Hedgie John Paulson, 21st Century Robber Baron?

What could be less likely to produce useful generalizations than a debate over vaguely defined moral issues based on unexamined ideological assumptions and presuppositions? - John Chandler, author of The Visible Hand

Outrageous fortunes tend to elicit suspicions of how they were amassed. In American history, this phenomenon is crystallized by the so-called "robber barons" prominent at the turn of the 20th century. Their names should be familiar to people the world over: John D. Rockefeller, Andre Carnegie, J.P. Morgan, Leland Stanford, and so on. Something these folks and their kin have done to take the sting from public scrutiny of how they amassed their wealth is to create foundations and sometimes institutions of higher education. Even today we have the Rockefeller Foundation, the Carnegie Foundation, and the JP Morgan Foundation, Meanwhile, Rockefeller also founded the University of Chicago, while Stanford did the same with his eponymous education institution.

The intersection of money and academia is of great interest to me personally for obvious reasons. Contrary to popular beliefs that academics are more interested in prestige or knowledge than wealth, I am often surprised how those in academia are among the worst money grubbers you'll find. There are certainly odd examples to be found. For instance, so many years after Enron became the very symbol of American corporate malfeasance, the University of Houston still awards--get this--the Enron Teaching Excellence award. Instructors also very much welcome chaired professorships. If you thought winning an Enron prize for excellence in anything was bad enough, the University of Missouri has a Kenneth Lay Chair in Economics. Malodorous dead company or malodorous dead guy--pick your poison, but it's still money either way. (A former American colleague tells me of someone offered the Playboy Enterprises Chair [!] who turned the offer down since he was a family man, but I sometimes doubt the veracity of this story even if it does make for great dinnertime conversation for academics,)

Anyway, just as episodes of corporate malfeasance symbolized by Enron were symptomatic of the excesses of the dot-com bust, so do we have our superstar hedge fund managers of today who are in serious need of...image rehabilitation. Like the robber barons of yore, John Paulson has made an outrageous fortune--in his case by taking out credit default swaps against issuers of subprime mortgages. The $15 billion he netted has been called The Greatest Trade Ever. The lustre of this move has dimmed somewhat with the revelation that Goldman Sachs offered a package of securities that Paulson shorted unknowingly to its buyers, but hey, read John Chandler's caveat above. Certainly, Paulson has his share of defenders in much the same way vultures have their defenders in the fauna food pyramid:

It’s widely accepted that while short sellers of stock are despised by corporate America, they serve a useful purpose. They enable people who don’t believe CEOs’ happy talk to put their money where their scepticism is. You may not believe the stock (or house prices) are a bubble, but those who think they are serve to restrain valuations by betting against them. In the process, they actually mitigate bubbles. One of the structural shortcomings of the housing market is that it is quite hard to short; houses are illiquid and heterogenous. This, all else equal, makes housing more inefficient and prone to bubbles. Arguably, devices that addressed this market flaw made the market more efficient. (Like Mr Sorkin, I am ignoring for the moment the legal question of whether Goldman made the right disclosures in marketing its synthetic CDO.)

Moralizing aside, I was reading my copy of the LSE employee newsletter when, lo and behold, I discovered that John Paulson was trying to cover his name in glory (or so he may think) by associating himself with our school. To remove the possible tarnish of dirty trading tactics, his pre-emptive strike is to fund a unit investigating Europe's role in combating financial crisis. It's interesting timing, of course, given that other hedge fund managers are using lower key tactics in taking advantage of EU turmoil. Maybe it's his way of washing his hands of the matter. Having had run-ins with US authorities already during the subprime fiasco, what better way to wash his hands of the matter as troubles head to Europe and its even more busybody lawmakers and civil servants...for the paltry sum of £2.5 million?

