"A wise and frugal government which shall restrain men
from injuring one another, which shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government."
(Thomas Jefferson)

Tuesday, August 23, 2011

'Too Big To Fail' Citibank CEO takes over S&P

The head of S&P is stepping down and is being replaced by the CEO of Citibank.  Do you mean to tell us that the only person qualified comes from one of the 'too big to fail' banks?  Why is anyone 'too big to fail'?  With those words their success in recent years is based on bailouts by the Federal Government which translates to our tax dollars at work.  The Feds prop up the banks so the rich get richer and the taxpayer gets the short end of the stick again.  If you try to save, you get paid next to nothing thanks to the Fed policy.

Now one of of those 'too big to fail' bank CEO's is going to take over the S&P rating system.  When is this going to all end so we get back to a normal business climate where the 'too big to fail' banks are split up and allowed to survive on their own merit not government bailouts?  
Musical chairs
by Russ Roberts on August 23, 2011 
From a WSJ alert: 
Standard & Poor’s President Deven Sharma is leaving the credit-rating firm at the end of the year, according to a person familiar with the matter. 
The credit-rating firm plans to announce Mr. Sharma’s exit on Tuesday before the markets open. Douglas Peterson, chief operating officer of Citigroup Inc.’s Citibank unit, will succeed Mr. Sharma on Sept. 12. Mr. Sharma will remain at S&P through the end of the year in an advisory capacity. 
According to his Citi bio, Peterson has been with Citigroup for 25 years. Citibank has been a huge beneficiary of government largesse (#2 recipient of emergency lending from the Fed–over $100 BILLION) as well as an eager participant in the affordable housing game in the 1990′s and early 2000′s. They are not a particularly healthy institution. Nor have they given any sign of understanding risk in the traditional sense. Given the help they’ve received from Washington, maybe their executives understand it all too well. 
I have tried a number of different additional sentences to summarize my thoughts but I keep crossing them out. The main thing to realize is that both Citibank and S&P have little to do with capitalism and everything to do with crony capitalism. This is a game of financial musical chairs where the government keeps the market from calling the tune. The cronies call the tune. 
I should add one more thing. People talk as if S&P and Fitch and Moody’s are independent private organizations. They are, sort of. But the structure of regulation empowers them. Without the regulations requiring their imprimature, I’d assume they’d be gone. Without the implicit support of the regulatory apparatus, why are any of the ratings agencies in business?

COMMENT on the POST:  
The SEC empowers them to be ratings agencies. The SEC and and the Fed allow only these triplet’s ratings to count for reserve requirements, counterparty assessments (AAA institutions deal only with other AAA institutions), etc. Thus, no rating agency can compete with them.
The triplets are not private in any meaningful sense. They are protected from competition and when they misrate MBS and CDO, as they did in the last decade, there are no consequences. There would be if they were truly private rating agencies in a competitive market. 
Regulating agencies provide cover for the large, politically connected firms at the expense of firms that are not large and politically connected. It is the regulator that creates Too Big To Fails, not the market. Once they are safely ensconced in the regulated fortress, protected from meaningful competition, they play their own game of fraud and incessant gambling. They’re safe from failure. can command transfers of wealth from you to them. 
All of that comes courtesy of government. 
Source:  Cafe Hayek

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