Category: Regulation

Regulation

Senate Hearings : S&P Steps Up

In the last statement listed on Banking Committee’s website, Vickie A. Tillman, Executive Vice President of Standard & Poor’s Credit Market Services, gave her views on the current controversy. She included a wonderful quotation from Eddy Wymeersch, Chairman of the Committee of European Securities Regulators and also Chairman of Belgium’s Banking and Financial Commission:

“The press and general opinion is saying it’s the fault of the credit rating agencies,” Eddy Wymeersch, chairman of Belgium’s Banking and Financial Commission watchdog told Reuters.

“Sorry, the ratings are just about the probability of default, nothing more. Now we have a liquidity crisis and not a solvency crisis,”

She then states that S&P has been rating Residential Mortgage Backed Securities (RMBS) for thirty years, with the following results:

Initial Rating % of Default
AAA 0.04
AA 0.24
A 0.33
BBB 1.09
BB 2.11
B 3.34

She then reiterates Moody’s testimony regarding the role of the Credit Rating Agency in it’s relationship with the Originators:

While evaluating the credit characteristics of the underlying mortgage pool is part of our RMBS ratings process, S&P does not rate the underlying mortgage loans made to homeowners or evaluate whether making those loans was a good idea in the first place. Originators make loans and verify information provided by borrowers. They also appraise homes and make underwriting decisions. In turn, issuers and arrangers of mortgage-backed securities bundle those loans and perform due diligence. They similarly set transaction structures, identify potential buyers for the securities, and underwrite those securities. For the system to function properly, S&P relies, as it must, on these participants to fulfill their roles and obligations to verify and validate information before they pass it on to others, including S&P. Our role in the process is reaching an opinion as to how much cash we believe the underlying loans are likely to generate towards paying off the securities eventually issued by the pool. That is the relevant issue for assessing the creditworthiness of those securities.

There’s a lot in the presentation that repeats Moody’s testimony, or simply describes the S&P version of the same procedure, so I’ll skip over a lot of verbiage. Her major headings are:

  • The “Issuer Pays” Model Doesn Not Compromise the Independence and Objectivity of Our Ratings … this section includes a reference to a Fed Reserve paper Testing Conflicts of Interest at Bond Ratings Agencies with Market Anticipation: Evidence that Reputation Incentives Dominate.
  • S&P Does Not “Structure” Transactions … they talk, yes. This encourages transparency and predictability.
  • Credit Enhancement – How Securities Backed By Subprime Mortgages Can Recieve, and Merit, Investment Grade Ratings … I’m getting tired of this topic, but I suppose she had to ensure it was addressed
  • S&P Has Been Warning the Market, and Taking Action, in Response to Deterioration in the Subprime Market Since Early 2006 … listing quite a few publications.
  • Impact of the Credit Rating Agency Reform Act of 2006 … blah blah blah

So … she covered pretty much the same ground as Moody’s did.

Interesting External Papers

Senate Hearings : The Empire Strikes Back

See? Accrued Interest isn’t the only blog in the world that can use Star Wars titles.

Following the last testimony reported here, that of Dr. Lawrence J. White, Moody’s stepped up to the plate. The testimony has been published by the Senate committee.

They first reviewed the process, including one very critical element:

It is important to note that, in the course of rating a transaction, we do not see individual loan files or information identifying borrowers or specific properties. Rather, we receive only the aforementioned credit characteristics provided by the originator or the investment bank. The originators of the loans and underwriters of the securities also make representations and warranties to the trust for the benefit of investors in every transaction. While these representations and warranties will vary somewhat from transaction to transaction, they typically stipulate that, prior to the closing date, all requirements of federal, state or local laws regarding the origination of the loans have been satisfied, including those requirements relating to: usury, truth in lending, real estate settlement procedures, predatory and abusive lending, consumer credit protection, equal credit opportunity, and fair housing or disclosure. It should be noted that the accuracy of information disclosed by originators and underwriters in connection with each transaction is subject to federal securities laws and regulations requiring accurate disclosure. Underwriters, as well as legal advisers and accountants who participate in that disclosure, may be subject to civil and criminal penalties in the event of misrepresentations. Consequently, Moody’s has historically relied on these representations and warranties and we would not rate a security unless the originator or the investment bank had made representations and warranties such as those discussed above.