Paulson & Co. founder, John A. Paulson has donated more than £2.5 million to fund new research and teaching on Europe's unique role in the post-crisis financial world at the London School of Economics and Political Science. The gift will establish the John Paulson Chair in European Political Economy, a position which will be occupied by a leading scholar who combines expertise in finance, policy and the European Union with the reputation to speak to a global audience.

The chair will be located in LSE's European Institute which applies a broad range of academic disciplines to understand Europe's complex and developing role in the world. This comes at a time when the euro crisis has focused attention not only on the currency's future but also on how EU governments can restructure their politics, economies and social affairs in response. It is hoped the holder of the chair will be able to take up the appointment in September. The donation also includes funding for an associated five-year research programme.

Question their methods but robber barons of a century ago left behind buildings, railroads, universities, and so forth. What will the current generation of budding industrialists (de-industrialists?) leave behind? I'll bet John Paulson is giving it some thought as evidenced by his donation to the LSE. Fair enough. And I certainly wouldn't mind being the John Paulson Chair in International Political Economy one day [just kidding--but only just ;-)].

Hedge Fund Attack Hits France, Germany [Shh]

No one knows what it's like to be the bad man
To be the sad man
Behind blue eyes...

It's pretty safe to say that those working in the financial services industry are the usual suspects when things go awry in the world economy: Erratic market movements? Betting on commodities driving up the cost of living? Casino capitalists playing god with the lives of those in the developing world? Blame it on "the speculators." Two years ago, former Brazilian President Lula (himself a former labour activist) memorably told then-UK Prime Minister Gordon Brown that "blue-eyed" individuals were at fault for the global financial crisis:

This crisis was caused by no black man or woman or by no indigenous person or by no poor person," Lula said after talks with the prime minister in Brasilia to discuss next week's G20 summit in London. "This crisis was fostered and boosted by irrational behaviour of some people that are white, blue-eyed. Before the crisis they looked like they knew everything about economics, and they have demonstrated they know nothing about economics."

Challenged about his claims, Lula responded: "I only record what I see in the press. I am not acquainted with a single black banker." The remarks by Lula, a former trade union leader who had an impoverished upbringing in the poor north-east of Brazil, enlivened Brown's five-day trip to North and South America.

Now, hedge funds tend to attract a lot of attention for obvious reasons. Not really being obligated to disclose their holdings or trading strategies, they are suspected of any number of things--from fomenting the Asian financial crisis to worsening the subprime crisis. Short selling, hoarding, and similar trading strategies are not usually pleasant matters for dinner table discussion.

With the spotlight still on hedge funds, they are now more circumspect when it comes to shorting troubled European economies' sovereign debt. The battleground of the Asian financial crisis was primarily Southeast Asia and the subprime crisis North America. Now, though, the theatre of operation is Western Europe. Let's say that scrutiny is forcing many hedge funds not to be so obvious--by purchasing naked credit default swaps on PIGS debt, for instance. Instead, they are waiting for blowback to the very centre of the European Union:

Hedge funds are steering clear of hotly debated credit derivatives and reverting to more orthodox bond plays so as not to invite more regulation from the many politicians who blame them for the global financial crash.

Fearing being seen as "bringing down a country", funds are instead trading sovereign and corporate bonds as they hunt for less controversial ways of making money from market volatility. "The larger funds have been really cautious in trading CDS. They don't want to find themselves in the newspaper, and let it become an issue with their client base," said Jeff Holland, co-founder of fund of hedge funds firm Liongate.

Scouring through the track records and portfolios of hundreds of fund managers, firms such as Liongate select other funds to invest client money in, giving them a wide overview of trading strategies used by hedge funds. At the height of Greece's debt problems in February last year, Europe's second-biggest hedge fund firm Brevan Howard, which now runs $32 billion in assets, told its investors it had sold out of "meaningful" positions in CDS and bonds in Spain, Portugal or Italy. The firm declined to give further details.

