this to universities or you know nonprofits but i wouldn't i wouldn't leave it where it is ok mark you what you point out here and i think it's a very good and interesting thing for of our viewers to do you know and then no one ever complains and they get a triple a rating everybody complains when it's anything lower go ahead. i mean there's a couple of i want to make i mean the bias has usually been in one direction and i think this is true with mortgage rated securities i think it's true with sovereign debt where they've inflated the rate in so certainly i don't hear any european countries complaining when they're rated aaa when they don't deserve to be but another point i want to make is there's a conflict of interest in almost any system you have certainly there's a conflict of interest on the part of an investor what investor after they bought an asset wants to see that asset downgraded so certainly if you have an investor pays there's a conflict of interest there you have the issuer pays is a conflict of interest there and certainly if the regulator themselves is rated i mean the united states government has a conflict of interest and certainly i don't believe when the when the e.u. says they want to suspend ratings when countries are going under restructuring is that they have the inside the you have the interest investors at heart i have their

own interest at heart so what the at the ultimate goal here is how do we minimize our offset to various conflicts of interest because there isn't just one conflict of interest here and of course that what concerns me about if you set up a government run and i've got no problem i mean i think what we should look at is maybe some sort of investor cooperative really investors have their own sort of ratings but again you have competition you have alternatives and the ultimate just you let me jump in here we go to a short break and after that show frank we'll continue our discussion on the radio station. to. grant you three cities and this is product of the price of.

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question on the dot com. and you can. start. welcome back to cross talk i'm peter lavelle to mind you we're talking about the credit rating agencies. and you can. say. ok carrie and i to go back to you in philadelphia what one observation is going on here is because we've seen standard and poor's and other agencies in the been in the news in a big way but in the euro crisis but it's kind of interesting to point out is that governments particularly in the european union really don't have an idea how to get out of this mess here and the rating agencies are really stepping up to the plate

in a big way and giving directions i mean what's wrong with the radiators he's saying you know we see systemic danger in the eurozone and there is some mean obviously and there's nothing wrong maybe somebody has to say to the european leaders you better do something because you keep kicking the can down the row. mood. i you know i've read a few of the press releases from moody's fitch and s. and p. in the last few days regarding european debt i don't i wouldn't characterize it as saying they're telling these governments what to do ok when you read it they stick to look this is what you did and here's the problem with that you know you they for instance they're saying that you know right now they're really focusing on the fact that the results of the meeting on friday are going to just lead to more austerity in southern european countries and probably lead to a lowering of economic growth and then that in itself is

a credit negative because it raises g.d.p. to debt ratios and so they're just saying that you know the solution you came up with is probably going to make things worse they're not saying you should do this or you shouldn't do that i mean i think in this case they're really just doing their job they have they have made huge mistakes in the past but i don't see this is one of them ok richard even if you think are you. going to richard here is that i mean are these agencies good it at describing political risk because what's your methodology ok can you show me the math how you determined that. well you know that's a great question because if you go for example to standard and poor's website you'll see a lot about how their methodology is per part per proprietary can't be accessed can't be reproduced and my reaction is always as if i'd won it but the real issue here and i think gary makes a good point too they're not necessarily wrong in this case but what's happened is

that they've become actors with excessive power in this drama and that's disturbing and almost equally disturbing is the fact that i think that mark and i could probably sit down and come up with a solution we both accept so this is an interesting day today but i would say that i don't want to graham and others were really about here i keep arguing ok with you no no no well then let's then let's go to austerity economics we're going to do sanctions or do you know i think the issue here. i think the issue is we have two issues the eurozone and the rating agencies and i think right now my point about the rating agencies is they shouldn't even be a voice on all this after the history they've had over the last ten years what do you think about that mark i mean i started out the program they're trying to make up for their past mistakes here and they're getting out in front here and somebody has to get out in front i mean i don't know if they're the right people to do it though. well there certainly in the degree to which the rating agencies are i think

or cyclical to a degree and every time we have some sort of turn of the cycle and they look bad they get more aggressive but i what i want to parse out is what does it mean by voice i mean you know i have a voice i go i'm talking here today about it and i can talk about what i think it should do and i'm often paid for it to talk about things that's not my job is so the question is you know how much of that what weight should be given on that voice and again i think this is the area where we agree which is you need to pull out all of these regulatory things now the difference in the e.u. is that it doesn't matter what the rating is on your government debt banks can hold as much of it as they want i mean it's shocking to me that italian banks have actually increased their holding of government debt over the last couple of months if that doesn't raise a red flag i don't know what to do what does but again we need to pull them out of all the regulatory reliance on them i think we need lots of voices because i think you know looks like to me that europe has no idea what they're doing or at least they're looking away from the obvious facts of what they need to address so again i think the rating agencies are legitimately adding their opinion on what happened to

saddam that mean for instance i had disagree all adamantly with their macro economic implications of austerity that they argue but i think putting that opinion out there is important put it into the debate again if i can go to you i mean if we look at the past mistakes at the beginning of this great global crisis here nobody is you know none of the agencies have to pay a penalty i don't even have to really say they're sorry i mean sitting this be something that they should be held accountable for for making these kind of huge mistakes and they've been mentioned already on this program here well personally you know i. advocate and have advocated that the f.c.c. institute penalties specifically for poor performance that rating agencies if they're going to continue to be used for regulatory risk assessment which they are you know that's what is happening no fundamental changes happen in that area that the quid pro quo should be since they're being paid by the issue is that they rate that they should have to pay a fine based on poor performance if their ratings turn out to be wrong in that debt