They also make the point that the 2002-2005 vintages of Residential Mortgage Backed Securities (RMBS; “vintage” refers to the date the mortgage was given) are performing at or above expectations; it’s the 2006 vintage that is creating headaches. The following data is extracted from their figure 2:

Downgrade / Upgrade Percentage By Vintage (By Rated Original Balance)
  Subprime
Vintage Downgrade Upgrade
2002 2.3% 2.0%
2003 1.1% 2.7%
2004 0.3% 0.2%
2005 0.5% 0.3%
2006 5.4% 0%
2002-2006 2.2% 0.6%

Moody’s categorized their response to an observed deterioration in sub-prime portfolios as follows:

  • We began warning the market starting in 2003
  • We tightened our ratings criteria
  • We took rating actions as soon as the data warranted it:As illustrated by Figure 3, the earliest loan delinquency data for the 2006 mortgage loan vintage was largely in line with the performance observed during 2000 and 2001, at the time of the last U.S. real estate recession. Thus, the loan delinquency data we had in January 2007 was generally consistent with the higher loss expectations that we had already anticipated. As soon as the more significant collateral deterioration in the 2006 vintage became evident in May and June 2007, we took prompt and deliberate action on those transactions with significantly heightened risk.

Note that the first two points are also elucidated; I’m just highlighting their third point.

Their Figure 5 provides some detail that I’ve been trying to find for a while. Readers will remember the decomposition of the Bear Stearns ABS 2005-1 in this blog, and know that the highest rated tranche is the biggest, while the smaller tranches are relatively small. The tranches On Review or Downgraded (First & Second Lien Transactions combined) comprise 15.9% of the total by number, but only 5.4% by dollar value.

And, finally, they get to their actions to address the problems and their recommendations for others. Moody’s initiatives are:

  • Enhancements to analytical methodologies
  • Continued investments in analytical capabilities
  • Changes to credit policy function (this means increased separation of the reporting channels between the sales and ratings departments)
  • Additional market education
  • Development of new tools beyond credit ratings

I am sure they mean well by their last two points, but they won’t work. The market does not want to be educated and the market does not want any more detail – the reaction to their change in bank rating methodology proves that.

What does the market want? The market wants a very simple methodology so it can claim to have done a due-diligence without wasting more than five minutes on investment crap and someone to blame when something goes wrong, that’s what the market wants.

Moody’s recommendations for policies outside its control are:

  • Licensing or other oversight of mortgage brokers
  • Greater disclosure of additional information by borrowers and lenders
  • Tightening due diligence standards for underwriters
  • Stronger representations and warranties
  • Increased disclosure from issuers and servicers on the individual loans in a pool
  • Increasing transparency (in structured products)

Not very much, perhaps, but not very much change is needed.

Regulation

Senate Hearings on Credit Ratings Begin

Senate Banking Committee hearings on the Credit Rating Agencies have commenced.

The committee has published remarks by the politicians and statements from witnesses on its website. Of great interest is the testimony from Professor John C. Coffee, Jr., of Columbia Law School. He criticizes Levitt’s proposals:

Although conflicts of interest are critical, it is far from clear that they can simply be eliminated. The fundamental conflict is that the issuer hires the rating agency to rate its debt (just as the issuer also hires the auditor to audit its financial statements). It is not easy to move to a different system. To be sure, until the early 1970s, the rating agencies were paid by their subscribers, not the issuer. But they barely broke even under this system. More generally, the deeper problem with subscription-funded ratings is that there is no way to tax the free rider.
…
Bureaucratic regulation faces other problems. It does not seem within the effective capacity of the SEC, or any more specialized agency, to define what an investment grade rating should mean or the process by which it is determined. Such efforts would only produce a telephone book-length code of regulations, which skilled corporate lawyers could easily outflank.