"Hedge funds have been playing the bond spreads, which is less visible," said Philippe Gougenheim, head of hedge funds at Unigestion, which invests in hedge funds. "In the macro space they're definitely active on the bonds." While data on hedge funds' trades can be scarce, at the time of the Greek crisis last year hedge funds accounted for 12-20 percent of CDS activity, according to one hedge fund industry source, citing estimates from banks...

Leading European politicians have blamed CDS -- a bet on the creditworthiness of a borrower -- for aggravating the debt crisis, allowing investors to speculate on a default rather than protect against it, their original goal. Europe is approving a law giving the European Securities and Markets Authority powers to intervene in markets to ban practices, including naked selling of CDS, where the buyer does not own the underlying bond. That comes after an EU report -- which was not published, despite protests from the hedge fund industry -- on sovereign CDS last year largely exonerated CDS markets for putting pressure on bond prices.

To avoid the risk of tighter regulation, many hedge funds are buying or short-selling sovereign bonds -- even of countries as seemingly stable as France and Germany. "CDS is proving to be a more challenging market for traders, considering that governments are indicating that they could well change how the market is regulated," said Scott MacDonald, at U.S.-based credit specialist Aladdin Capital...

"We're still seeing some funds using CDS but a lot have diversified because of politics and uncertainty in the regulation of CDS," said Ben Funk, head of research at fund of funds firm Liongate, adding that cash bonds and currency also offer better liquidity. He added: "The general consensus is that there's more pain to go (for indebted European countries)... A lot of managers have taken off short Portugal or Spain positions, where it's almost a given there's going to be problems, and have moved to France or Germany...[i]n those countries the spreads are so tight, but should there be instability in the periphery they'll move."

I still remember then-Malaysian Prime Minister Mahathir "Death to Speculators" Mohamad calling out George Soros for destabilizing regional currencies. (They eventually kissed and made up.) Every generation creates its bogeymen, and the next one to raise the EU's ire just may be--you guessed it--a blue-eyed hedgie.

But my dreams
They aren't as empty
As my conscience seems to be...

Funding Carry Trade w/ $, Currency of the Doomed

It is common knowledge by now that next to nothing is going right in the US economy. America's various debt orgies have brought it little but additional misery. Deficit lovers thought they could revive this wasteland by borrowing even more humongous amounts to cure ills caused by borrowing too much in the first place. In the end, nobody feels sorry for America--except perhaps Martin Wolf, who's become something of an apologist for Anglo-Saxon orthodoxy as of late. It's justice served: if you act foolishly, you fully deserve what's coming to you.

As if we needed even more proof of the descent of this economic wasteland comes even more news of its pointless existence. Briefly, the "carry trade" is one of the most basic plays in foreign exchange. One borrows in a currency charging lower interest--the "funding currency"--and lends in a currency yielding higher. In the past, nearly zero-yield Swiss francs and Japanese yen were the favourite funding currencies of foreign exchange traders. However, a comatose US economy has meant policymakers keeping similarly low interest rates Stateside.

Voila! The dollar is now becoming a funding currency of choice. Not only is it yielding next to nothing, but limited expectations of the US escaping the ambit of its self-inflicted and wholly deserved financial ruin mean many are willing to use the dollar as a cheap and stably moribund funding currency. That is, a funding currency is best provided by an economy with few growth prospects that may require interest rate rises to cool down. Reuters explains this latest piece in the puzzle of American decline:

While the dollar is still far from surpassing the Japanese yen and the Swiss franc as the world's funding currency of choice, investors are no longer rushing to buy the greenback as a safe haven any time trouble erupts worldwide. While not inherently bad for the dollar, being a funding currency is a sign of investors' disenchantment in U.S. economic growth and return potential. In time, countries with funding units face difficulty attracting foreign investment, further eroding economic prospects and the attractiveness of their currency.

