IN the grand scheme of things, the news that JP Morgan’s profits hit a record high, while Goldman Sachs massively smashed expectations, was the most significant business story of the week. Wall Street is back; the US financial system is in much better shape than Britain’s. At the same time, the fact that Jamie Dimon, JP Morgan’s boss, had his pay halved, while Goldman paid its staff the lowest share of revenues since 2009 also shows a rebalancing towards long-suffering investors and away from staff. On balance, this is good news for London, even though staffing levels are still falling.
But yesterday was also the day it became clear that the UK high street is genuinely going through the equivalent of a wholesale, epoch-defining evolutionary “shock” moment similar to the extinction of the dinosaurs. The internet was the meteorite and the retailers that specialise in goods that can be sold online and content that can be digitised the plodding, formerly all-powerful but now obsolete beasts. It is a tragedy for thousands of staff but another important moment for the reallocation of capital. Blockbuster’s collapse into administration, just days after HMV’s demise, Jessop’s liquidation and the death of Comet, is a shocking sign of the scale of what is happening. Some say that capitalism is conservative. That isn’t true. It is the most radical, revolutionary system we have ever known.
THE IMPOSSIBILITY OF CREDIT RATINGS
PERHAPS surprisingly, the new rules for credit rating agencies outlined by the European Parliament weren’t all bad. The best news is that ratings will no longer have official status and will no longer be embedded into the financial system via regulation. By 2020, no EU legislation should directly refer to external ratings, and financial institutions will no longer be forced to automatically sell assets in the event of a downgrade.
The rest, unfortunately, will be either useless or dangerous. I say that as critic of this industry, which failed appallingly during the crisis.
Unsolicited sovereign ratings will be allowed to be published no more than three times a year, on dates announced ages in advance. This will put agencies even further behind the curve than they already are: if a country goes through a crisis, the agency will not be able to publish an update to its position and will presumably end up misleading investors, potentially for months. Issuing a rating outside the calendar would be grounds for allowing investors to sue the agency for negligence. This is a counter-productive, stupid move and makes a mockery of free speech. Credit rating agencies will also be banned from calling for policy changes. And the call to consider developing a European creditworthiness assessment will rightly be seen as an attempt at propaganda.
The key problem at the heart of credit rating is not even the wrong incentives, though they play a role. It is the credit rating agencies’ pretence (implicit or explicit) to knowledge that they cannot possibly have. To be truly useful, a credit rating agency would need the same skills as Warren Buffett, the greatest investor of all times. That is of course epistemologically impossible, a fatal conceit. Non-superhuman investors mostly get it wrong; rating agencies are no different. So rather than be granted God-like status – via regulations that base key investment decisions on their ratings – or as evil, Anglo-Saxon conspirators, they need to be seen as what they really are: generally well-intentioned scribblers with spreadsheets. They should have the right to say what they want – but not to be taken too seriously.
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