Sadly, he did not discuss Levitt’s five recommendations in detail. He did, however, make three recommendations of his own:

Proposal One: Disclose Default Rates On Each Rating Grade For Each Product. … the SEC could calculate the five year cumulative default rates on different classes of financial products for each rating agency and disclose this data on one centralized web site. Admittedly, Moody’s already discloses such information on its own web site, but others do not, and it is the comparison that is critical.

…

Proposal Two: Forfeiture of NRSRO Status. … In principle, rating agencies should compete in terms of their relative accuracy. But the market does not appear to penalize inaccuracy very heavily, and corporate issuers may prefer the rater with the most optimistic bias. The best response to this problem is to make the rating agency’s status as an NRSRO depend upon maintaining an acceptable level of accuracy. … This proposal would not bar a rating agency from continuing to issue ratings during any period in which it was disqualified as an NRSRO, but such ratings would be useful only for their informative value, not their legal impact.

…

Proposal Three: A Transparency Rule: Encourage the Growth of Subscription-Based Rating Agencies By Giving Them Access to the Same Data Made Available By the Issuer to Any Other Rating Agency.

The point regarding Proposal Two is introduced earlier in his remarks:

In other markets, a professional whose advice was demonstrably inaccurate would lose business. But this does not necessarily hold true in the market for debt ratings, because the service providers in this market are not simply providing information through their ratings. They are also conferring a governmentally-delegated permission to buy upon institutional investors that are legally restricted to purchasing securities rated investment grade.6 This is the real significance of the SEC’s Nationally Recognized Statistical Rating Organization (or “NRSRO”) designation, because only a rating agency with this designation can render debt securities eligible for purchase by many investors. Put bluntly, an NRSRO can sell its services to issuers, even if the market distrusts the accuracy of its ratings, because it is in effect licensing the issuer to sell its debt to certain  regulated investors. This is a power that no other gatekeeper possesses.

I should point out that the statement In other markets, a professional whose advice was demonstrably inaccurate would lose business. is demonstrably false. There are many, many professionals in the business who are chronic underperformers and still do quite well, thank you very much. I suggest that if the regulators wish to intervene to improve capital market efficiency to such an extent, they would be better off imposing performance measurements on stockbrokers and portfolio managers. This will not happen; nor would I support it happening.

Dr. Lawrence J. White, Professor of Economics at NYW was the next to speak:

I would strongly prefer the simple elimination of the NRSRO designation and the concomitant withdrawal of the regulatory delegations of safety judgments that have given so much power to the SEC’s NRSRO decisions. The participants in the financial markets could then freely decide which bond rating organizations (if any) are worthy of their trust and dealings, while financial regulators and their regulated institutions could devise more direct ways of determining the appropriateness of bonds for those institutions’ portfolios. Also, I fear that some of the “good character” provisions of the Act might be used in the future to create new barriers to entry.

He analyzes the Agencies role in the current kerfuffle, stating:

Here, the story as to why the bond raters have been slow to downgrade is clearer. To a large extent — with only one new element — it is a repeat of the reasons for their delay in the Enron and other, earlier downgrades.

First, the bond rating firms have a conscious policy of not trying to adjust their ratings with respect to short-run changes in financial circumstances; instead, they try to “rate through the cycle”. Regardless of the general wisdom of such a philosophy, it does mean that when the short-run changes are not part of a cycle but instead are the beginning of a longer-run trend, the bond raters will be slow to recognize that trend and thus slow to adjust their ratings.

