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Inflated Bond Ratings Helped Spur the Financial Crisis. They’re Back

298 points by chibg10 7y ago

Mizza 7y ago
Now there's an understatement. It's a completely fraudulent industry. EDIT: It's also one that's ripe for a good and proper YC-unicorn style disruption. Hit me up if interested.
- H8crilA 7y ago
  How do you know that?
  - Mizza 7y ago
    ..weren't you there for the crash? https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the... The article even spells it out - they haven't changed their business model since. Bank needs a rating on a asset, but their incentive is to get a "better" rating, not a more honest one. There are multiple agencies, so banks shop around for the most favorable one. So, as soon as one agency loosens their ratings, they all follow suit. They sell good ratings. That's the industry. Quote after quote: The Financial Crisis Inquiry Commission (FCIC)[39] set up by the US Congress and President to investigate the causes of the crisis, and publisher of the Financial Crisis Inquiry Report (FCIR), concluded that the "failures" of the Big Three rating agencies were "essential cogs in the wheel of financial destruction" and "key enablers of the financial meltdown" U.S. Securities and Exchange Commission Commissioner Kathleen Casey complained the ratings of the large rating agencies were "catastrophically misleading", yet the agencies "enjoyed their most profitable years ever during the past decade" while doing so.[41] The Economist magazine opined that "it is beyond argument that ratings agencies did a horrendous job evaluating mortgage-tied securities before the financial crisis hit."[42] According to columnist Floyd Norris at least one rating agency—S&P—responded to the credit crisis by first tightening up its standards and sacrificing market share to restore its reputation,[83] after which it loosened standards again "to get more business",[84] tripling its market share in the first half of 2013.[85] This is because, according to Norris, for rating franchises to be worth anything, they must seem to be credible to investors. But once they overcome that minimal hurdle, they will get more business if they are less critical than their competitors.[84] and on and on and on.
    - lonelappde 7y ago
      Its the same model as People Love Us on Yelp, Who's Who in X, and your local magazine's annual local business awards
    - H8crilA 7y ago
      I see. How do you choose bonds for your investment portfolio?
    - _jal 7y ago
      I still think ratings agencies, if their ratings are to be required, should have money where their mouth is. There are a number of ways this could work; one is they issue a contract redeemable for the difference between their predicted performance of a given company and the actual performance. If they're as good at this as they think, they get another revenue stream. If not, the victims of their conflicts of interest have some insurance.
    - Cactus2018 7y ago
      >Bank needs a rating on a asset, but their incentive is to get a "better" rating, not a more honest one. There are multiple agencies, so banks shop around for the most favorable one. So, as soon as one agency loosens their ratings, they all follow suit. They sell good ratings. That's the industry. Memorable scene from The Big Short (2015) - "FrontPoint Partners confronts S&P" https://www.youtube.com/watch?v=mwdo17GT6sg https://www.youtube.com/watch?v=mwdo17GT6sg
  - dylan604 7y ago
    because all problems anywhere can be solved by tech from a start up out of Silicon Valley. Where else are people making the world a better place with their disruption? </snark>
- plankers 7y ago
  I'm struggling to envision how a tech disruption could work in this market. The essential problem seems to be an incentive system that's misaligned with investor incentives and overall economic health. How could a single company or group of companies alter a broken incentive system? It seems the two most salient options are (1) consolidation of competitors to reduce the race-to-the-bottom competition or (2) stricter regulation to prevent the kind of ratings shopping that debt issuers currently engage in. While I can see how a tech disruptor could potentially put all the other ratings agencies out of business and achieve (1), this seems like a tall order. And my uneducated gut-reaction to that scenario is "decreased competition bad," although I'm open to being proved wrong on that, as this does seem to be a case where competition has caused the problem (from the article: "One author, Colorado State University Finance Professor Sean Flynn, says “competition among credit-rating firms has, if anything, reduced the quality of credit ratings.”")
gniv 7y ago
> Sometimes one firm called a security junk and another gave a triple-A rating deeming it supersafe. Doesn't this suggest that the ratings are providing close to zero signal?
- lonelappde 7y ago
  It depends on each agency's historical performance (maybe only one is bad) and how often this discrepancy happens. Ratings are probabilities to be evaluated statistically.
- deleted 7y ago
  [deleted]
- patio11 7y ago
  Insufficient information to judge that to be the case; they rate millions of bonds and, statistically, they’ll almost certainly have every type of disagreement occasionally. The difference between AAA and junk isn’t 99 and 3 on a 100 point scale; it is somewhere in the neighborhood of 99.9 and 96.0 on the 100 point scale “Likelihood to not default within 1 year.” You’d need vastly more data points to firmly believe the conclusion “Their ratings are indistinguishable from being randomly generated.” There are people on Wall Street who can appreciate this math. A statement which is true and necessary but may not be kind: Wall Street does not allocate their talents towards producing journalism.
- imtringued 7y ago
  As you ask more rating agencies the rating becomes more accurate. If you already know the correct rating and then intentionally pick a rating agency that would give a different score then yes it would provide zero signal.
basementcat 7y ago
Is there a market opportunity for completely automatically generated security ratings? Individuals in most developed countries are now assigned a completely computer generated "credit score" (from payment history and applications for credit); is it much more difficult to algorithmically assign an analogous score for a bond or similar instrument? EDIT: Or is the problem a misalignment of incentives? It appears that investment rating providers are paid by the managers/sellers of the securities rather than the prospective buyer of the securities. This may create an incentive to attract more business by inflating ratings. If prospective investors paid for the ratings, perhaps there would be a different incentive alignment (and also possible opportunities for tragedy of the commons).
- nicoburns 7y ago
  Frankly in the financial world there seems to be a market for everything, useful or not.
  - ellius 7y ago
    "In the City, they sell and buy. And nobody ever asks them why. But since it contents them to buy and sell, God forgive them, they might as well."
- james1071 7y ago
