welcome back you're watching live from moscow these are they have lines blackwater received back into iraq the infamous mercenary company undergoes a rebranding facelift in an effort to raise its history and cash in on the country's uncertain future. northern cost of a stop russian drugs carrying humanitarian aid from reaching struggling local serbs stripping down a vital supplies in an apparent show a political force. revolution flashback tens of thousands of people across libya take to the streets to demonstrate against the country's transitional government

the protesters want immediate reforms and more transparency as patients for the post gadhafi government then. use latest plan to save the euro zone faces a very real prospect of falling flat on his face debt stricken euro gratz will have to persuade the britain to cough up for a new blog bailout through the i.m.f. and. that's the headlines here on our team and the next leader of al and his guests discuss the motivations of the rating agencies involved in the economic crisis. and if you.

blow in the welcome to cross talk i'm peter lavelle the credit rating agencies all powerful financial bullies for profit or necessary evils watching governments and companies having grossly stumble during the great global recession are they now trying to make up for past mistakes. and if you. start. to cross talk the rating agencies i'm joined by richard asco in washington he's a blogger and writer and a former wall street executive also in washington we have mark calabria he is director of financial regulation studies at the capital institute and in philadelphia we cross to gary which he is assistant professor of finance and statistics at temple university and former moody's managing director are a gentleman this is cross talk that means you can jump in anytime you want and i very much encourage it but first let's have a look at some of the controversy surrounding the rating agencies. last week u.s.

rating agency standard and poor's said it was placing fifteen euro zone member states including germany and france on negative watch with the possibility of a downgrade it did so ahead of the european council meeting where angle merkel and nicolas sarkozy were supposed to thrash out a response to the european debt crisis this is not some critics to believe the agency is exerting pressure on the european council and trying to influence the course of the talks the financial crisis will be causing in the eurozone is no longer a crisis of individual countries on the periphery we think it has taken on sort of a more systemic trajectory has been spreading into some core countries and also financial institutions of the core countries ergo standard and poor's warning to downgrade practically the entire eurozone would also include the european financial support facility the euro zone's financial backstops critics say that becoming an additional player in the game of european politics standard and poor's could

further complicate current attempts to create central control over fiscal deficits and state borrowing while others suggest that rating agencies cannot be blamed for sounding an alarm on the fiscal problems of the e.u. countries some reports are of course not always right they got the subprime mortgages the united states spectacularly wrong but the part of the matter is that when the european political leaders complain about the rating agencies all they're really doing is shooting the messenger standard and poor's much criticized here to for c. the collapse in the us a prime mortgage crisis which triggered the two thousand and eight meltdown has led some to interpret its tough stance on the eurozone as an attempt to offset would some have called illini an attitude and some politicians have even welcomed the agency's levee district the truth is that europe needs to reorganize and to get rid of its debt that's a fact it's a good one the agency is saying is that in order to attract investors europe needs and the eurozone. a rigorous structured efficient framework capable of meeting its

long term and mid-term commitments from all meanwhile pressure on the e.u. leaders has been for their compound and by moody's warning on monday saying it will give you all e.u. credit ratings if the member states cannot deliver decisive policy measures to fix the eurozone crisis matia charney for cross-talk r.t. . ok first i'd like to go to richard in washington richard you are like in the rating agencies to a racket and you've written they act like a drunken sheriff uses his badge in a speedy western to bully intimidate and cajole themselves into ever greater positions of power and wealth well you have an opinion on it. well look at it probably wasn't fair to say they're drunk and share a silly and intimidating look you have a situation where i don't know their drinking habits but you have a situation where by government to crease starting in one nine hundred seventy five

these agencies are in within the united states at least recognized quote unquote as a nationally recognized statistical organizations yet at the same time they are for profit corporations publicly traded that benefit from getting more and more business and they go to the financial institutions that they're rating for business so the records that have been uncovered about internal correspondence and and phone conversations and so on clearly show that these agencies were trading ratings for money when it came to the big united states banks and that they're very susceptible to political influence as we saw this summer when standard and poor's downgraded the united states to billion dollar error was found in their calculations and they neither explained it nor change their rating so i think what we're seeing are for profit companies using the leverage the badge if you well that

the government's given them and others have given them for their own personal gain and i think that's a very broken system ok mark in washington what do you think about that it sounds like a different form of corruption to me. well you know surprisingly i think there's actually a lot that i agree with that was just said i think i would parse out who gave the badgeman who created this system you know i certainly start from the premise that if the government starts paying goodies people are going to lobby for those goodies and they're going to exploit those goodies so who's really the blame here the addict or the dealer and of course i look at it that the f.c.c. started in again you could actually in the thirty's the o.c.c. started implementing provisions on bank control in terms of what assets they could hold with the rating agencies so again the regulators haven't betted rating so into the system i do think we need to get to a world war financial markets are far less dependent on rating agencies and that means we need to add in my opinion the n r s r o system we need to make these ratings stand for themselves and of course there are several regencies minicon

