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Portfolio > ETFs > Broad Market

LTCI Watch: Ratings

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Having intelligence, a great education, good manners and good shoes are great, but they do nothing to control fate.

Paying chief executive officers $100 million per year may make directors feel as if they have done something about the wretched dice of chance, but, hey, at some point, it doesn’t matter what the CEOs make. The dice roll and heads roll.

Similarly, bond rating analysts may have actuarial credentials, graduate degrees from top universities, and super computers registered with the NSA. But, at some point, it doesn’t matter how many degrees analysts have from Harvard, MIT and the Sorbonne. At some point, the dice roll.

So, to me, the idea that credit rating agencies can reliably predict which companies will default on their obligations in extreme conditions has always seemed absurd. 

But, on the other hand, the rating agencies do get armies of intelligent, educated people to look hard at debt issuers, make sure the issuers really exist, and come up with reasonable predictions about how markets and issuers might perform.

They apparently suffered from conflicts of interest when they were looking at mortgage-backed securities in the late 1990s and early 2000s, and they may have been overly kind when assigning ratings, but they also issued reports that gave readers data and analytical tools the readers could use to think hard about how stable the mortgage-backed securities market really was.

See also: Industry Starting To Recover From The Stresses Of Last 3 Years

Meanwhile, the Federal Reserve Bank has intentionally yanked interest rates up and down like window shades over the past few decades, and it never seems to make much of an effort to even acknowledge, let alone quantify, that financial stress it’s adding to the market, including issuers of long-term care insurance (LTCI), as it intentionally tries to pull the “invisible hands” that move the economy into positions it happens to like.

So, one arm of the federal government has just imposed a $1.5 billion fine on Standard & Poor’s for problems with the ratings S&P gave to mortgage-backed securities. That fine is big enough that it could hinder, or even stop, any sincere, intelligent efforts company analysts are making to monitor the securities now on the market, and the effects of Fed actions on the securities now on the market.

Meanwhile, another arm of the government is intentionally tying the invisible hands of the market in such a way that, eventually, the strings will snap and the hands will whirl around and slice off some heads. 

The government is like a vandal who goes around tying string in the works of the clocks in a clock museum, then gets mad at the security guards for not being very good at keeping him from ruining the clocks. Maybe the government should worry more about the strings it’s tying in the works and less about the analysts trying to understand the strings.


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