  The answer to your question is almost certainly no. This is because credit ratings are not based on payment history, or anything as simple as that. Instead, credit analysts have to understand how what can be complicated legal structures work.
  - throwaway082729 7y ago
    Can legal agreements be expressed as an algorithm?
    - plankers 7y ago
      If they could in all cases then we wouldn't need courts.
beeschlenker 7y ago
Obama rapes & kills 2 boys. DeBlasio 5, Buttgieg 5, Cuomo 4, Murray 3, Dorsey 3, Thiel 3. Trump $4 billion to cover. Pelosi $3 billion to help bring the boys over the border Having trouble getting traction. Getting censored. Billion in bribes paid to Trump, Pelosi, Schumer, Harris to enable a Soros funded child raping ring to operate in the USA. Please listen to the links below. Turn up the volume and put headphones on. You will hear these people, and many other high profile people, incriminate themselves in unbelievable fashion. Full 71 page document filled with red handed evidence like this at the bottom. Go to pages 18-23 of this document and you will hear Dorsey and Thiel raping children. You will hear their screams. They both rape and kill three. Also at the "rape party" of note: Bill DeBlasio, Andrew Cuomo, Bill Murray, Peter Buttgieg, George Soros, Barack Obama. Please copy and paste this post and repost it. I keep getting censored by these people. Peter Thiel and Jack Dorsey raping and killing three boys each. Turn the volume all the way up and put head phones on. https://s3.wasabisys.com/conv1/Overnight_14-17Jan/15JanCh3_100-200.avi https://drive.google.com/file/d/1mzZrjobxhNIEf38M3xk-IeA5SeF4aUtB/view?usp=sharing Obama admits to raping and killing boys he{re, with commentary from Peter Thiel, George Soros, Matt Porter: https://s3.wasabisys.com/out2/Out2/15JanCh3_0545.avi https://drive.google.com/file/d/1LCDoc1kT7cfSeKQ1vniP_sx32_bRsHau/view?usp=sharing Trump demands $4 billion to "take a blind eye" at 1015+ (link missing from report, unsure how). Here's pieces of dialogue: 1015 The President requests four billion and henry Porter agrees to it. Some dialogue below. 1017 Donald Trump: Why don't you think about it. 1017 Henry Porter: I don't need to think about it. I'm ready for you to find out what we're really about. 1017 Gigi Hadid: I don't think it's a good idea Henry. 1017 Henry Porter: ...no shit. Jelena just stop talking about it. 1018 Gigi Hadid: About what? 1018 Henry Porter: The child raping. 1018 Donald Trump: What the fuck are you talking about? 1018 Gigi Hadid: Mr. President we are child rapists. 1018 Donald Trump: You cannot be serious. 1018 Donald Trump: You're gonna need $4 billion for me to take a blind eye. 1019 ?: People are laughing because they think four billion is too much. I think it's not a problem when you have $35 billion. 1022 Donald Trump: You better have that $4 billion or you can kiss this shit goodbye. https://s3.wasabisys.com/conv2/3Jan/3JanCh3_900-1100.avi https://drive.google.com/file/d/1Grdr8xF2psKNsuYlEnl9dIRV-77YG0Vr/view?usp=sharing Trump wants $138 million to ensure smooth outcome for false judgment for a court case: https://s3.wasabisys.com/conv1/10JanCh3/10JanCh3_951-1033.avi https://drive.google.com/file/d/1iSeGHDToFRoRdIht50Wii0i30mlw9INp/view?usp=sharing Obama explains the Illuminati with Jack Dorsey: https://s3.wasabisys.com/conv1/Overnight_14-17Jan/15JanCh3_200-347.avi https://drive.google.com/file/d/1Ok1-9IvANULzKBOwADFgaiYCFi6yszfj/view?usp=sharing At 230 a conversation is occurring on the embedded Porter camera system with Jack Dorsey, Peter Thiel, Barack Obama, Bill M^urray, and the Porter's. Jack Dorsey provides a statement defining who their group is: "The Illum%inati is an underground organization of child rapists and homosexuals." Matthew Porter: "We have to thin the herd, so Barack is going to explain a few things." At 232 Barack Obama says the following: "You people have to realize we are child rapi'sts. The Illuminati are child rapists. As soon as you figure that out, you can decide what to do. Everybody is freaking out about what just happened [child raping event still going on]. This is who ^we are." Full 71 page document: https://s3.wasabisys.com/aviewmefirst/FBI_FinalDraft_26Jul2019_BSchlenker.pdf https://drive.google.com/file/d/1dXNjPQdQ8c-hFFLt9LT0GiSY5Vud0TzL/view?usp=sharing Please post this anywhere you can! Each google drive link is a backup to the wasabi link just in case one is "down". A word about the "faggot" usage: it was a necessary tool. It showed three things: they were not in control, if they were the usage would have be stopped. Everyone out there needed to see t%his. Two, it made it unpleasant for them to be in the headspace, which has obvious advantages. Three, it pointed out impersonators of BS because they would not call each other faggot, thus helping to mitigate the spread of false information. Apologies for those unintentionally offended. Of special interest to the LGBT community, I give you Barack Obama in a foursome with Peter Thiel, Jack Dorsey, and Matthew Porter. It is on page 12 of the document where you can download the video containing audio footage of the "event". Link is just above under "Full 71 page document".
lossolo 7y ago
From the comments: "Moving to dismiss the suit in a California federal court, S&P said that reasonable investors would know its assurances of independence were just marketing, and that its ratings should be treated as free speech, not as financial statements." https://qz.com/101722/sp-amazingly-says-no-one-should-believe-its-ratings-are-independent-and-objective/ https://qz.com/101722/sp-amazingly-says-no-one-should-believ...
- wayoutthere 7y ago
  I upvoted this because I thought it was an Onion-like satire; but no. No it is not.
- AnimalMuppet 7y ago
  Someone should sue to get banks to stop using S&P, using this suit as evidence. (Yeah, I know, establishing standing to sue would be problematic...)
  - pas 7y ago
    Banks don't use it. They provide the ticker just for convenience to their customers/clients.
    - AnimalMuppet 7y ago
      Well, all right, but aren't there clients who legally have to invest in instruments that have at least rating X?
      - pas 7y ago
        Yes, those are big institutional investors, eg. pension funds. It's not like there are only a handful of AAA investment options. And those investors don't only depend on these rating agencies. (They have their own fund managers, they have different divisions for different type/risk of assets - for example some dude going after risky VC type investments, a trader doing daytrading with stocks and other more liquid things [forex, derivatives <this is where the ratings come in>, money markets].) But they don't just blindly buy anything that has been rated AAA. In that sense the fact that rating agencies inflate ratings just means these big funds have more options to put on some more risk. Of course, investing always had and will have some gambling style part. Because yes, maybe some thing is doomed to fail, but ... if that's thing is very large [eg. all of housing, or all of mortgages] you'll have to either hedge that risk anyway (and/or basically short it), or go in long, set up saddle options, etc. And usually that what happens, and then eventually reality gets more complex and enough small unnoticed bad assumptions get built into the system that it starts to crumble. Naturally, it's not a great thing, because it has real world consequences. Funds go bust, projects get stopped, orders get stalled/cancelled, people are let go, families are stressed, health becomes at risk, lives are lost. Is there a better system? Well, so far not really. The problem is not that there are some sophisticated bets on new research & development, new real estate, new capacity expansion for some company, or even betting on people paying back loans OR getting a house, or even the securitization of this is not a problem. The problem is that US and a lot of other "modern societies" don't have sufficient support nets for when those bets fail and people lose their work.
