Regulate the Credit Ratings Agencies

The Obama Administration Prefers Fishing Expeditions to Structural Change

Looking to refinance your mortgage with a shiny, new rate, but your FICO score is a few points shy of the minimum requirement? Why, just hire Experian to review your financial details and they will find ways to tweak the results on your behalf. For a few hundred dollars you can save thousands in interest costs!

Wait! You can't do that, can you? Isn't that illegal??

Well, yes, if you are a consumer, where credit ratings are regulated by the Fair Credit Reporting Act (FCRA), but not if you are a corporation who is planning a bond issue.

But, isn't that a serious conflict of interest? I mean, shouldn't the credit rating agencies be working for the institutions and individuals who rely on their ratings to decide whether or not to subscribe to the bond issue?

Of course it is, but there is no FCRA for credit ratings agencies like S&P, Moody's, Fitch, or even Dun & Bradstreet, which tracks small and medium-sized business credit-worthiness. They operate in a completely unregulated environment where they can say whatever they want, with legal impunity.

Wait, they completely missed the collapse of Bear Stearns and Lehman Brothers, among others. Pension funds lost millions, but they are not liable for their mistakes?

Nope. If you ask them, they are simply expressing "opinions" which are shielded by the First Amendment, and a long series of court decisions has supported them in this position. And, now the Obama Administration is taking them back into court on a $5 billion dollar fishing expedition, alleging that S&P knew more than it told and so are therefore liable to those who lost money by following their advice.

However, what the Administration should be doing instead of seeking to hit S&P with a slap on the wrist or extract some face-saving settlement is to radically alter current public policy and give the Treasury Department or the Securities and Exchange Commission the authority to regulate any company that wants to provide credit ratings on U.S. institutions.

Why is the credit worthiness of households important enough to have regulations on how the information is collected and disseminated, including how this process is financed, but money market investors are left to the wolves? Why are our pensions less important to our government than our credit card accounts? Why is the process leading up to the mortgage loan highly regulated, but when an investment bank packages these mortgages and sells them to investors is the process without oversight?

Failing to regulate the commercial credit reporting agencies led to bad decisions and a financial perfect storm. If we don't draft new authorities to structure these businesses, change how they collect their fees, and make them responsible for the reports they issue it is just a matter of time before it is 2008 all over again.

Where is Our Peace Dividend?

Faced with a gargantuan federal budget deficit, the U.S. government will have to find ways to trim the budget by cutting discretionary spending. And, what discretionary spending category tops the list? The budget of the Department of Defense. The Pentagon commanded $683 Billion discretionary dollars in the 2012 budget, nearly TEN TIMES as much as any other discretionary spending category (the Dept. of Health and Human Services, including Medicare and Medicaid, was a distant second at $84 Billion).

Why, at a time when one could argue that we are not really in open war with anybody, anywhere, are we spending over $2,000 per man, woman and child in America for our nation's defense? Is this level of spending during peacetime not a form of tyranny of which our Founding Fathers warned us? And, aren't we at MUCH GREATER RISK OF WAR AND CONFLICT in the future if we maintain such a large military complex WITH NO GOOD WAY TO OCCUPY ITSELF APART FROM WAR?

I do not question the patriotism of the men and women who volunteer to serve in our Armed Forces, but I do question a paradigm that makes cycles of war and conflict a self-fulfilling prophecy while not truly advancing U.S. economic interests in any significant way.

It is my opinion that, if there ever were a time when we should reap a "peace dividend" by making major cuts to our defense budget, that TIME IS NOW.

Note: People will argue that I am wrong here, that we ARE at war, in fact the "War on Terror", which includes Operation Enduring Freedom (currently in the Phillipines, Afghanistan, Horn of Africa, Trans-Saharan Aftrica), and Operation Freedom Eagle in North-West Pakistan. However, these operatinos, which are as much CIA intelligence and drone operations as military engagements, and which are open-ended without any clear timetable or measurable objectives, do not rise what I would classify as "open war", which is defined as "any overt and demonstrative combat employing conventional forces and legitimate resources, as opposed to covert or clandestine operations."

Where We Are Today

 

"In time of actual war, great discretionary powers are constantly given to the Executive Magistrate. Constant apprehension of War, has the same tendency to render the head too large for the body. A standing military force, with an overgrown Executive, will not long be safe companions to liberty. The means of defense against foreign danger, have been always the instruments of tyranny at home. Among the Romans it was a standing maxim to excite a war, whenever a revolt was apprehended. Throughout all Europe, the armies kept up under the pretext of defending, have enslaved the people."

-- James Madison, Addressing the Constitutional Convention
Philadelphia, June 1787

How Best to Accessorize for the Upcoming Assault Weapons Ban

At the same time that the U.S. government is pushing to disarm the general population, the Department of Homeland Security (DHS) is dramatically increasing the hardware and firepower that it has at its disposal to use in domestic federal law enforcement operations:

• DHS has acquired at least 16 MRAP vehicles, such as the one displayed above, and has outfitted them for use on U.S. streets, courtesy of the U.S. Dept. of Defense (DoD). The DoD has another 2,700 of these that are going to be out of work after the U.S. withdrawal from Afghanistan, so I suspect more will be getting a new paint job and heading to DHS.
• DHS has ordered over 1.6 billion rounds of ammunition of various calibers, or five rounds for every American citizen.
• DHS has ordered over 7,000 "Assault Weapons", the same exact weapons they seek to ban, except these are "select-fire" which means they can fire semi-auto, 3-round burst, or full-auto, while civilian models are limited to semi-auto only.

It seems that the President, and DHS Secretary Janet Napolitano, are concerned about "righwing extremism", and are arming themselves in anticipation of armed conflict with large groups of disgruntled American citizens. Some insight into their reasoning can be found in this unclassified April 2009 DHS report, "Rightwing Extremism: Current Economic and Political Climate Fueling Resurgence in Radicalization and Recruitment".

As I mentioned in the previous post, I would add that DHS is also concerned about their ability to enforce U.S drug policy when more and more states are legalizing the recreational use of marijuana.

Either way, this helps explains the virulent backlash to gun control legislation this time around, something that was largely absent in 1994 under Bill Clinton.

Update 3/6/13: My original report that DHS had acquired over 2,700 MRAP vehicles for use in their domestic operations seems to be false. The original total was based on a Business Insider report by Paul Szoldra. Paul, in turn, had based his article on a propagandized report by Russia Today, which I believe was essentially a twist on an old Firedoglake blog report. I contacted Paul Szoldra when I became suspicious of the 2,700 number; he followed-up with his DHS contacts which is how we came up with the new number of DHS MRAPs in service.