Richmond Fed on "Incentivisation" and Ratings
Of all organizations, the Richmond Fed was the last place one would expect a broad scope critique of rating agencies. Yet in a piece released today, this is precisely what the bank did, potentially paving the way for the next big whiplash as ever more politicians are already contemplating the next major scapegoat for when the market turns out to have been priced in just a little too much to perfection.
Alas, the problem with incentivisation, ratings shopping, and other less then virtuous approaches that the raters have been blamed for, have to start at the root of the problem, which, as is becoming prevalently clear, is Wall Street. The vicious triangle of Wall Street - Rating Agencies - SEC, has to be seen for the conflicted construct it is, and approached appropriately, if 3rd party "independent" raters can hope to salvage their business models, let alone their reputation.
An curious excerpt from the Richmond piece focuses on a topic near and dear to anyone who rebels against a tiered market:Ratings are intended to be simply one tool of many for reducing asymmetric information, however. This logic was spelled out in the SEC’s initial regulations requiring institutions to rely on NRSROs. But the profitability and complexity of the securitization market in recent years induced investors to ignore this caution, a fact that issuers and rating agencies may have intentionally or unintentionally exploited.
It is precisely the concept of asymmetric information perpetuation that is the heart of Wall Street, as in its various forms, it allows those "connected" to, for lack of a better word, abuse those who are not. This asymmetry is prevalent and evident in every aspect of Wall Street (that has gotten public attention so far) - Flash, HFT, the "huddle", ratings, preferred clients, selective bid/ask spreads, and many other topics that the mainstream media has not (or dares not) touch upon, but which Zero Hedge has every intention of disclosing for public consumption.
I humbly disagree with ZH (we can do that, you know, we don't all have to be on the same team on everything - I said the same thing at Denninger in regards to Dallas Fedhead Fisher's claim that the Fed was not the Treasury's bitch) on his statement.
To quote: "Of all organizations, the Richmond Fed was the last place one would expect a broad scope critique of rating agencies." I am going to have to shake my head and say uhhh no, you've got them all wrong. Actually, Richmond Fed is the perfect source for a well-founded criticism of moronic behavior. Remember, they're my favorite bank for a reason and I don't make it a habit of rubbing Fed balls just for kicks. Come on, this is the same Fed bank who spat out this awesome guy. Richmond publications are always good for an exciting read and holy shit, they've got libertarian BB&T, what more do you want?!
So yeah. This is exactly what I expect from Richmond, ZH. You aren't hip to the 5th District yet?! I highly recommend you read up on "The Richmond mentality" because it's about as closely aligned to our own as it can be, considering, well, they're a Fed bank and all. We forgive them.
We fully disclose our love and admiration for Richmond Fed President Jeffrey Lacker (and his awesome hair), especially since he took jabs at Timmy Geithner where and when he could while Geithy was on his way out. Save us, JL!
Oh, and the ratings agencies are still full of shit. That is all.