raven105x 7y ago
There is so much armchair theory and bullshit surrounding economics (especially in the news) that it's hard to tell what's valid anymore.
- cbanek 7y ago
  Valid is hard to tell in economics, because economics isn't really a science. More of a social science. A lot of people have debated this point before, but even at a theory level, it imagines people as rational actors, and we know they are not always, and sometimes not ever.
  - rahimnathwani 7y ago
    "even at a theory level, it imagines people as rational actors" There is a whole field of economics ('behavioural economics') that explicitly doesn't make this assumption.
    - sprafa 7y ago
      That’s the only scientific part about it but afaik it still only applies to micro not macroeconomics. To quote Charlie Munger: “it economics is not behavioural, what the hell is it?”
      - TheOtherHobbes 7y ago
        Politics. Economics is persuasion. It's about some people telling other people how they should act "because". It's not descriptive or empirical, and never has been. The more honest economists will tell you it's considered part of moral philosophy.
        arethuza 7y ago
        I can recommend the book "Licence to be Bad: How Economics Corrupted Us" by Jonathan Aldred - it makes a pretty strong case that the way economics has influenced politics over the last few decades has had a pretty strong negative impact on society: https://www.goodreads.com/book/show/43267091-licence-to-be-bad https://www.goodreads.com/book/show/43267091-licence-to-be-b...
formercoder 7y ago
Tricky problem to solve. Maybe we don’t need ratings at all. Investors should simply perform their own DD on any deal as they naturally would. We can still rank companies on factors like leverage and coverage ratios for comparison purposes.
- tbrownaw 7y ago
  The trouble is when they're managing money for other people who done have a say - pension funds or whatever - and the government wants to have some way to regulate them. Because not restricting then from "dangerous" things would bad, whether or not it actually helps. (And with the way things went bad when the regulation stopped working, maybe it even does help?)
- jpmattia 7y ago
  I don’t think it’s at all tricky to solve: Don’t believe ratings from people who are not investing their own money. E.g., VCs in later rounds make sure that VCs from earlier rounds put in pro rata, because investing actions speak louder than words. Until the misaligned incentives of the rating agencies get fixed, the ratings are really not worth the paper they’re printed on.
- notfromhere 7y ago
  Investors don't have the manpower to do their DD on every bond issue they buy. You need to remove the ability of bond issuers to shop for credit agencies
cryptozeus 7y ago
These ratings are not cause but the side effect of how much of a crisis this financial system is already in. What about the incompetent companies giving these ratings?
drawkbox 7y ago
One pretty solid indicator of recessions to the year or two is the inverted yield curve on short and long term yields. From the FRED: 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (T10Y2Y) [1]. Once it dips and inverts, recession seems fairly consistent. Nothing is ever guaranteed but it is better reliability than most financial media, though the possible inverted yield curve is getting attention [2]. Machines and A.I. run it mostly now though, so game theory is now in their/algorithms hands. We are mere spectators in the speculative simulation. They are definitely watching for an inverted yield curve. [1] https://fred.stlouisfed.org/graph/?g=lFt2 https://fred.stlouisfed.org/graph/?g=lFt2 [2] https://www.bloomberg.com/news/articles/2019-08-05/yield-curve-blares-loudest-u-s-recession-warning-since-2007 https://www.bloomberg.com/news/articles/2019-08-05/yield-cur...
- melling 7y ago
  I read somewhere that this only seems to be an indicator for the United States. For the rest of the world it has not been a predictor. Unfortunately I can’t remember where I saw the article in the past day or two.
  - antupis 7y ago
    German is already entering to recession so the rest eurozone will follow very soon. https://www.theguardian.com/world/2019/aug/07/german-industrial-production-suffers-amid-us-china-tension https://www.theguardian.com/world/2019/aug/07/german-industr... Also Chinas economy is slowing down but the problem is that probably nobody knows how much.
    - noitsnot 7y ago
      There are a number of countries cutting interest rates to attempt to help their slowing economies. https://finance.yahoo.com/news/india-delivers-rare-35-basis-061505034.html https://finance.yahoo.com/news/india-delivers-rare-35-basis-... https://finance.yahoo.com/news/brazil-cuts-rates-6-amid-211813450.html https://finance.yahoo.com/news/brazil-cuts-rates-6-amid-2118...
    - 7y ago
znt 7y ago
The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market - Michael G. Pento This is a good read if you'd like to have an understanding on what's coming up next.
- Buttons840 7y ago
  That book is 6 years old.
  - deleted 7y ago
    [deleted]
  - mooreds 7y ago
    "Economists have predicted 9 of the last 5 recessions."
    - thesagan 7y ago
      Like politicians, smart economists wait to make predictions—growth or recession—until two quarters later. As a group they miss acute macro moves, altogether.
  - sameers 7y ago
    Yeah, that's what I looked for right away. I mean, I'd read it if someone could tell me if explains the structure of (international) bond markets so at least I can come to my own conclusions about the 'imminent collapse.' Authors frequently bow to editors/publishers as far as the title goes. So maybe Pento didn't want to call it that. But then the blurb talks about how he "accurately predicted the housing bubble" so then I think, nah, Pento also wants us to buy into his new prediction. Though the folks on Goodreads that read it are sort of 50/50: https://www.goodreads.com/book/show/16719321-the-coming-bond-market-collapse https://www.goodreads.com/book/show/16719321-the-coming-bond... This guy liked the parts where the book introduces you to specific macro concepts/schools: https://www.youtube.com/watch?v=uhSJ429r9mk https://www.youtube.com/watch?v=uhSJ429r9mk But the comments are pretty negative.
  - dylan604 7y ago
rolltiide 7y ago
There’s nothing else to invest in though. If investment grade bonds are all crowded overvalued trades then you have to go further out on the risk curve. If the market is slow to do that then the rating agency will just start inching ratings up and lowering criteria