is not repaid in full and that the amount that they should be fined should be you know some multiple of the wiis that they received and i don't think it would be that difficult for the f.c.c. to institute a fairly simple. system of fines and i think under dodd frank they already have the power to do so but i haven't seen any movement from their quarter to do that one of the issues one of the problems with trying to make the ratings better through issuing from having fines or having a system of penalties is that people like richard just say well we should just get rid of ratings altogether because they're obviously conflicted and stupid let's get rid of them but you know what that just plays in that plays into the lives of the radiative sees in a sense because we don't get stronger and then you say let's get to relate the ranges themselves because you have these voices saying let's get rid of richard go ahead jump in jump in well that's mischaracterizing my position

a little because i didn't say let's get rid of ratings of course we need ratings i said let's get you know let's not tinker with this system that's so broken in terms of its incentives let's take these these organizations let them compete in the free market but in terms of the and s.r.o. status or anything else that gives a month or a government advantage let's take that away let's get another objective system where smart people can analyze risk in an objective way where they're not. being incentivized for the wrong things so we need ratings and we need to you know i can also agree with mark although i'm not a pure free market guy the market needs transparency and information let's get a rating system that's transparent that's open that lets us know what's really going on in the world mark you know there's a there's a lot of criticism it's a paved pay to play game this is one of the things that is criticize the agencies are criticised for because you know you basically pay to get your your high rating

ok when you take that incentive out more eve that possibility out do you think would get better ratings. i'm not convinced of because as i mentioned earlier i mean there's a conflict of interest between on the investor side as well there's a conflict of interest on the government side and i do think the market to be there but a number of empirical studies that do find differences even for the same ratings between moody's and s. and poor for instance so there are some reputational effects that are found in the marketplace i think we need to strengthen those reputational effects but one point i want to emphasize to you is that look at what the rating agencies had originally gotten wrong i mean i would say that there are errors have largely been consensus errors the biggest problem they had in the mortgage backed securities was like everybody else i should say ninety percent of everybody else they believed housing prices had simply go up forever or that they would simply level off these were the same mistakes i mean ben bernanke was out there saying that the subprime crisis was going to be contained so i'm skeptical that the when the rating agencies are making the same errors that the regulators are making are that the politicians are making i have a tremendous amount of skepticism about more regulation solving that when that is

the consensus view point ultimately what i think we ultimately want to do is encourage more diversity and more variety of viewpoints to enter the conversation and therefore if you have too much litigation you have too much penalties on the rating agencies to me you're going to force them to take the consensus view point to protect themselves but at the end of the day i want them to take some contrarian view points i want them to challenge the conventional wisdom which is not what we're getting today gary i want to go to you and i want to go back to the euro zone here the europeans in the euro zone are complaining it's the agencies are making the situation with the euro crisis even worse how do you come out on the. well they're trying to get the facts out and to the extent that makes it more difficult for european governments to raise more money you know i guess that's true but the radio agencies exist for the purpose of informing investors in the debt about what the risks are in the debt that they purchase you know their job is not to make the politicians in europe more comfortable. already richard how do you feel about the

idea or the rating agencies being a positive role in this crisis in europe. well let's look at if you go back to this summer and look day by day at what happened in the united states when standard and poor's issued its downgrade the market actually jumped slightly a couple days afterwards then john boehner and president obama did their austerity deal and that's when the market really tanked so i think their analysis is not off but the problem is they're not just an impartial observer they're a player in the process so as to so viewer i make that observation it's one thing if they make that observation it impacts the results so you know i think we have to separate those two things out is their analysis reasonable. through two are they credible and three aren't they a player so yes there analysis may be reasonable to there they don't have a lot of credibility so there are

a lot of people whose analysis i value more and three because there are a player there now almost creating a self-fulfilling prophecy as i think gary was suggesting marco do you think about that how can you take them out as a player in this process or is it impossible you have to reinvent the wheel here. well i mean there's probably a degree to which you're going to have to reinvent the wheel again the regulatory process as it has made them players of anything i think they've been too slow i would put far more criticism on moody's and fitch for not downgrading the united states and i would be they've been by all the rain agencies have actually been in my opinion quite timely when it comes to greece and italy they were calling this one before their actual problems there but again if anything the errors have been on the on the wrong side that they've let inflated ratings been the case you know it seems clear to me that the political process in the us and europe is broken and that we're not going in a resolution of this so again i think it's a shoot the messenger i mean you've seen these things in europe where they've complained about short sellers and if complained about the rating agencies it seems to be that they want to point the finger at everybody and what the obvious problem

is which are structural financial deficit fiscal deficits there and i think we're going to be gentlemen let's not forget the police now for. and to blame the politicians too many thanks my guess the day in washington and in philadelphia thanks to our viewers for watching us here r.t.c. you next time remember. sister.

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