On Thursday for example, the dollar sold off against both yen and Swiss franc after a report showed factory activity in the U.S. Mid-Atlantic region unexpectedly contracted. Both currencies are lower yielding than the dollar, making them better funding options. Until recently investors would have sold them and bought back dollars after the headlines.

The move on Thursday "was not a flight into U.S. dollars, but a flight out of the dollar," said Douglas Borthwick, a managing director for trading at Faros Trading LLC, a forex execution firm in Stamford, Connecticut. "If the dollar is no longer seen as the destination for the 'flight to safety' then the market will use it as the currency to be short against high-yield trades given it will shield them the most from adverse moves," he added. "Thus it would become the funding currency of choice."

In the forex markets, a funding currency is used to finance so-called carry trades. A carry trade involves borrowing in a low yielding currency to buy higher yielding assets elsewhere. High liquidity, low yields and low volatility are all desired traits in a funding currency. The Japanese yen fit all of those attributes for years, making it popular for trades involving the Brazilian real, the Mexican peso and the Australian dollar.

"There's a possibility the dollar will be just like the yen a couple of years ago," said Dean Malone, a currency director at Compass FX in Dallas, Texas, which sold U.S. dollar versus Swiss francs on Thursday. "With yields these low, there's simply very little appreciation value in the dollar," he said. "Until we turn the corner, until employment picks up and the Fed decides to start raising interest rates, markets will keep looking for higher returns elsewhere. And the dollar may be used to help fund those trades..."

Some analysts are cautious however on reading too much into the dollar's recent trading behavior. They note that when taken into account the implied volatility and yield spreads across currency pairs -- key measures to help gauge a carry trade efficiency -- the dollar doesn't stand out as a funding unit.

Analysts at RBC Capital Markets compile a "carry value barometer," which ranks funding currencies, using option prices and measuring yield spreads adjusted for volatility. According to the bank's latest reading the Canadian dollar is now the best funding currency, in particular for trades involving the Australian dollar, South African rand, the Brazilian real and the Turkish lira.

In comparison, the dollar ranked between the 4th and 6th best option among 8 currencies, involving the same pairs. "No doubt the low yields are hurting the dollar," said Todd Elmer, a G10 currency strategist for Citigroup Inc. in New York. "But I'm not sure about selling it to buy the yen and the Swiss franc for some potential marginal yield gain."

I don't need to spell out what it means when some traders view USD as a better funding currency for the carry trade than the yen given the state of the Japanese economy for the last two decades. We knew it all along: America stinks and so does its currency. Long live the carry trade! I think it's time I took a punt on AUD/USD...

Protecting Asia From the West's Financial WMD

Liberalize, privatize, and deregulate your way to almost paradise; that was the message the West propagated during the height of the Washington Consensus era. Like many other Asian countries, however, China did not heed this call, preferring to stay away from securitization in a big way. Instead, China's recent financial problems are more prosaic and involve large government-run banks being compelled to lend to state-owned enterprises with sometimes limited regard for their ability to repay these loans. This trope was prominent in the middle part of last decade, and has resurfaced during recent times as the PRC once again made state-owned banks (SOBs?) lend to spur investment. Critics often say that investment in export-geared enterprises is the last thing China needs at this point, but we have yet to see another massive wave of defaults.

Anyway, back to today's story. The LSE house journal Global Policy has an interesting feature from the chief advisor to the China Banking Regulatory Commission (CBRC), Andrew Sheng, on how China was able to avoid the worst effects of the financial crisis. Aside from prudent regulation, another important task was shielding the Chinese economy from aftershocks emanating from the subprime capital of the planet and other bastions of financial innovation. It's a different world we live in when China--now the second largest economy in the world which I'll have more about soon--gets to lecture the West on such matters. With nearly $3 trillion in foreign exchange reserves, I guess China has many reasons not to take any £$%^ from Westerners wanting to ply their market open without reflecting on how their practices have impacted the economies of their home countries. What follows are the abstract and key policy implications:

Abstract

Asia was not directly or significantly hurt through financial channels by the global financial crisis, but rather was hurt through trade channels. This article reviews the current regulatory reforms of global financial markets and how these affect Asia. The current crisis has exposed many weaknesses in the existing financial architecture, including the fragmentation of regulatory jurisdiction at the national and institutional levels. What is required is a system-wide and global view of market behaviour. The article uses a network perspective to analyse the issues and to propose solutions. The globalisation of finance and its fragmented regulatory oversight is a collective action problem that easily slips into a tragedy of the commons. Given the fact that there is no unanimity of views on how finance should be structured, there are differences in approaches to the reforms. Because Asian financial institutions and structures are less sophisticated, Asia is still struggling with how to make the financial system more efficient and responsive to real sector needs. The article suggests that Asia needs to identify its financial needs and can develop its markets through greater regional cooperation. Identifying the need to see financial markets as ecosystems through diversity, the article suggests that Asia can evolve through simpler but more robust financial systems.

Policy Implications

• As a matter of priority, Asia needs to strengthen domestic capital markets according to international standards.
• The Asian approach will tend to be more pragmatic, focusing on simpler rules more effectively enforced. Financial innovation should be encouraged with an emphasis on functionality for the real sector, rather than leverage for the financial system.
• Using the network approach means that Asians should build financial markets on a modular basis, ensuring that failure of one module will not destroy the whole system.
• Since it is recognised that global problems cannot be solved at national levels alone, Asia can increase its voice in the international arena through regional subsets of the Financial Stability Board, central bank grouping within the Bank for International Settlements (BIS), and the International Organisation of Securities Commissions (IOSCO) to help push implementation and enforcement according to global standards and to have regional input into global policy decisions.

Its a common theme that should resonate with reasonable-minded folks: financial practice should map closely to the real economy instead of being used to create virtual economies whose basis of and reason for existence is hard to determine.

Wild Days and Nights of Korean Won Intervention

Asian developing countries are noted for their highly involved approaches to foreign exchange policy. Perhaps this is a natural result of being export-oriented: sustaining large trade surpluses involves no small attention to currency matters. Just as Japan's model of export-led industrialization set a template for other Asian economies wishing to follow in its lead--Akamatsu-san famously called it the "flying geese model" (with Japan in front)--its policy choices have filtered down to other wannabe economic powerhouses. Although Japan has not intervened in the currency markets for a very long time, other Asian economies have not hesitated to demonstrate what exactly a "managed float," or more condescendingly, a "dirty float" is.

However, one thing most commentators (like American lawmakers, say) don't make more of is that Asian countries intervene to both strengthen and weaken their currencies based on perceptions of prevailing economic conditions. During the Asian financial crisis, the region was obviously preoccupied with maintaining the value of their currencies as speculators bet on devaluation. Many didn't beat the speculators, but some did. Around 2007 when the dollar was in a free fall, many of these same countries then began to buy dollars and sell their local currencies to ensure continued export competitiveness. And we all know what China has been up to all this time.

It seems old habits die hard. As you know, South Korea has been hit by political turmoil as the country grapples with how to deal with North Korea over the sinking of a warship that caused the loss of 46 lives. A formal peace has never been declared between these warring states and tensions are again high. Along with sinking equity markets, South Korea has been hit by volatility in the all-important currency market. Last Wednesday, its financial authorities signalled that they would be taking a more active approach to dealing with FX matters:

“Authorities will supply sufficient foreign currency liquidity if needed,” Vice Finance Minister Yim Jong Yong said at an emergency meeting of officials from the Finance Ministry, central bank, economy ministry and financial watchdog in Gwacheon today. “We will be closely watching for herd behavior in the currency market and take necessary actions in a prompt and active manner...”

South Korean Finance Minister Yoon Jeung Hyun said today the government is “ready to cope with” the volatility in financial markets given its substantial foreign-currency reserves. The reserves totaled a record $278.9 billion at the end of April, 31 percent more than a year earlier.