aussiegreenie 7y ago
There are at least three debt markets that will cause problems. 1. Student Debt - It is non-renounceable. Bankruptcy does not clear it. 2. Oil and gas companies - the entire "fracking revolution " has been funded by loses from bondholders. 3. All Private Equity debt - the basic business model is broken.
- epsolos 7y ago
  1. Economically speaking, this is actually a really good thing in terms of stability. We would be much more concerned if these borrowers could default. Instead, they have to work, which is good for our economy and good for this specific debt market's health as a whole.
  - dfischer 7y ago
    No it’s not. The need for work doesn’t offset that economic calamity that happens with a liquidity crisis and the subsequent devaluation of the dollar. That means people need to work and there’s no money available to pay them. You get a run on banks with more debt than cash available. Everyone is frozen.
    - epsolos 7y ago
      Are you saying that student debt being non-renounceable is bad if and only if we have a liquidity crisis? Because, that's the way your comment reads, to me at least. For the record, I am not endorsing this type of structure for all forms of debt. I am simply bringing to light a more positive view on the supposed "student loan crisis". If so, let's look at some numbers to paint a broader picture: the US mortgage market is 10x the size of the student loan market with average monthly payments in the $1000-1600 range, whereas the national average student loan payment is less than $500. If there were to be a liquidity crisis, the worst we would see out of the student loan market is a larger fraction of borrowers struggling to come up a few hundred dollars per month throughout the recessionary cycle. I just don't think this market is large enough to have the kind of effect your are describing in your comment. I think your comment makes sense for debt as a whole, but I don't think it scales well with the market it's targeted towards.
H8crilA 7y ago
For those that believe rating agencies are garbage: what bonds do you keep in your portfolio?
im3w1l 7y ago
Who is the buyer of these questionably-rated bonds? Passive bond funds? Pension plans?
- H8crilA 7y ago
  Pretty much everyone who has bonds relies on credit rating. In particular on the "investment grade" rating. How do you buy bonds?
  - im3w1l 7y ago
    Well my (shallow) understanding is that some entities are required to buy bonds of certain rating because of regulatory reasons or because that's what they promised investors. Other entities may not have such requirements but do rely on the rating because they don't have the resources to check the creditworthiness. And yet other entities may disregard the rating entirely and solely put their faith in their own analysis. If I bought bonds myself I certainly wouldn't trust the rating. I'd only use it to serve as an indicator of how likely I can find a "greater fool"
    - H8crilA 7y ago
      So you have zero bonds in your portfolio? Directly or through funds (mutual/ETF).
nullwasamistake 7y ago
Is this a hit piece on smaller ratings agencies? For example, the only charts on the page show how smaller agencies give higher grades on average. What does this have to do with risky asset vehicles exploding in popularity? Not much. There are many obvious explanations to this that the article doesn't even mention. Like how a slightly lower rating from a bigger agency may still carry more weight, skewing ratings higher the smaller the agency. The article mentions several times that additional ratings agency competition has made things worse. And that doesn't make any sense, investors now have the ability to choose who they believe. The bond inflation part of the article is believable, but the focus on comparing agencies to eachother is suspect to say the least
ripvanwinkle 7y ago
Is it time to have a federal agency assign debt ratings. After all we don't let the pharmaceutical companies determine if a drug is safe. The feds may well outsource ratings to private companies but those companies are no longer beholden to the issuer of the debt.
- 0x8BADF00D 7y ago
  Yeah, that’s what we need. More government to guarantee that bonds are good when they’re actually shit. The Federal Reserve already does a fine job of that. After all, US treasuries are AAA, right?
hugofirth 7y ago
This might be stupid - but why are these credit ratings agencies allowed to exist in a comparatively free market? Surely a function like the one they provide is better handled by a Not-For-Profit governmental body? Without this - or incredibly tightly policed regulation of the existing private agencies, I don't see how an outcome like the one described here isn't mathematically guaranteed?
- tw1010 7y ago
  I guess the standard argument is that a governmental credit rating body would slow things down. If fintech startups needed some new feature from the credit rating agency, they might not be able to get it in a reasonable amount of time. Is that slowdown worth the tradeoff of occasional crises like this? I guess society has made its choice.
- sytelus 7y ago
  Bond rating is literally a speculation. Government body would need deterministic definitive rules to assign bond rating which would immediately be gamed. The idea of having private firm do speculation instead is that if they are not good at it then people will stop using them and strongest would eventually survive. Unfortunately, they are well enough "protected" to go away.
  - cjcole 7y ago
    What we need is credit rating agency rating agencies. Then, of course, ...
    - theWheez 7y ago
      The $ Combinator
- Afforess 7y ago
  Agreed, profit motive in the rating agencies was to blame during the 2008 financial crisis buildup: >The Financial Crisis Inquiry Commission estimates that by April 2010, of all mortgage-backed securities Moody's had rated triple-A in 2006, 73% were downgraded to junk >many of their ratings turned out to be catastrophically misleading, the large rating agencies enjoyed their most profitable years ever during the past decade. I think we should have new state run ratings agency, one that competed for ratings at market rate. This would force the private labels to at least give out more plausible ratings. [1] http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf [2] https://www.sec.gov/news/speech/2009/spch020609klc.htm https://www.sec.gov/news/speech/2009/spch020609klc.htm
sfthrower89 7y ago
Trump knows bonds. He's a genius, ya know? Trump knows bonds better than perhaps any living human being. Nobody knows bonds like Trump. Trump said Bonds were great, that he'd be dating them if they weren't his daughter.
deleted 7y ago
[deleted]
acd 7y ago
We should go back to free banking. The current model privatizes profits but shares losses on the public. There is no regulation that will fix the current system it is broken in its design. I hope there will new banking through crypto currencies which work also for the environment. If this was a app/provider outage and we would do a root cause analysis we would determine that monetary centralization is the root cause issue.

