.
While they have a fairly good general grasp of economics, Krugman and Stiglitz missed that minor detail. They confidently asserted that the PPIP program was a raid on the FDIC trust fund. The FDIC did not allow its trust fund to be raided. Bair does not want to have to beg Congress for money.
In this case, the FDIC decided without any particular guidance from NRSROs. Clearly the political pressure was intense. The FDIC did not give in.
More like that please. And thank you Sen LeMieux.