jones as well in an agency that still use a subscriber model and oddly enough even judges been more aggressive than the other agencies in terms of downgrading sovereign debt and of course you can judge was also one of the agencies the court won't comment enron so again these agencies have had a horrible track record but at the end of the day i think what we need to do is remove the regulatory reliance on them and treat them as what they truly are simply somebodies opinion ok. i mean there's profit involved here and so and i was looking at some of the research done on these companies and everything almost the first thing they always say you know what what your goal is to make money ok it's not to be right it's to make money go ahead gary yeah. again i agree with much of what the first two commentators have said but there. there is a lot of misunderstanding about the role of rating agencies and the role that they played in the financial crisis and the role that they're playing now in the european debt crisis are totally different it's really important to understand that

in the financial crisis of two thousand and seven two thousand and eight it was inflated ratings and structured finance that were incorrect and that led to that. bubble here today in the european debt crisis they're actually lowering ratings and warning of lowering ratings on sovereign debt an area which they don't get paid it's basically a loss leader for them so yeah the conflict of interest between the fact they get paid by the corporate and structured finance issuers that they rate and the fact that they do they are used by regulatory for regulatory risk assess assessment by governments all over the world including the b i yes those two facts are a huge problem but the real issue is not should we come up with something different from ratings yes by all means if we come up with something better for regulatory

risk assessment let's use it the question is what is that better. risk assessment that can be used by you know government regulators ok what is it ok let's everybody says let's get rid of. and then i was going to richard i want to go i want to go to you anyway because i'm holding one of your articles right now and i mean if if we if we're going to trust the rating agencies when it comes to sovereign debt i mean you point out ninety percent of mortgage securities were rated aaa in two thousand and seven later to be downgraded to junk status i mean that's not just an error that is you know what that's a fundamental flaw in the entire system here so if you get it wrong on mortgages you can get it wrong also on sovereign debt. well you know two things really offend me in life one is you know the kind of conflict of interest or selling opinion the other is doing a lousy job of analytically and so these guys these agencies have offended me on both grounds by being bad at their jobs as well as having

a conflict of interest and i wanted to respond to gary as saying that this is a loss leader because i think that's absolutely right but for whom so the question is when you have your primary clients are the most powerful corporate leaders in the world and you're offering another service as sensually for free who is that you're going to try to please and ingratiate yourself with in providing that service and i've been in that world and maybe it's just a happy coincidence that there are opinions on sovereign debt always seem to line up so nicely with the political and other opinions of their largest clients but it does seem to work that way so if you put together they're really terrible track record at crunching the numbers which as i say also annoys me with their history and their conflict of interest which is documented in our ages i think what you have here is a broken very broken system i think these guys should be taken off the field

frankly and left to compete in the private market but i would differ with mark in that i think that the profit motive has got to be to i think these guys should be like the fire inspectors that rate buildings for flammability it should not be sold to anyone especially the building owners they that's a government function of keeping the public safe that's ok i give this to universities or you know nonprofits but i wouldn't i wouldn't leave it where it is ok mark you want to point out here and i think it's a very good good interesting thing for of our viewers to do you know and then no one ever complains when they get a triple a rating everybody complains when it's anything lower go ahead. b. 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 is comfort 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've

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 in the have the interest investors at heart i have their own interests at heart so what the at the ultimate goal here is how do we minimize our offset the 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 decision let me jump in here we go to a short break and after that show frank will continue our discussion on the rating agencies state.

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the. line. would be so much brighter if you knew all about song from phones to impressions. whose phone starts on t.v. don't come. up. and you can. still. want to. welcome back to cross talk i'm curious about your mind you were talking about the credit rating agencies. and.

ok gary and i to go back to you in philadelphia one observation is going on here because we've seen the standard and poor's and the other agencies in the in the news in a big way particularly 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 direction i mean what's wrong with the radiations 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 road. 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

say for instance they're saying that you know right now they're really focusing on the fact that. results of the meeting on friday are going to just lead to more austerity in southern european countries and probably we 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 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 richard if i go to you and they say let me go to richard here is it i mean are these agencies good at the at describing political risk because what's 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 john those were really only about here i keep arguing ok with you no no no well then let's then let's go to austerity economics where are we 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 and i can talk about what i think you should do and i'm often paid for to talk about things that's on my job is so the question is 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 is 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 i carry 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 of pay a penalty they 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 i have advocated the s.e.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 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 into that plays into the way the rating agencies in a sense because we don't get so wrong i meant to say let's get to relate the rein aid system cells 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 them on fair government advantage let's take that away let's get another objective system where smart people can analyze risk and 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 or criticize more because you know you basically pay to get your your high rating ok when you take that incentive out 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 believe housing prices and 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 in 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 ok 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 the agencies are making the situation with the euro crisis even worse how do you come out on that

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 the 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. all right richard how do you feel about the idea the rating agencies being a positive role in this crisis in europe. well let's look at it 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 and 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 is so if you're 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 they don't have a lot of credibility so there are a lot of people whose analysis i value more and three because they were a player they're now almost creating a self-fulfilling prophecy as i think gary was suggesting 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 which are 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 they've complained about the rating agencies it seems to me that they want to point the finger at everybody and what the obvious problem is which are structural financial deficit fiscal deficits there so and i think we're going to hear gentlemen let's not forget the police now forget the blame the politicians too many thanks to my guest today in washington and in philadelphia thanks to our viewers for watching us here r.t.c. takes time to remember. it.

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