298 points by chibg10 7y ago

Now there's an understatement. It's a completely fraudulent industry. EDIT: It's also one that's ripe for a good and proper YC-unicorn style disruption. Hit me up if interested.

H8crilA 7y ago
How do you know that?
- Mizza 7y ago
  ..weren't you there for the crash? https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the... The article even spells it out - they haven't changed their business model since. Bank needs a rating on a asset, but their incentive is to get a "better" rating, not a more honest one. There are multiple agencies, so banks shop around for the most favorable one. So, as soon as one agency loosens their ratings, they all follow suit. They sell good ratings. That's the industry. Quote after quote: The Financial Crisis Inquiry Commission (FCIC)[39] set up by the US Congress and President to investigate the causes of the crisis, and publisher of the Financial Crisis Inquiry Report (FCIR), concluded that the "failures" of the Big Three rating agencies were "essential cogs in the wheel of financial destruction" and "key enablers of the financial meltdown" U.S. Securities and Exchange Commission Commissioner Kathleen Casey complained the ratings of the large rating agencies were "catastrophically misleading", yet the agencies "enjoyed their most profitable years ever during the past decade" while doing so.[41] The Economist magazine opined that "it is beyond argument that ratings agencies did a horrendous job evaluating mortgage-tied securities before the financial crisis hit."[42] According to columnist Floyd Norris at least one rating agency—S&P—responded to the credit crisis by first tightening up its standards and sacrificing market share to restore its reputation,[83] after which it loosened standards again "to get more business",[84] tripling its market share in the first half of 2013.[85] This is because, according to Norris, for rating franchises to be worth anything, they must seem to be credible to investors. But once they overcome that minimal hurdle, they will get more business if they are less critical than their competitors.[84] and on and on and on.
  - lonelappde 7y ago
    Its the same model as People Love Us on Yelp, Who's Who in X, and your local magazine's annual local business awards
  - H8crilA 7y ago
    I see. How do you choose bonds for your investment portfolio?
  - _jal 7y ago
    I still think ratings agencies, if their ratings are to be required, should have money where their mouth is. There are a number of ways this could work; one is they issue a contract redeemable for the difference between their predicted performance of a given company and the actual performance. If they're as good at this as they think, they get another revenue stream. If not, the victims of their conflicts of interest have some insurance.
  - Cactus2018 7y ago
    >Bank needs a rating on a asset, but their incentive is to get a "better" rating, not a more honest one. There are multiple agencies, so banks shop around for the most favorable one. So, as soon as one agency loosens their ratings, they all follow suit. They sell good ratings. That's the industry. Memorable scene from The Big Short (2015) - "FrontPoint Partners confronts S&P" https://www.youtube.com/watch?v=mwdo17GT6sg https://www.youtube.com/watch?v=mwdo17GT6sg
- dylan604 7y ago
  because all problems anywhere can be solved by tech from a start up out of Silicon Valley. Where else are people making the world a better place with their disruption? </snark>
plankers 7y ago
I'm struggling to envision how a tech disruption could work in this market. The essential problem seems to be an incentive system that's misaligned with investor incentives and overall economic health. How could a single company or group of companies alter a broken incentive system? It seems the two most salient options are (1) consolidation of competitors to reduce the race-to-the-bottom competition or (2) stricter regulation to prevent the kind of ratings shopping that debt issuers currently engage in. While I can see how a tech disruptor could potentially put all the other ratings agencies out of business and achieve (1), this seems like a tall order. And my uneducated gut-reaction to that scenario is "decreased competition bad," although I'm open to being proved wrong on that, as this does seem to be a case where competition has caused the problem (from the article: "One author, Colorado State University Finance Professor Sean Flynn, says “competition among credit-rating firms has, if anything, reduced the quality of credit ratings.”")

gniv 7y ago

> Sometimes one firm called a security junk and another gave a triple-A rating deeming it supersafe. Doesn't this suggest that the ratings are providing close to zero signal?

lonelappde 7y ago
It depends on each agency's historical performance (maybe only one is bad) and how often this discrepancy happens. Ratings are probabilities to be evaluated statistically.
deleted 7y ago
[deleted]
patio11 7y ago
Insufficient information to judge that to be the case; they rate millions of bonds and, statistically, they’ll almost certainly have every type of disagreement occasionally. The difference between AAA and junk isn’t 99 and 3 on a 100 point scale; it is somewhere in the neighborhood of 99.9 and 96.0 on the 100 point scale “Likelihood to not default within 1 year.” You’d need vastly more data points to firmly believe the conclusion “Their ratings are indistinguishable from being randomly generated.” There are people on Wall Street who can appreciate this math. A statement which is true and necessary but may not be kind: Wall Street does not allocate their talents towards producing journalism.
imtringued 7y ago
As you ask more rating agencies the rating becomes more accurate. If you already know the correct rating and then intentionally pick a rating agency that would give a different score then yes it would provide zero signal.

basementcat 7y ago

Is there a market opportunity for completely automatically generated security ratings? Individuals in most developed countries are now assigned a completely computer generated "credit score" (from payment history and applications for credit); is it much more difficult to algorithmically assign an analogous score for a bond or similar instrument? EDIT: Or is the problem a misalignment of incentives? It appears that investment rating providers are paid by the managers/sellers of the securities rather than the prospective buyer of the securities. This may create an incentive to attract more business by inflating ratings. If prospective investors paid for the ratings, perhaps there would be a different incentive alignment (and also possible opportunities for tragedy of the commons).

nicoburns 7y ago
Frankly in the financial world there seems to be a market for everything, useful or not.
- ellius 7y ago
  "In the City, they sell and buy. And nobody ever asks them why. But since it contents them to buy and sell, God forgive them, they might as well."
james1071 7y ago
The answer to your question is almost certainly no. This is because credit ratings are not based on payment history, or anything as simple as that. Instead, credit analysts have to understand how what can be complicated legal structures work.
- throwaway082729 7y ago
  Can legal agreements be expressed as an algorithm?
  - plankers 7y ago
    If they could in all cases then we wouldn't need courts.