…

Fourth, and this is a new element in the current situation, the bond raters have had to deal with (for them) a new kind of risk. For their traditional ratings of corporate, municipal, and sovereign bonds, and even for rating simple MBS, they have focused solely on credit (or default) risk: the possibility that the borrower will fail to repay its obligations in full and in a timely manner. In rating collateralized debt obligations (CDOs), however, where the underlying collateral was MBS and other securities, an extra feature could affect the ability of the CDOs to be paid off in full and in a timely manner: liquidity risk, which is the risk that the markets for the underlying collateral will become illiquid (perhaps because of fears and uncertainties among market participants as to underlying repayment possibilities), leading to unusually wide spreads between bid and ask prices for those underlying securities. Those wider spreads, in turn, could trigger forced liquidations of the asset pools underlying the CDOs and lead to unexpected losses to the investors in the CDO securities, even if the underlying collateral were ultimately to perform with respect to credit risk along the lines that had been predicted.

Holders of, for instance, DG.UN, will know all about the fourth risk!

Readers will not be surprised at my rapturous applause for his conclusion:

I strongly urge the Congress not to undertake any legislative action that would attempt to correct any perceived shortcomings of the bond rating firms.

I base this plea on two grounds: First, it is difficult, if not impossible, to legislate remedies that could somehow command the bond raters to do a better job. One could imagine legislation that would mandate certain business models — say, forcing the industry back to its pre-1970s model of selling ratings to investors, because of concerns about potential conflicts of interest — or that would mandate certain standards of required expertise as inputs into the rating process. But such legislation risks doing far more harm than good, by rigidifying the industry and reducing flexibility and diversity.
…
Second, as was discussed above, the Credit Rating Agency Reform Act of 2006 was signed just a year ago, and the final implementing regulations were promulgated only three months ago. Including the two firms that were newly designated in May 2007, just before the final regulations were promulgated, there are now seven NRSROs. The SEC’s more timely and transparent procedures under the Act should yield at least a few more. The financial markets — and equally important, financial regulators — should be given an opportunity to adjust to the new circumstances of a more competitive ratings market, with more choices, more business models, and more ideas.

More later.

Regulation

IMF Calls for New Credit Rating Scale

As reported today by Bloomberg:

The IMF, which is charged with promoting global economic stability and lends to financially distressed nations, blamed the crisis on “benign economic and financial conditions” which “weakened incentives to conduct due diligence on borrowers and counterparties.”The fund also said the methodology of credit-rating companies, some of which gave high ratings to subprime mortgage securities that have plummeted in value, needs to be examined. The complexity of many of these securities may have made it difficult for investors to assess their worth based on the assigned ratings.

“In the case of complex structured credit products, investors need to look behind the ratings,” the report said.

Regulators and investors will have to work together to strengthen financial markets to prevent a recurrence, and develop ways to improve the spread of accurate and timely information to help markets assess risk, the report said.

Parts of this report are available at the IMF site. In Chapter 1 they urge:

The need for a differentiated scale of credit ratings has
again been made apparent.
The fallout in the mortgage market has drawn attention to the role of credit ratings agencies in structured credit markets. Less sophisticated investors, who were content to delegate the risk assessment of their positions to the credit ratings agencies, were negatively surprised by the intensity of downgrades. Previous GFSRs have pointed out that structured credit products are likely to suffer more severe, multiple-notch downgrades relative to the typically smoother downgrade paths of corporate bonds (IMF, 2006). The experience of the past year has underscored the need for further efforts to inform investors of these risks, but better still would be the introduction by ratings agencies of a more differentiated scale for structured credit products. For example, a special rating scale for structured credits could be introduced to highlight to investors that they should expect a higher speed of migration between ratings than on a traditional corporate bond.

The section (page 37 of the PDF) ends with some sound advice for institutional investors; sadly, it does not advocate that institutional investors who bought CDOs without understanding them seek retraining as ditch diggers. The closest they get to advocating this urgently needed market reform is elsewhere in the document:

Finally, credit ratings evaluate only default risk, and not market or liquidity risks, and this seems to have been underappreciated by many investors.

