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[William Pesek] Investors unite: Buy Australian bank debt

Feb. 23, 2011 - 18:53 By 류근하
Investors of the world, unite and buy Australian bank debt. Why? Moody’s Investors Service suggests you shouldn’t.

Really, in our post-U.S.-crisis world, is there a better contrarian indicator? Credit raters missed the Asian crisis, Russia’s default, the tech-stock crash, Enron, the U.S. housing bubble, Wall Street’s collapse and Europe’s meltdown. Now, we’re supposed to care what they think about anything?

Our continued interest in their musings shows how little has changed since the death of Lehman Brothers. What the gods of credit bring to the table in this real-time, globalized era is beyond me. They are the poster children of how much of the outdated system that crashed so spectacularly in 2008 remains.

It’s hard to recall the last time credit raters were ahead of the curve. If regulators aren’t going to impose sweeping reforms on them, the so-called bond vigilantes must wage their own uprising to downgrade the downgraders.

Credit markets did just that in Sydney last week. Moody’s didn’t say investors shouldn’t buy the debt of the country’s four biggest lenders. Yet that’s the inference many drew from the company’s warning that it may lower its Aa1 ratings on the banks because they rely on financial markets for 43 percent of their funding, leaving them too dependent on investor confidence.

Well, thanks for the newsflash. The failure of Bear Stearns was essentially a run on the bank. Investor confidence turned on Lehman, no matter how many times chief executive Richard Fuld pleaded for patience.

And if credit analysts are worried about Australia’s bank model, it’s predictably behind the curve. Data show bank profits rising as deposits grow, letting them reduce bond sales.

That explains why traders rolled their eyes and bond prices point to diminishing concern about the balance-sheet strength of banks. An Australian replay of how Wall Street brought down the American economy is a big reach.

Asia’s bond vigilantes should stir things up more. They should still go after profligate governments. They also should pressure credit-rating companies to try harder and tell regulators that all’s not well in world debt markets.

Wouldn’t it be delicious if Singapore stopped paying to be rated and said investors can make up their own minds about our debt? Or if Hong Kong billionaire Li Ka-shing announced he no longer needed a Good Housekeeping stamp?

Yes, such steps are unthinkable.

There’s also scant logic in paying for ratings that don’t reflect the true risks and opportunities facing a nation or company that many investors won’t trust anyway. This whole process has become more about going through the motions than financial transparency.

It’s difficult, author Upton Sinclair famously said, to get a man to understand something when his salary depends on his not understanding it. Tobacco executives and sausage-factory workers claim they don’t know what harmful substances might be found in their products. We package it, you buy it, and we don’t know.

Credit analysts can’t really say the same. If they don’t know the makeup of the securities they’re rating, red flags should be raised and more information sought before AAA or other ratings are bestowed.

Yet there was big money to be made from rating the increasingly complex products Wall Street tossed their way. Any system that allows issuers to shop around for the best rating is destined to be corrupt. Given all the money to be made from assigning the desired rating on this mortgage-backed security or that collateralized-debt obligation, greed and creative analysis fuse into a big conflict of interest.

And then there’s national interest. China’s Dagong Global Credit Rating, for example, keeps a straight face as it assigns Beijing a higher grade than the U.S. So does the Japan Credit Rating Agency when it explains why its debt-addicted government is a AAA credit. As if.

The process of assigning blame for the crash has homed in on greedy bankers, lax regulators, dishonest homeowners, Fannie Mae and Freddie Mac, you name it. Credit-rating companies deserve more scrutiny than they have received thus far.

The securities at the heart of the U.S. crisis could never have been marketed and sold without their complicity. And yet, too much of our flawed pre-2008 system remains.

Here’s an idea for Asia’s bond activists: Demand that fees paid for ratings be held in a sort of escrow and debt issues be assigned randomly to credit raters. This step alone would increase objectivity and restore some credibility. Otherwise AAA will come to mean ‘’Another Absurd Analysis.’’

If lawmakers aren’t going to change a system that says you need a rating, no matter how dubious, to get pension funds and other investors to buy your bonds, markets must take matters into their own hands. This is a job for the bond vigilantes. It’s time to direct their ire at our credit-rating system.

By William Pesek

William Pesek is a Bloomberg News columnist. The opinions expressed are his own. ― Ed.