beeschlenker 7y ago

Obama rapes & kills 2 boys. DeBlasio 5, Buttgieg 5, Cuomo 4, Murray 3, Dorsey 3, Thiel 3. Trump $4 billion to cover. Pelosi $3 billion to help bring the boys over the border Having trouble getting traction. Getting censored. Billion in bribes paid to Trump, Pelosi, Schumer, Harris to enable a Soros funded child raping ring to operate in the USA. Please listen to the links below. Turn up the volume and put headphones on. You will hear these people, and many other high profile people, incriminate themselves in unbelievable fashion. Full 71 page document filled with red handed evidence like this at the bottom. Go to pages 18-23 of this document and you will hear Dorsey and Thiel raping children. You will hear their screams. They both rape and kill three. Also at the "rape party" of note: Bill DeBlasio, Andrew Cuomo, Bill Murray, Peter Buttgieg, George Soros, Barack Obama. Please copy and paste this post and repost it. I keep getting censored by these people. Peter Thiel and Jack Dorsey raping and killing three boys each. Turn the volume all the way up and put head phones on. https://s3.wasabisys.com/conv1/Overnight_14-17Jan/15JanCh3_100-200.avi https://drive.google.com/file/d/1mzZrjobxhNIEf38M3xk-IeA5SeF4aUtB/view?usp=sharing Obama admits to raping and killing boys he{re, with commentary from Peter Thiel, George Soros, Matt Porter: https://s3.wasabisys.com/out2/Out2/15JanCh3_0545.avi https://drive.google.com/file/d/1LCDoc1kT7cfSeKQ1vniP_sx32_bRsHau/view?usp=sharing Trump demands $4 billion to "take a blind eye" at 1015+ (link missing from report, unsure how). Here's pieces of dialogue: 1015 The President requests four billion and henry Porter agrees to it. Some dialogue below. 1017 Donald Trump: Why don't you think about it. 1017 Henry Porter: I don't need to think about it. I'm ready for you to find out what we're really about. 1017 Gigi Hadid: I don't think it's a good idea Henry. 1017 Henry Porter: ...no shit. Jelena just stop talking about it. 1018 Gigi Hadid: About what? 1018 Henry Porter: The child raping. 1018 Donald Trump: What the fuck are you talking about? 1018 Gigi Hadid: Mr. President we are child rapists. 1018 Donald Trump: You cannot be serious. 1018 Donald Trump: You're gonna need $4 billion for me to take a blind eye. 1019 ?: People are laughing because they think four billion is too much. I think it's not a problem when you have $35 billion. 1022 Donald Trump: You better have that $4 billion or you can kiss this shit goodbye. https://s3.wasabisys.com/conv2/3Jan/3JanCh3_900-1100.avi https://drive.google.com/file/d/1Grdr8xF2psKNsuYlEnl9dIRV-77YG0Vr/view?usp=sharing Trump wants $138 million to ensure smooth outcome for false judgment for a court case: https://s3.wasabisys.com/conv1/10JanCh3/10JanCh3_951-1033.avi https://drive.google.com/file/d/1iSeGHDToFRoRdIht50Wii0i30mlw9INp/view?usp=sharing Obama explains the Illuminati with Jack Dorsey: https://s3.wasabisys.com/conv1/Overnight_14-17Jan/15JanCh3_200-347.avi https://drive.google.com/file/d/1Ok1-9IvANULzKBOwADFgaiYCFi6yszfj/view?usp=sharing At 230 a conversation is occurring on the embedded Porter camera system with Jack Dorsey, Peter Thiel, Barack Obama, Bill M^urray, and the Porter's. Jack Dorsey provides a statement defining who their group is: "The Illum%inati is an underground organization of child rapists and homosexuals." Matthew Porter: "We have to thin the herd, so Barack is going to explain a few things." At 232 Barack Obama says the following: "You people have to realize we are child rapi'sts. The Illuminati are child rapists. As soon as you figure that out, you can decide what to do. Everybody is freaking out about what just happened [child raping event still going on]. This is who ^we are." Full 71 page document: https://s3.wasabisys.com/aviewmefirst/FBI_FinalDraft_26Jul2019_BSchlenker.pdf https://drive.google.com/file/d/1dXNjPQdQ8c-hFFLt9LT0GiSY5Vud0TzL/view?usp=sharing Please post this anywhere you can! Each google drive link is a backup to the wasabi link just in case one is "down". A word about the "faggot" usage: it was a necessary tool. It showed three things: they were not in control, if they were the usage would have be stopped. Everyone out there needed to see t%his. Two, it made it unpleasant for them to be in the headspace, which has obvious advantages. Three, it pointed out impersonators of BS because they would not call each other faggot, thus helping to mitigate the spread of false information. Apologies for those unintentionally offended. Of special interest to the LGBT community, I give you Barack Obama in a foursome with Peter Thiel, Jack Dorsey, and Matthew Porter. It is on page 12 of the document where you can download the video containing audio footage of the "event". Link is just above under "Full 71 page document".

lossolo 7y ago

From the comments: "Moving to dismiss the suit in a California federal court, S&P said that reasonable investors would know its assurances of independence were just marketing, and that its ratings should be treated as free speech, not as financial statements." https://qz.com/101722/sp-amazingly-says-no-one-should-believe-its-ratings-are-independent-and-objective/ https://qz.com/101722/sp-amazingly-says-no-one-should-believ...

wayoutthere 7y ago
I upvoted this because I thought it was an Onion-like satire; but no. No it is not.
AnimalMuppet 7y ago
Someone should sue to get banks to stop using S&P, using this suit as evidence. (Yeah, I know, establishing standing to sue would be problematic...)
- pas 7y ago
  Banks don't use it. They provide the ticker just for convenience to their customers/clients.
  - AnimalMuppet 7y ago
    Well, all right, but aren't there clients who legally have to invest in instruments that have at least rating X?
    - pas 7y ago
      Yes, those are big institutional investors, eg. pension funds. It's not like there are only a handful of AAA investment options. And those investors don't only depend on these rating agencies. (They have their own fund managers, they have different divisions for different type/risk of assets - for example some dude going after risky VC type investments, a trader doing daytrading with stocks and other more liquid things [forex, derivatives <this is where the ratings come in>, money markets].) But they don't just blindly buy anything that has been rated AAA. In that sense the fact that rating agencies inflate ratings just means these big funds have more options to put on some more risk. Of course, investing always had and will have some gambling style part. Because yes, maybe some thing is doomed to fail, but ... if that's thing is very large [eg. all of housing, or all of mortgages] you'll have to either hedge that risk anyway (and/or basically short it), or go in long, set up saddle options, etc. And usually that what happens, and then eventually reality gets more complex and enough small unnoticed bad assumptions get built into the system that it starts to crumble. Naturally, it's not a great thing, because it has real world consequences. Funds go bust, projects get stopped, orders get stalled/cancelled, people are let go, families are stressed, health becomes at risk, lives are lost. Is there a better system? Well, so far not really. The problem is not that there are some sophisticated bets on new research & development, new real estate, new capacity expansion for some company, or even betting on people paying back loans OR getting a house, or even the securitization of this is not a problem. The problem is that US and a lot of other "modern societies" don't have sufficient support nets for when those bets fail and people lose their work.