Which isn’t really very close, is it? Ah, well, perhaps someday.

Update: Accrued Interest has some explanations and suggestions for the CDO market.

Regulation

Rating Agency Regulation: Levitt Weighs in

The Globe and Mail astonished me today by publishing a reasonably balanced review of what ratings agencies do and why they do it. They also published a precis of Levitt’s op-ed in the Wall Street Journal.

There were three snippets in the G&M piece worthy of comment, the first from Brian Neysmith, former head of DBRS (and boy, I bet he’s happy he’s retired!):

Pretend you’re a park ranger, and a camper wants to cross a big lake. He tells you he’s got a canoe, a paddle and a lifejacket, and asks what his chances are of crossing safely. You ask him what his canoeing experience is, and conclude that his chances are decent.

But then the camper asks what he would have to do for you to conclude that his chances were excellent. And so you tell him that he needs to add a flotation device, heavy weather gear and an extra set of paddles, just in case one falls out. And you say that if he does all that, you’ll give him a 100 per cent chance of success.

This is, essentially, what the ratings agencies are doing when they are retained by issuers to consult on the structure of new securities – with the notable exception that they never, ever give anybody a 100% chance of success. All they will ever do is (as the reporter noted at the beginning of the paragraph, but forgot by the end) conclude that the chances are excellent.

The second snippet comes courtesy of an ABCP investor:

“When you’ve got cash sitting around, you phone your banker, or you phone your money desk, and you say ‘I’ve got cash, what can you show me?’ ” said Richard Gusella, chairman of Calgary-based Petrolifera Petroleum Ltd. “And they tell you, ‘I’ve got 30-day Apsley Trust R1-high rated paper, per DBRS, and other people are buying it.’ And they say this is better than bank paper, and so you buy it,” he said.

The company had invested about $37.7-million, or more than half its total cash, in asset-backed securities. Its cash management policy had been to invest in short-term securities with DBRS’s highest rating, R1-High. On Aug. 15, $31.4-million of the notes became due but were not repaid. Mr. Gusella says the company is not in financial difficulty now – but he wants his money.

More than half its total cash in this stuff? Mr. Gusella may well be a very skilled oil & gas operator – and the front-line decision to gamble may not have been his, but rather his treasury group’s – but if I were a shareholder in Petrolifera, I’d be asking some rather pointed questions about prudent cash management.

A relatively small company such as Petrolifera (shareholders’ equity of about $120-million, according to its most recent financials) should not be doing its own money market investing anyway. Pay the fee and concentrate on what you’re good at … most (if not all) of the banks have institutional money market funds; some investment counsellors do; it’s not really all that expensive.

I will point out as well that the quote makes him sound a little pompous (talking about ‘phoning his money desk’). Perhaps his remarks were misconstrued for brevity, but:

  • all dealers will have a range of products
  • if you don’t like one dealers offerings or prices, you call another
  • it certainly sounds as if he bought whatever the friendly salesman told him to buy

I’ve emphasized in the past and will emphasize again: dealers are not your friends, no matter how many social functions they invite you to – or how much of a big-shot they make you feel like.

And one last snippet:

For instance, the Canada Marine Act sets minimum ratings on investments that port authorities can buy. And in a stroke of good luck or prescient planning, the act says authorities can only buy investments rated by two bond-rating companies – meaning that authorities couldn’t touch the asset-backed commercial paper that’s run into trouble because there was only one rating agency that graded it (DBRS).

No. Not “good luck”. Not “prescient planning”. Merely a reasonable, if rather mechanical, application of the Prudent Man Rule.

So, finally, we get to Arthur Levitt’s proposals (bolded, with my comments in italics).

