Saturday, August 22, 2009

Do you?

Societies, do you want your bankers to know about credit risks or do you give them credit rating agencies? (Like in: Parents, do you want your children to know about north, south, east and west or do you give them a GPS?)

Thursday, August 20, 2009

And, what about some minimum capital requirements to cover for the credit rating agencies’ exposure in credit risk opinions?

If the banks invest in AAA rated securities then these are risk-weighted by the regulator to only signify an exposure of 20 percent and so if the banks invest $1 trillion of 1.000 billion dollars in these securities they have to put up only $16 billion in equity, the result of multiplying the now risk-weighted exposure of $200 billion times the basic capital requirement of 8 percent.

And so $16 to cover $1.000! The question that hangs in the air is why then do not the rating agencies need some capital requirements to back up the accurateness of their ratings.

I mean after taking away the $16 billion of equity of the banks their opinions are sort of backing the remaining $ 984 billion. Is it prudent to trust the word of the credit rating agency so much? You tell me!

We live in a crazy world, our financial regulators in Basel were so naïve and gullible they did not even know they were setting the credit rating agencies to be captured.