raven105x 7y ago

There is so much armchair theory and bullshit surrounding economics (especially in the news) that it's hard to tell what's valid anymore.

cbanek 7y ago
Valid is hard to tell in economics, because economics isn't really a science. More of a social science. A lot of people have debated this point before, but even at a theory level, it imagines people as rational actors, and we know they are not always, and sometimes not ever.
- rahimnathwani 7y ago
  "even at a theory level, it imagines people as rational actors" There is a whole field of economics ('behavioural economics') that explicitly doesn't make this assumption.
  - sprafa 7y ago
    That’s the only scientific part about it but afaik it still only applies to micro not macroeconomics. To quote Charlie Munger: “it economics is not behavioural, what the hell is it?”
    - TheOtherHobbes 7y ago
      Politics. Economics is persuasion. It's about some people telling other people how they should act "because". It's not descriptive or empirical, and never has been. The more honest economists will tell you it's considered part of moral philosophy.
      - arethuza 7y ago
        I can recommend the book "Licence to be Bad: How Economics Corrupted Us" by Jonathan Aldred - it makes a pretty strong case that the way economics has influenced politics over the last few decades has had a pretty strong negative impact on society: https://www.goodreads.com/book/show/43267091-licence-to-be-bad https://www.goodreads.com/book/show/43267091-licence-to-be-b...

formercoder 7y ago

Tricky problem to solve. Maybe we don’t need ratings at all. Investors should simply perform their own DD on any deal as they naturally would. We can still rank companies on factors like leverage and coverage ratios for comparison purposes.

tbrownaw 7y ago
The trouble is when they're managing money for other people who done have a say - pension funds or whatever - and the government wants to have some way to regulate them. Because not restricting then from "dangerous" things would bad, whether or not it actually helps. (And with the way things went bad when the regulation stopped working, maybe it even does help?)
jpmattia 7y ago
I don’t think it’s at all tricky to solve: Don’t believe ratings from people who are not investing their own money. E.g., VCs in later rounds make sure that VCs from earlier rounds put in pro rata, because investing actions speak louder than words. Until the misaligned incentives of the rating agencies get fixed, the ratings are really not worth the paper they’re printed on.
notfromhere 7y ago
Investors don't have the manpower to do their DD on every bond issue they buy. You need to remove the ability of bond issuers to shop for credit agencies

cryptozeus 7y ago

These ratings are not cause but the side effect of how much of a crisis this financial system is already in. What about the incompetent companies giving these ratings?

drawkbox 7y ago

One pretty solid indicator of recessions to the year or two is the inverted yield curve on short and long term yields. From the FRED: 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (T10Y2Y) [1]. Once it dips and inverts, recession seems fairly consistent. Nothing is ever guaranteed but it is better reliability than most financial media, though the possible inverted yield curve is getting attention [2]. Machines and A.I. run it mostly now though, so game theory is now in their/algorithms hands. We are mere spectators in the speculative simulation. They are definitely watching for an inverted yield curve. [1] https://fred.stlouisfed.org/graph/?g=lFt2 https://fred.stlouisfed.org/graph/?g=lFt2 [2] https://www.bloomberg.com/news/articles/2019-08-05/yield-curve-blares-loudest-u-s-recession-warning-since-2007 https://www.bloomberg.com/news/articles/2019-08-05/yield-cur...

melling 7y ago
I read somewhere that this only seems to be an indicator for the United States. For the rest of the world it has not been a predictor. Unfortunately I can’t remember where I saw the article in the past day or two.
- antupis 7y ago
  German is already entering to recession so the rest eurozone will follow very soon. https://www.theguardian.com/world/2019/aug/07/german-industrial-production-suffers-amid-us-china-tension https://www.theguardian.com/world/2019/aug/07/german-industr... Also Chinas economy is slowing down but the problem is that probably nobody knows how much.
  - noitsnot 7y ago
    There are a number of countries cutting interest rates to attempt to help their slowing economies. https://finance.yahoo.com/news/india-delivers-rare-35-basis-061505034.html https://finance.yahoo.com/news/india-delivers-rare-35-basis-... https://finance.yahoo.com/news/brazil-cuts-rates-6-amid-211813450.html https://finance.yahoo.com/news/brazil-cuts-rates-6-amid-2118...
  - 7y ago

znt 7y ago

The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market - Michael G. Pento This is a good read if you'd like to have an understanding on what's coming up next.

Buttons840 7y ago
That book is 6 years old.
- deleted 7y ago
  [deleted]
- mooreds 7y ago
  "Economists have predicted 9 of the last 5 recessions."
  - thesagan 7y ago
    Like politicians, smart economists wait to make predictions—growth or recession—until two quarters later. As a group they miss acute macro moves, altogether.
- sameers 7y ago
  Yeah, that's what I looked for right away. I mean, I'd read it if someone could tell me if explains the structure of (international) bond markets so at least I can come to my own conclusions about the 'imminent collapse.' Authors frequently bow to editors/publishers as far as the title goes. So maybe Pento didn't want to call it that. But then the blurb talks about how he "accurately predicted the housing bubble" so then I think, nah, Pento also wants us to buy into his new prediction. Though the folks on Goodreads that read it are sort of 50/50: https://www.goodreads.com/book/show/16719321-the-coming-bond-market-collapse https://www.goodreads.com/book/show/16719321-the-coming-bond... This guy liked the parts where the book introduces you to specific macro concepts/schools: https://www.youtube.com/watch?v=uhSJ429r9mk https://www.youtube.com/watch?v=uhSJ429r9mk But the comments are pretty negative.
- dylan604 7y ago

rolltiide 7y ago

There’s nothing else to invest in though. If investment grade bonds are all crowded overvalued trades then you have to go further out on the risk curve. If the market is slow to do that then the rating agency will just start inching ratings up and lowering criteria

aussiegreenie 7y ago

There are at least three debt markets that will cause problems. 1. Student Debt - It is non-renounceable. Bankruptcy does not clear it. 2. Oil and gas companies - the entire "fracking revolution " has been funded by loses from bondholders. 3. All Private Equity debt - the basic business model is broken.

