Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Linking Valuation Standards, Basel II, Basil Fawlty, Moody’s, Hitler, & Goldman Sachs

Stock-Markets / Credit Crisis 2010 May 08, 2010 - 08:46 AM GMT

By: Andrew_Butter


Best Financial Markets Analysis ArticleBill Gross had a go at the rating agencies this week, as always he has a lot of sensible things to say.

The point he didn’t make clearly (he did make it, but it was easy to get distracted by the discussion of working ladies of the night and six-inch heels…(where does he get his information?)), was that rating agencies have a monopoly franchise to “protect” the world financial system.

It’s like as if McDonalds, Burger King, and KFC were the mandated sole-supplier of school-meals throughout the world, except instead of “protecting nutritional values” , the rating agencies “protect the financial system”…from “surprises”.

The reason there are rating agencies and that they are at the hub of one financial disaster after another financial disaster (from Enron, to World-Com, to Sub-Prime, to Lehman, to Greece), is because the whole infrastructure of financial regulation hinges on them.

Under all the systems of financial regulation outside of Zimbabwe and North Korea, including, and in particular the much vaunted Basel II Guidelines which were more or less in place just in time to claim credit for the 2008 financial collapse (i.e. it proved to be about as useless as the rating agencies…and by-the-way should not be confused with Basil Fawlty), the “Risk Weighting” of a bond is determined by it’s rating.

So for a bond to have any value, it has to have a rating.

 That’s important for “financial stability”, particularly since insurance companies and pension funds are obliged under the law to have a certain proportion of their assets in AAA securities. It’s like a quality control stamp mandated by the regulator, and once you have the stamp the pension funds and insurance companies are obliged to buy that rubbish.

Very nice too (for the purveyors of toxic assets).

A good explanation of how that all works is a recent article by Rorty Bomb:

The flip side of that is the risk weighting. If you got a AAA bond paying 4% you can finance that at a gearing of 1:49 (theoretically…Lehman only went to 1:30 “officially”), and borrow the rest from the Fed discount window at 0% or thereabouts…(that’s how the TBTF are “earning their way out of trouble”).

The point is that a rating is an “Opinion of Value”, and anyone who has any common sense (what Gross calls the CQ Index) knows that in any transaction you have two opinions of value – one on the side of the seller and one on the side of the buyer.

Then you negotiate.

The purpose of a rating is to provide a THIRD opinion, which is the opinion of the all-powerful regulator (not to be confused with Basil Fawlty).

So the purpose of a rating is simply to work out if a bond complies with the idiotic standards of the regulator that are in place at the time, which have been proven time and time again to be as useless as many of the ratings they mandate and approve.

If you want to see something truly idiotic, the sort of tribute to the Monty Python of Financial Regulation, have a read of the BIS Guidelines.

It’s hilarious; much funnier than any of the Fawlty Towers episodes, in 251 pages they mention the word “Value” 150 times, but they never explain what “value” is, or how you measure it.


So what is “Value”?

Value according to BIS is what the Fed bought all those toxic assets for, value is what  those Greek bonds were worth after “God’s Workers” had done their magic, value is mark-to-market on the way up a bubble, and mark-to-myth on the way down.

Pure Genius!!!

The point of course is that the Rating Agencies don’t do valuations, what they do is get paid money to put AAA stamps on things, and the more money you pay them the more stamps you get.

That’s why in July 2003 International Valuation Standards (who actually know how to do valuations), wrote to The Bank of International Settlements to tell them that the valuations that were bing used (i.e. by the rating agencies), were completely and totally absolutely useless.

There is no record of any response to that letter, although actions speak larger than words, basically it was ignored.

So you have an independent body (IVSC is a UN NGO dedicated to setting valuation standards that make sense prepared by the best valuation people in the world), ignored by The Bank of International settlements (and all the other banking regulators in the world – who know absolutely nothing about valuation).

And BIG SURPRISE…the collateral posted by the crooks to back-up the silly AAA ratings, proved to be worth a lot less than what was lent at the time that the lenders came to cash it in (after the borrowers decided not to pay the money back).

BIS, the SEC, FASB, IFRS, and all the other geniuses, including the rating agencies would like to tell you that was a BIG SURPRISE.

It wasn’t it was obvious, from the beginning.

What happened in Greece was nothing new, it was simply another example of the corruption of the World Financial system, thanks to the “guidance” of BIS.

So what’s the difference between a Moody’s Valuation and a valuation done according to International Valuation Standards (IVS)?

1: Purpose

Under IVS you are supposed to explicitly state the purpose of the valuation. For example if the purpose was to rip-off a bunch of dumb German bankers by getting them to take the long side of a dodgy CDO as a way to “pass the parcel” of silly insurance policies (CDS (Criminally Dysfunctional Shite)) that Goldman Sachs had sold to John Paulson, (and they wanted to get rid of their exposure)…then you are supposed to explicitly state that, like write it on top of the valuation (or rating), in plain English (or German).

If you get an “approved” rating agent to do that, you don’t have to.

The reason IVS requires you state the purpose is that the value of something depends what you want use it for. For example if you buy a house, you want to know you are paying the right price…today (and the banks wants to know that you don’t have a side deal with the seller so you can get a bigger mortgage – or at least it ought to).

But the bank also wants to know (if it has any brains), how much it can reasonably expect to sell the house for (in the event you jingle-mail them the keys and run away), at some unspecified time in the future. That’s not always the same value as what you paid, today.

2: Market Disequilibrium

Under IVS you are supposed to examine whether the reference market is in disequilibrium or not, and if there is evidence that it is (for example in the housing market in USA if the IMF, The Economist Magazine, and Professor Shiller are all saying there is a bubble), you are supposed to work out how much the house could reasonably expect to sell for in the future (like about half the price the suckers paid today), and explain that to your client. A rating agency has no legal or moral obligation to do that.

3: Explaining how you did it

Under IVS you are supposed to explain how you did the valuation to your client, and to anyone who is expected to rely on the valuation. For example if you are doing a valuation of some RMBS you are supposed to provide the base data on those, plus data on sufficient (note the word “sufficient”) market-derived data on comparables (so that in the case of a pool of RMBS anyone can run a multivariate regression analysis to check the answer).

A rating agency has no legal or moral obligation to do that, and in fact they are not even obliged to do the necessary analysis or collect sufficient data (and they didn’t and they don’t – all they do is say “let’s assume” (“the world is flat” or something equally asinine)).

4: Independence of the Valuation

Under IVS you are not supposed to change the answer depending on how much money you get paid, or the likelihood of getting more (very lucrative) work from your client. If you are an approved rating agency, that is absolutely fair-play (in fact it’s the whole point).

What’s the connection with Hitler?

The Bank of International Settlements (the purveyors of Basel II and what passes for “God” in financial circles), was set up to extract from Germany the reparations agreed in the Treaty of Versailles, which was what caused the hyper-inflation of the Weimar Republic.

But then they came to an “accommodation” with Hitler, who continued to “co-operate” with them during the war, handing over the gold looted from banks in Belgium and France (which was returned) and gold extracted from the teeth of concentration camp victims (which was not), to keep his credit good.

It was on such foundations that the current financial system was built.

Do you wonder why it doesn’t work?

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2010 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in