  • The SEC needs to set standards for agencies and punish transgressions. Too vague for much commentary! It makes my hackles rise a bit because it implies that the SEC should be regulating agencies, but I’m willing to wait for the specifies and will attempt to retain an open mind. Note that Mr. Levitt is a former head of the SEC … when you have a hammer, everything looks like a nail!
  • Ratings agency employees shouldn’t be able to jump to investment banks they have helped to structure transactions.: This suggestion came up in the September 4 commentary. No! A thousand times, no! In the first place, there is no indication that this is, in fact, a problem. Secondly, it will enforce draconian restrictions on the career choices of analysts. And thirdly, it is inappropriate because agency analysts have no power to force anybody to do anything; they give advice. Full stop. This sort of restriction is appropriate for regulators but is not even applied to them. Regulation Services trumpetted the fact that their employees were jumping to the banks for fat paycheques as evidence of the impressive skill of their employees; let’s fix up this aspect of revolving-door regulation before going after mere advisors! I will, perhaps, give a certain amount of additional credence to a particular agency if they tell me that each analyst has “gardening leave” in their contracts; to give such a matter of judgement the full force of law would be abuse of regulatory authority. I would be much more impressed if the agencies reacted in the same way every single brokerage firm in the world reacts when an employee leaves: devote a lot of time to reviewing the employee’s work. In the brokerage’s case, this is in order to retain the clients for the firm; in an agency’s case, it should be to double-check the ratings assigned to the instruments reviewed by that employee. The ratings should never be the responsibility of a single employee in any event. I recently reported the DBRS downgrade of little rinky-dink ES.PR.B – that report has two names on it.
  • Issuers should disclose any consulting services provided by ratings agencies. I’m of two minds about this one. Disclosure is a good thing, but too much disclosure leads to the voluminous and unread state of modern prospectuses. I’m more against it that for it, but don’t think it makes a lot of difference either way.
  • Investors should be able to hold ratings agencies “liable for malfeasance that is more than mere negligence.” No! Investors do not pay ratings agencies any money; there is no fiduciary relationship between investors and agencies. I can buy something solely on the basis of its rating; I can buy something solely because I got an anonymous eMail telling me it was good. If investors want a fiduciary relationship, there are many shops out there (like CreditSights, discussed here recently) who are more than willing to fill that need.
  • Investors must stop blindly relying on credit ratings, and instead do more research on structured products to determine their safety. Hey! Finally, something I agree with completely! I will also note that one or two errors won’t hurt you (much) as long as you’re well diversified.

Update, 2007-09-19: Douglas W. Elmendorf has published a commentary on current policy issues, in which he endorses

additional oversight by the SEC, a one-year waiting period for a ratings agency employee wanting to join a security issuer, and disclosure in debt-offering documents of any related advice provided by the rater to the issuer.

without further argument.

Update, 2007-09-24: The WSJ has reported on an interview of Greenspan by FAZ:

In an interview with Sunday’s Frankfurter Allgemeine Zeitung, one of Germany’s most prominent newspapers, former Federal Reserve Chairman Alan Greenspan sharply criticized ratings agencies for their role in the current credit crisis. “People believed they knew what they were doing,” Mr. Greenspan says in today’s FAZ. “And they don’t.”

Still, he doesn’t think it’s necessary to strengthen rating-agency regulation. Essentially, they’re “already regulated,” he says, because investors’ loss of trust means the agencies are likely to lose business. “There’s no point regulating this. The horse is out of the barn, as we like to say.” Greenspan also said he believes that the volume of structured-finance products will decrease. “What kept them in place is a belief on the part of those who invested in that, that they were properly priced. Now everyone knows that they weren’t. And they know that they can’t really be properly priced,” said Greenspan.

Regulation

To Arms! The Regulators are Coming!

I can see that there is going to be a lot of debate over the next year (until the day after the US Presidential elections, anyway) about regulation, so I’ve started a new category in this blog for it.

Anyway … the forces of regulation are gathering and the issues need to be understood.

Menzie Chinn at Econbrowser abandons her usual highly technical approach to state:

While I haven’t drawn a particular conclusion regarding the right direction to move, one insight prompted by current commentary is that — if the Fed were to opt for looser monetary policy — greater regulation of the financial sector would make a lot of sense.