"Active" is the key word here. And so South Korea has once again waded into familiar waters of Asian currency intervention. Yet, an even more notable thing is the recent bounceback of the won being deemed as perhaps too excessive. Call it a fine line to walk between perceptions of a free-falling currency and maintaining export competitiveness. Instead of waiting weeks or months to see the fruits of their actions, Korea's central bank is believed to have step in again just a day after on Thursday to stem won appreciation!

The South Korean won soared nearly 3% during Asian trade Thursday on heavy buying by offshore players and exporters but pared those gains in the afternoon session following suspected intervention by the central bank. Traders were surprised by the central bank's suspected moves to support the dollar as it would mark a reversal from its reckoned selling of the greenback just days earlier, when the won had fallen to a 10-month low due to rising geopolitical tensions between the two Koreas.

"This seems to be a means to prevent excessive (one-sided) moves," given the won's sharp gains earlier in the day, said a local bank trader. "But I personally don't understand this." Authorities likely stepped in Thursday near the dollar's intraday low of KRW1,217.50, lifting it to KRW1,224.0, several local traders said. Two of those traders estimated the central bank to have bought between $500 million and $1 billion, possibly through two foreign banks.

You can make the argument that all this busywork is part of an overall effort to stabilize the won within an acceptable range. In line with this argument, financial authorities are keen on limiting derivatives trading involving the Korean won to also limit the range of currency fluctuation:

“The events of the past week gave us another reminder of the impact of capital flows driven by short-term market-driven dynamics rather then the economic fundamentals,” said Shin Hyun-song, the South Korean president’s senior adviser on international economy. Mr Shin said the government was considering “various options” for regulating currency forward positions for domestic banks and the Korean branches of foreign banks. He insisted that any measures would be introduced carefully to allow market participants a “smooth transition...”

At the end of last year, financial regulators limited the size of forward transactions by local companies to no more than 125 per cent of the revenues they were hedging. Exporters, especially shipbuilders, were accused of overhedging foreign orders, putting upward pressure on the won before the global financial crisis hit the country.

Talk about playing both ends with some mustard on the side. If true, these actions set a new standard for central bank activism. And you though the Chinese and Japanese were pretty active on the management of currencies front. South Korea, you are our new king of the hill in this arena. The "overmanaged float," perhaps?

Record US Foreclosures? Excellent News!

Call it schadenfreude, but I cannot but help applaud news that the United States is suffering record delinquencies and foreclosures (also see the MBA press release). Remember, these are the same folks who tried to impose upon the world "Washington Consensus"-style strictures of liberalization, privatization, and deregulation on the road to some sort of economistic paradise. Yet, when faced with troubles have happened at home, they've undertaken unprecedented deliberalization, nationalization, and reregulation. While this sort of double talk is to be expected from Americans (as other who've aspired to similar hegemonic entitlements in history), the only real question for me is why the rest of the world allows the United States to get away with this boorish behaviour.

What rising delinquencies and foreclosures demonstrate are obvious things folks in the blogosphere aside from me have reiterated over and over:

• You can't fix a problem caused by excessive borrowing by borrowing trillions more;
• Helping wipe out private finance for housing isn't a characteristic of a market economy;
• Massive losses by Fannie Mae and Freddie Mac indicate the rot of continuing patterns of government involvement in the US housing market;

Alike with the subprime crisis, the whole point is to reveal that massive state supports to housing are fiscally wrongheaded and, ultimately, senseless. The American Dream is a farce. Ditto for pretending that the fiscal consequences of extending a limitless lifeline to Fannie Mae and Freddie Mac do not exist. When you lie so much to others that you believe your own lies--Fannie Mae and Freddie Mac's deficits don't matter--don't expect sympathy from anyone else. Such is modern America; the "ownership society" is, in reality, the tent ownership society [1, 2]. This emperor has no clothes.