epsolos 7y ago
1. Economically speaking, this is actually a really good thing in terms of stability. We would be much more concerned if these borrowers could default. Instead, they have to work, which is good for our economy and good for this specific debt market's health as a whole.
- dfischer 7y ago
  No it’s not. The need for work doesn’t offset that economic calamity that happens with a liquidity crisis and the subsequent devaluation of the dollar. That means people need to work and there’s no money available to pay them. You get a run on banks with more debt than cash available. Everyone is frozen.
  - epsolos 7y ago
    Are you saying that student debt being non-renounceable is bad if and only if we have a liquidity crisis? Because, that's the way your comment reads, to me at least. For the record, I am not endorsing this type of structure for all forms of debt. I am simply bringing to light a more positive view on the supposed "student loan crisis". If so, let's look at some numbers to paint a broader picture: the US mortgage market is 10x the size of the student loan market with average monthly payments in the $1000-1600 range, whereas the national average student loan payment is less than $500. If there were to be a liquidity crisis, the worst we would see out of the student loan market is a larger fraction of borrowers struggling to come up a few hundred dollars per month throughout the recessionary cycle. I just don't think this market is large enough to have the kind of effect your are describing in your comment. I think your comment makes sense for debt as a whole, but I don't think it scales well with the market it's targeted towards.

H8crilA 7y ago

For those that believe rating agencies are garbage: what bonds do you keep in your portfolio?

im3w1l 7y ago

Who is the buyer of these questionably-rated bonds? Passive bond funds? Pension plans?

H8crilA 7y ago
Pretty much everyone who has bonds relies on credit rating. In particular on the "investment grade" rating. How do you buy bonds?
- im3w1l 7y ago
  Well my (shallow) understanding is that some entities are required to buy bonds of certain rating because of regulatory reasons or because that's what they promised investors. Other entities may not have such requirements but do rely on the rating because they don't have the resources to check the creditworthiness. And yet other entities may disregard the rating entirely and solely put their faith in their own analysis. If I bought bonds myself I certainly wouldn't trust the rating. I'd only use it to serve as an indicator of how likely I can find a "greater fool"
  - H8crilA 7y ago
    So you have zero bonds in your portfolio? Directly or through funds (mutual/ETF).

nullwasamistake 7y ago

Is this a hit piece on smaller ratings agencies? For example, the only charts on the page show how smaller agencies give higher grades on average. What does this have to do with risky asset vehicles exploding in popularity? Not much. There are many obvious explanations to this that the article doesn't even mention. Like how a slightly lower rating from a bigger agency may still carry more weight, skewing ratings higher the smaller the agency. The article mentions several times that additional ratings agency competition has made things worse. And that doesn't make any sense, investors now have the ability to choose who they believe. The bond inflation part of the article is believable, but the focus on comparing agencies to eachother is suspect to say the least

ripvanwinkle 7y ago

Is it time to have a federal agency assign debt ratings. After all we don't let the pharmaceutical companies determine if a drug is safe. The feds may well outsource ratings to private companies but those companies are no longer beholden to the issuer of the debt.

0x8BADF00D 7y ago
Yeah, that’s what we need. More government to guarantee that bonds are good when they’re actually shit. The Federal Reserve already does a fine job of that. After all, US treasuries are AAA, right?

hugofirth 7y ago

This might be stupid - but why are these credit ratings agencies allowed to exist in a comparatively free market? Surely a function like the one they provide is better handled by a Not-For-Profit governmental body? Without this - or incredibly tightly policed regulation of the existing private agencies, I don't see how an outcome like the one described here isn't mathematically guaranteed?

tw1010 7y ago
I guess the standard argument is that a governmental credit rating body would slow things down. If fintech startups needed some new feature from the credit rating agency, they might not be able to get it in a reasonable amount of time. Is that slowdown worth the tradeoff of occasional crises like this? I guess society has made its choice.
sytelus 7y ago
Bond rating is literally a speculation. Government body would need deterministic definitive rules to assign bond rating which would immediately be gamed. The idea of having private firm do speculation instead is that if they are not good at it then people will stop using them and strongest would eventually survive. Unfortunately, they are well enough "protected" to go away.
- cjcole 7y ago
  What we need is credit rating agency rating agencies. Then, of course, ...
  - theWheez 7y ago
    The $ Combinator
Afforess 7y ago
Agreed, profit motive in the rating agencies was to blame during the 2008 financial crisis buildup: >The Financial Crisis Inquiry Commission estimates that by April 2010, of all mortgage-backed securities Moody's had rated triple-A in 2006, 73% were downgraded to junk >many of their ratings turned out to be catastrophically misleading, the large rating agencies enjoyed their most profitable years ever during the past decade. I think we should have new state run ratings agency, one that competed for ratings at market rate. This would force the private labels to at least give out more plausible ratings. [1] http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf [2] https://www.sec.gov/news/speech/2009/spch020609klc.htm https://www.sec.gov/news/speech/2009/spch020609klc.htm

sfthrower89 7y ago

Trump knows bonds. He's a genius, ya know? Trump knows bonds better than perhaps any living human being. Nobody knows bonds like Trump. Trump said Bonds were great, that he'd be dating them if they weren't his daughter.

deleted 7y ago

[deleted]

acd 7y ago

We should go back to free banking. The current model privatizes profits but shares losses on the public. There is no regulation that will fix the current system it is broken in its design. I hope there will new banking through crypto currencies which work also for the environment. If this was a app/provider outage and we would do a root cause analysis we would determine that monetary centralization is the root cause issue.