If you thought the ratings agencies were bad...wait until the DC bean counters take control

The latest fallout from the Frank-Dodd miscarriage of economic prudence was released today in the form of a joint statement by the top bank cops, including my beloved Fed. Frodd requires a retooling of existing bank supervisory regulations to eliminate any reliance on ratings agencies. After all, weren't they the bad guys? Not that shoveling nearly unlimited amounts of free money to banks courtesy the Fed had anything to do with it.

What will be the effects of this latest Frodd finger of [in]stability? More appropriately phrased, what will it not affect? Every security or money market instrument on a bank's balance sheet will be subject to the bureaucratic modeling whims du jour. He who defines risk by fiat controls where investment money flows. A bean counter in a cubicle will give the ol' Caesar thumbs up or thumbs down to entire asset classes, directing money to those that are most likely to squander it [god forbid we don't help the children and the earth some more].

Apparently outsourcing regulatory capture was too inefficient and it will now be done in-house. What used to be decided by a government-licensed (but at least putatively private sector) analyst who got paid by the issuer/rate-ee will now be performed by an army of unbiased, tax subsidized public servants exercising all the dispassionate analytical rigor demanded by their post.

Never mind that a functional private ratings agency model exists, as anyone familiar with Egan Jones can attest--one in which those seeking the best opinions on the buy side are the ones picking up the tab. Never mind, it was the captured bank cops in the first place that approved and promoted the S&P/Moody model to provide flimsy cover for moral hazard and a license to securitize anything and everything down to discarded offtrack betting receipts.

The saddest part: this is but one of dozens, if not hundreds, of similar economy-wrecking changes coming down the pike. The progressives' ultimate dream is finally coming true, and all it took was a bamboozled public whose 401K's halved in four months to get bought off with two years of unemployment insurance and various promises of debt forgiveness. The Jubilee this ain't.

Full text of the release follows, with a link to the full Notice at the bottom.

Joint Press Release

Board of Governors of the Federal Reserve System

Federal Deposit Insurance Corporation

Office of the Comptroller of the Currency

Office of Thrift Supervision

For immediate release August 10, 2010

Agencies Issue Advance Notice of Proposed Rulemaking Regarding Alternatives to the Use of Credit Ratings

The federal banking agencies (agencies) today have agreed to publish an advance notice of proposed rulemaking (advance notice) regarding alternatives to the use of credit ratings in their risk-based capital rules (capital rules) for banking organizations. The advance notice is issued in response to section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Act), enacted on July 21, 2010, which requires the agencies to review regulations that (1) require an assessment of the credit-worthiness of a security or money market instrument and (2) contain references to or requirements regarding credit ratings. In addition, the agencies are required to remove such references and requirements and substitute in their place uniform standards of credit-worthiness, where feasible.

Through this advance notice, the agencies are seeking to gather information as they begin to develop alternatives to the use of credit ratings in their capital rules. This advance notice describes the areas in these capital rules where the agencies rely on credit ratings, as well as the Basel Committee on Banking Supervision's recent amendments to the Basel Accord. The advance notice solicits comment on alternative standards of creditworthiness that could be used in lieu of credit ratings. It requests comment on a set of criteria the agencies believe are important in evaluating creditworthiness standards, including risk sensitivity, transparency, consistency, and simplicity. It asks for comment on a range of potential approaches, including basing capital requirements on more granular [read: up everyone's arse] supervisory risk weights or on market-based metrics, as well as on how these approaches might apply to different exposure categories. It also seeks comment on the feasibility of and burden associated with alternative methods of measuring creditworthiness for banking organizations of varying size and complexity.

The advance notice addresses only the references to credit ratings in the agencies' capital rules. It is expected that proposals for removing references to credit ratings in other parts of their regulations will follow separately.

The advance notice, issued by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation, solicits comment for 60 days after publication in the Federal Register, which is expected shortly. The Office of Thrift Supervision plans to join the other federal banking agencies in issuing this advance notice pending clearance by the Office of Management and Budget.

Media Contacts:

Federal Reserve Board Barbara Hagenbaugh 202-452-2955

FDIC David Barr 202-898-6992

OCC Dean DeBuck 202-874-5770

OTS William Ruberry 202-906-6677

Attachment (73 KB PDF)