I have had an intense dislike of rating agencies for almost 30 years. It all started when credit cards were no longer given to trusted clients but to people with most suitable profiles. For many years I had been a "trusted" client and used credit cards as a sensible part of running my working life. I traveled extensively and a credit card was a tremendous convenience enabling me to work overseas for several months while carrying only a modest amount of cash.
My payment history was erratic ... I paid down the balance when I returned to the USA, and ignored all of this while I was travelling. I did this for about 15 years, and it worked very well. And then along came the "credit bureaus" and their "profiling". My erratic payment history earned me very low marks and my interest rate shot up from almost nothing to something over 20%. In all of history this type of interest charge has been called "usury" and has been illegal ... but not now in modern banking! I have not had much nice to say about credit card companies and the "credit bureau" world since that time. They have adopted technology and use it to "profit" and the concept of "service" has been eliminated.
In the Community Analytics (CA) system of metrics much of the profit of the credit card industry comes from value destruction for the clients who most need a good service! It would have been nice for my old ... and very good ... banking relationship to have transferred to the new technology based profiling system for credit cards ... but it never did. It was an early warning of worse to come!
Rating agencies are nothing more than a bigger version of the credit bureaus. They do more sophisticated mathematics, but at the end of the day they produce a simple metric to represent the quality of the underlying security. My impression is that rating agencies are doing complex mathematics that I cannot understand, and very little of common sense that I do understand. I have had conversations about some of the modeling ... and I know some of the real world situations to which the models relate ... and the lack of understandable correlation is mind-boggling. Of course, rating agencies are not being paid to provide common sense assessment, they are paid for the complex and totally opaque conclusions that result in the "rating". They have become major money makers in the Wall Street scene!
Most of the time nothing bad happens ... and it really does not matter whether the rating was AAA or something much lower. But when there is turmoil ... which there is from time to time ... it is only then that the true underlying strength of the security becomes apparent. The rating agencies labelled an awful lot of really low grade securities with a Triple A rating ... showing that either (1) their models are not worth very much; or, (2) they function in a perfectly fraudulent manner. It is difficult to know which. Both are bad news for a serious society.
In other posts I have spoken well of the way Goldman Sachs handled the sub-prime mortgage debacle and the fall out from this. By contrast, I think that the work of the rating agencies was a central flaw in the debacle, and I see very little that suggests that they contributed anything but dangerous misinformation into the run-up to the crisis.
What am I missing?
I am 70 years old, well trained, experienced and mad as hell. The state of accounting and accountability is appalling ... with everyone talking and nobody doing much that is effective. Nobody seems to have a clue where so much money has been consumed!
I was first associated with international relief and development assistance (ORDA) activities in the early 1980s. In a varied career have been a corporate CFO, cost accountant and factory manager ... as well as doing assignments in a variety of international situations. I know how powerful good accounting and management information can be.
But I am appalled at the state of accounting and accountability in the ORDA community ... in the past and continuing now. Why is transparency and accountability talked about so much? Why is accountability never done? The current situation in Haiti is an accountability mess. A little progress in understanding how much money has been mobilized ... but little or nothing on where these moneys have gone and what has been accomplished. At best, someone will try to lock the stable door when all the horses have gone! This is foolishness at its best!
How might the problem be addressed? ReliefWeb postings are helpful ... but they are a piece of the journalistic framework. We need an accountability framework ... and one that is totally accessible to the public.
My attempts to connect with major users of resources to talk about the accountability issue have gone nowhere ... and others report the same.
Good accounting and accountability are not difficult ... and they solve a big part of the corruption problem ... but they do require commitment from the top of organizations which has been sadly missing for the best part of the last 25 years!
What can I do? What can we do?