So, may the fates deliver those participating in these housing shenanigans to a very, very well-deserved fate. Our only regret should be that the US isn't being slammed even harder. Thankfully, we're getting there. Quit this nonsense or suffer the consequences. Throw them out. Throw them all out.

EU: Screw Credit Rating Agencies; We'll Do Rating

Credit rating agencies have long been bogeymen for those facing down financial crises. During the Asian financial crisis, Ferri, Liu, and Stiglitz (1999) found these agencies complicit in procyclical ratings that worsened matters. Here is the abstract of their paper:

We demonstrate that credit rating agencies aggravated the East Asian crisis. In fact, having failed to predict the emergence of the crisis, rating agencies became excessively conservative. They downgraded East Asian crisis countries more than the worsening in these countries' economic fundamentals would justify. This unduly exacerbated, for these countries, the cost of borrowing abroad and caused the supply of international capital to them to evaporate. In turn, lower than deserved ratings contributed – at least for some time – to amplify the East Asian crisis. Although this goes beyond the scope of our paper, we also propose an endogenous rationale for rating agencies to become excessively conservative after having made blatant errors in predicting the East Asian crisis. Specifically, rating agencies would have an incentive to become more conservative, so as to recover from the damage these errors caused to them and to rebuild their own reputation.

Well it's 2010 and it seems these same credit rating agencies haven't learned their lesson at all. In this game of perception, have a gander at the view of market participants at what EU actions mean. To them, the ECB allowing Greek bonds to be used as collateral regardless of their credit rating is the latest in a long line of concessions to erring EMU countries:

Still, crucially, this isn't the first key rule behind the euro to be scrapped. Greece, and a number of the other 15 euro members, have already disregarded the rule that borrowing levels should be kept low. Another perceived rule, that no euro member should bail out another, has also been ignored. Now, market watchers warn that this fresh rule-bending exercise creates a further dent to the solidity of the single-currency project. "Junk debt is junk debt. You can't have different rules for different members of the euro. Otherwise, what's the point of having a single currency?" said Simon Derrick, a senior currencies analyst at The Bank of New York Mellon in London

Ah, well. Markets will markets, eh? Far more interesting has been the response from EU bigwigs, In particular, Michel Barnier, Commissioner for the Internal Market and Services, has been keen on policing the dreaded Anglo-Saxon abuses of the credit rating agencies:

"I think we need to go further to look at the impact of the ratings on the financial system or economic system as a whole...," European Internal Markets Commissioner Michel Barnier told members of the European Parliament. "That's why I asked for responsibility to be assumed in the work they are doing." Barnier added: "If you look at Greece, for example, I was quite surprised by the quite rapid deterioration in rating." His comments follow a reminder from the executive European Commission to rating agencies to be careful in their work.

The kicker, though, is that he's now proposing that the EU itself do the job of rating (or at least sponsor an organization doing so on the EU's behalf):

The European Union is examining plans to set up a European credit-ratings authority for sovereign debt ratings in the wake of the Greek crisis, the bloc’s top financial regulator said today. Financial Services Commissioner Michel Barnier is also examining whether ratings companies have too much power, he told the European Parliament’s economic and monetary affairs committee in Brussels today.

“We are undertaking work on creating a European agency,” Barnier said. “We need a very fast, but not off-the-cuff reflection,” he said. “The power of these agencies is quite considerable, not just for products but also for states.” Scrutiny of credit-ratings companies intensified after Greece’s rating was last week cut to junk status.

Is it just me or are there similar conflicts of interest inherent here as when financial service concerns approached credit rating agencies soliciting business? While credit rating agencies' reputations are deservedly junk, you have to wonder if the alternative here can be made to be worth rather more. Yes, EMU countries are probably suffering from credit rating agencies' overreaction now as during the Asian crisis. However, the 'cure' may be worse than the disease.