Archive for October 23rd, 2008

It could be structured by cows and we would rate it!

October 23, 2008

I had pointed to the Lehman and AIG Hearing and had also summarised Richard Fuld’s testimony.

The same Oversight Senate Committee had a hearing on credit rating agencies. The findings on the hearing are not comforting at all. I only read the opening statement by Chairman Waxman. The committee has shown evidence that things weer quite messy in these elite halls of fame.

In October 2007, a Moody’s management report said:

We heard 2 answers yesterday: 1. people lied, and 2. there was an unprecedented sequence of events in the mortgage markets. As for #1, it seems to me that we had blinders on and never questioned the information we were given. … As for #2, it is our job to think of the worst case scenarios and model them. … Combined, these errors make us look either incompetent at credit analysis, or like we sold our soul to the devil for revenue.

At S&P:

The documents from Standard and Poor’s paint a similar picture. In one document, an S&P employee in the structured finance division writes: “It could be structured by cows and we would rate it.” In another, an employee asserts: “Rating agencies continue to create [an] even bigger monster — the CDO market. Let’s hope we are all wealthy and retired by the time this house of cards falters.”

I had posted a while back that soul searching was needed at rating agencies. A complete overhaul is needed to thew way these institutions function. Let me read the testimonies and point if I find anything interesting.

UK National debt and battle of waterloo

October 23, 2008

Mervyn King has given a speech after a long long time ( The last speech was on 18 June 2008.

In this speech King says why the recapitalisation of UK Banks was important. In sum, move was not to save the banks but to save the economy from the banks.

What was however amusing was his discussion of the govt. deficit. Recapitalisation would lead to higher government deficit. He says:

The cost of supporting the banking system will inevitably raise the level of national debt. Managed properly, however, such a rise in national debt need not prove inflationary. Indeed, within a reasonable period it should be possible for the Government to reduce its stake in the banking system, for example by selling units in a Bank Reconstruction Fund, and repay the additional debt that had been issued. That is one difference between past increases in national debt in times of war and the increase now to pay for recapitalisation of the banking system which involves the acquisition of an asset.

To help understand the difference between war-times and current times, King tells you a story:

Let me take you back again to 1958. In the very first television interview given by a Governor of the Bank of England, Cameron Cobbold explained national debt to RobinDay on “Tell the People”, the highlight of ITN’s Sunday evening schedule fifty years ago. Here is the exchange:

Cobbold: The National Debt represents the sums of money which the Government have over the years borrowed from the public, mainly in this country and, to some extent, abroad. That is really the amount of expenditure which they have failed over the period to cover by revenue.

Day: Have we paid for World War II?

Cobbold: No.

Day: Have we paid for World War I?

Cobbold: No.

Day: Have we paid for the Battle of Waterloo?

Cobbold: I don’t think you can exactly say that.


New Zealand lowers interest rates by 100 bps

October 23, 2008

Reserve Bank of NZ has lowered its interest rates by 100 bps to 6.50%. NZ did not join the central bank coordination to cut rates.

This rate cut is however in line with the 100 bps rate cut by Australia. Previously, NZ had cut rates by 50 bps to 7.50% on 11 Sep 2008.

It seems to be rate cutting season of central banks. I however still fail to understand how such dramatic rate cutting would help? When banks don’t want to enter the markets and there is absolutely no confidence, how would lowering the interest rates help?

Another thing which I don’t understand is as follows. The usual claim of central banks is monetary policy works with a lag i.e. when inflation is high, central banks increase rates gradually and the impact on inflation is seen after some months. For advanced economies, the lag is about 6 months and for emerging economies it is about 9-12 months. If this is the case, it should apply to opposite scenario as well. If central banks are lowering rates, it should impact with the same lag. So, how will lowering interest rates impact the situation immediately? And that too in such frozen times? Why are they panicking so much?

Assorted Links

October 23, 2008

1. WSJ Blog points Bernanke still avoiding the R word. WSJ Blog on whether asset prices can be targeted by mon pol

2. Macroblog gives a reality check on the eco forecasts

3. Rodrik points to old wisdom from James Tobin

4. ALB points how households don’t diversify risks adequately

5. FCB points to how ridiculous things are at credit rating agencies

6. DBB points Belarus has undertaken reforms making it easier to do business

7. JRV comparesconditions in India in Oct 2008 and in US/Europe in Aug/Sep 2007

8. ACB on the importance of good quality roads.  

9. MR points Cayman islands are not doing badly at all

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