Credit where credit’s due, part 1


It is a few weeks now since my business partner, Paul Gambles, compared long suffering US Treasury Secretary Tim Geithner to a transvestite athlete but it seems to have caused quite a stir, so for anyone who missed it, here is part 1 of what he said to Money Channel’s Banphot Thanapermsuk when he asked Paul about the recent performance of credit ratings agencies:

“Quite apart from just looking at the individual actions that the credit rating agencies are taking, which are very interesting in themselves, I think there’s also a bigger picture here that’s to do with the whole investment market, the whole economy and even everything to do with human behaviour.

“When you play golf, if you take one shot more than you’re supposed to take, they call that a bogey and the reason for that is that centuries ago in Scotland, people used to imagine that they were playing against an imaginary opponent, a bogey man, and if they got one shot less than the bogey man, they won the hole, so they had someone to blame, basically, if they lost. And I think one of the questions about the ratings agencies is, do they just exist so that there’s somebody there who can quantify things that really are measurable? That’s how credit rating agencies really started out in life. At that stage, they were working for investors. Investors used to ask credit agencies to assess individual securities and the agencies would come back with reports saying, ‘yes it appears their credit is good and their business model is good,’ but they were paid by investors to do that work. The other thing is maybe we’re expecting these guys to go and measure things that really aren’t quantifiable at all. We’re asking them to give ratings on things that you can’t measure.

“Nassim Taleb has written a couple of books about the fact that we all want to create order when actually things are completely random. Both ‘Black Swan’ and ‘Fooled by Randomness’ explain this concept that we all try to arrange things into patterns when patterns maybe don’t really exist at all. I think one difficulty for ratings agencies is that in 2011/12, we don’t really know what they are. We don’t really know exactly what job we’re expecting them to do. They’re no longer just working for investors. If investors want to get information about a particular stock or bond, they don’t really base it on what a particular credit rating agency says, and they don’t really have that direct relationship any more. The credit agencies aren’t really working for them. In 2008, we became very uncomfortable with the fact that the credit rating agencies had been working for the companies whose sub-prime securities they had been rating. That made us very worried about conflicts of interest. We’re not really sure what credit rating agencies do and who they do it for.

“If I can use another sporting story perhaps – when we saw Secretary Tim Geithner famously go on TV to say it was a terrible decision for S&P to cut the US credit rating from AAA, we were reminded of a couple of female athletes in the 1930s, Stella Walsh and Helen Stephens. In the 1936 Olympics in Berlin, Helen Stephens beat Stella Walsh to the gold medal. Stella Walsh and all her fans were so upset that they accused Helen Stephens of being a man. As a result, Helen Stephens had to undergo a lot of testing, and it turned out she really was a woman. She may have been bigger and stronger than most but she really was a woman. The allegations were completely unfounded.

“About 50 years later, when Stella Walsh died, it actually turned out that Stella Walsh, the woman who had accused Helen Stephens of being a man, who had been making all these unfounded accusations, really was a man. There seems to be an eerie echo of this when Secretary Geithner turned around and said the downgrade was a bad decision by the S&P. After all, the main reason why the US rating was downgraded was because of what Tim Geithner’s predecessor, Hank Paulson, had been doing when he was Treasury Secretary, and what the FED under Ben Bernanke had been doing. They had been pursuing this totally irresponsible monetary policy that had created so many Dollars in the system, and so many liabilities that we still don’t know how far they go. So blaming S&P smacks of hypocrisy.”

To be continued…

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]