The Government Is The Only Quick Way To Restore Faith

September 28, 2009 by · Leave a Comment
Filed under: General 

The implications of inaccurate bond ratings are enormous and will take decades, maybe generations to sort out. But the problem lies deeper than with the rating system.

Investors have lost faith in their paper. At the simplest level they agreed to loan money using a multi-obligor bond as a security. The investor does his due diligence and sees that the bond is rated as a safe investment by a credit risk agency. Then a while later the bond is downgraded and the investor is exposed to more risk than was agreed and a whole set of problems ensue for the investor: under-capitalization, devaluing of the bond, greater risk profile, etc.

But the worst is that the credibility of the issuer and the rating agency are made suspect. The fundamental trust upon which our financial system is based is compromised.

So how do we restore trust? The leap of faith that is integral to any business transaction now needs to be backed by a neutral third party.

Unfortunately the only entity large enough and with sufficient standing to back trillions in possibly toxic assets is the US government — not someone with whom you want to do business. But, do we have a choice?

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