I don’t know. To me, that if-then logic looks like a complete non-sequiter, but I can’t really comment too much until there is something to comment about. Let’s hear some proposals – I’ll consider them!

Mark Thoma has written a piece titled Fed Intervention and Moral Hazard which, really, simply explains the concept of moral hazard in home-spun tones, but declares himself “in substantive agreement” with what must be deemed a polemic by Robert Reich, Stop the Hedge Fund Casinos:

Yet there’s precedent: in September 1998, despite growing evidence of inflation, the Fed lowered interest rates in order to forestall a global credit crisis after Russia defaulted on its loans (many had been underwritten, foolishly, by several large Wall Street investment banks).

No substantiation is offered for the word “foolishly”. Additionally, there is no acknowledgement of any role played by investors, as opposed to underwriters, in the process.

Oddly, private credit-rating agencies judged these “sub-prime” loans to be relatively good risks.

Mr. Reich does not substantiate his use of the word “Oddly”. Additionally, there is no indication of an awareness of a risk/return trade-off.

Meanwhile, hedge funds created what can only be described as giant betting pools — huge amalgamations of money from pension funds, university endowments, rich individuals, and corporations — whose assumptions about risk were derived from the assumed low risks of the home loans (hence the term “derivatives”).

This is a novel derivation of the word “derivatives”! One can, I suppose, characterize hedge funds as giant betting pools – but only to the extent that any investment that has ever been made in the history of the earth has been a bet.

Investors in these hedge funds had little or no understanding of what they were buying, because hedge funds don’t have to disclose much of anything.

No substantiation is offered for this rather surprising smear. In the first place, the fact that hedge funds don’t have to disclose much of anything to regulators doesn’t mean they don’t disclose anything to investors. It is up to investors to demand whatever they want to demand from those who want discretionary authority over their money – Mr. Reich does not make any sort of case that further disclosure to regulators is necessary.

An investor can do whatever he wants with his own money. If, however, someone is acting as a fiduciary (as will be the case with pension funds and university endowments) there is a standard of care required. There may well be cases in which the Prudent Man Rule has been violated – well, nail ’em to the wall, I say, and I’ll ask Mr. Reich to pass me the hammer; that is not only a separate issue, but it’s already regulated.

That doesn’t mean, though, that the irresponsibilities now so clearly revealed in American financial markets should be excused or forgotten.

Mr. Reich forgets that he has not, in fact, discussed even a single instance of irresponsibility.

Credit-rating agencies have cut corners or averted their eyes, unwilling to require the proof they need.

This is the first mention of credit-rating agencies in the entire essay. No supporting evidence or argument is brought forward to support this charge.

They’ve [the credit rating agencies] been too eager to make money off underwriting the new loans and other financial gimmicks on which they’re supposed to be objective judges.

I am not aware that any credit rating agency anywhere has acted as underwriter. I’m not even aware of any credit rating agency having a license to underwrite. Let’s have a few more details, Mr. Reich!

Banks and other mortgage lenders have been allowed to strong-arm people into taking on financial obligations they have no business taking on.

Strong arm? Let’s have some evidence, or some argument at the very least. I suspect that any wrong-doing of this nature is already regulated.

For the financial market to work well — to ensure fair dealing and to prevent speculative excess — government must oversee it.

There are no arguments, no details and no evidence in this essay to make this assertion even worthy of consideration.

This mess occurred because nobody was watching.

Nonsense. There ain’t nuthin’, anywhere on earth, watched as carefully as the financial markets. Investors, traders and Mr. Reich’s beloved regulators watch it very carefully indeed.

Credit-rating agencies must not have any relationship with underwriters.

What? They shouldn’t even accept details of the issue so they can assign a provisional rating prior to its sale to investors? Mr. Reich betrays complete ignorance of the credit rating process with this slogan.

Finance is too important to be left to the speculators.

I’m … speechless.