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Jeff Nielson is the writer/editor of Bullion Bulls Canada. He came to the precious metals sector as an investor in the middle of last decade, and quickly decided this was where he wanted to focus his career. Jeff's background includes four years of Economics at the University of British Columbia, before he went on to earn his law degree from that same institution.

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The Ratings Agencies, Part I: Experts or Charlatans?

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Originally Posted at BullionBullsCanada.com

I hate hypocrites. It’s no secret. I’ve stated it on countless occasions in previous commentaries. Supposedly, the Western legal system (the literal “foundation” of our democracies) “hates hypocrites” as well.

To be specific, supposedly our legal systems don’t allow a group of people to call themselves “experts” when they are pocketing fat fees for their analysis/assessment of the quality of complex financial products; and then to say “Just kidding. We’re not experts, and no one should base any financial decision on our opinions” once such “opinions” have been shown to be severely flawed.

Then there is the United States of Crime. In the Land of Looting, we see the “double-standard” (i.e. blatant hypocrisy) enshrined as the highest ideal. On the one hand, cheap con-men (i.e. the privileged financial insiders in their expensive suits) can use the “rules of Justice” to hide behind – irrespective of how fraudulent/absurd are their legal defenses. On the other hand, the victims of these sleazy shysters discover that (one by one) all of our legal protections are nothing but illusory anachronisms, simply erased whenever they threaten the interests of those same financial criminals.

There is no more blatant demonstration of “American Justice” at work than with respect to the fraudulent double-standard which has been invented for the sole benefit of the Wall Street crime syndicate, and their accomplices – the ratings agencies.

The sham/scam is as simple as it is blatant. When someone sells something, they can get a higher price for it if there is some “warranty of quality assurance” or “verification of independent testing” to reassure potential buyers of the safety/security/suitability of the product in question.

Note the need for “independence”. If Goldman Sachs is looking for another chump to buy a “mortgage-backed security”, and it says to a potential buyer “our boys in ‘quality control’ have given this one their highest rating” (nudge, nudge, wink, wink), no sane buyer who is aware of Goldman Sachs’ long track-record of fraud would be reassured. However, when that same potential buyer is told that an independent group of experts has assessed this financial product as “AAA”, then that buyer will reach for his cheque-book.

It is unequivocal that these ratings are used as “inducements to purchase”. Indeed, countless institutional investors and funds are prohibited from investing in any financial product which has not received a sufficiently high “rating” from these ratings agencies.

There can be absolutely no doubt that any/every buyer of these financial products considered the “independent ratings” attached to these financial products to be a “warranty” of the quality/stability/reliability of these financial instruments. The reason I’m stressing what the buyers perceived is because that is what our laws are based upon. Specifically, the standard of justice is how “an ordinary person” would view such transactions.

The intent of the Wall Street banks in using these ratings is legally irrelevant. The intent of the ratings agencies in issuing these ratings (in return for fat fees) is legally irrelevant. All that is relevant is how this system of paying for “expert ratings” was perceived by the general public (i.e. the average retail investor).

What is the ridiculous “defense” of the ratings agencies, when confronted with the $trillions which investors have lost – just on their “AAA” rated junk? They claim that they were merely exercising “free speech”, and that the “AAA” rubber-stamps they used on this financial feces were “mere opinions” which no investor should “rely upon”. In other words, they are claiming that their prestigious “ratings” are no more meaningful than what some anonymous stock-jockey posts on some obscure bulletin board.
It is a legal defense without an iota of merit.

1) They accepted large payments in return for their officially recognized ratings.

2) They made no attempt to refute their obvious status as “experts” with any form of remotely sufficient legal disclaimer.

In a short clip, we have various suit-stuffers representing these ratings agencies claiming after the fact that they are not “experts”, and all of their highly-sought (and very expensive) “ratings” were mere opinions – of no more value than what one might get from some “whino” mooching spare-change. Again, such statements (in retrospect) are legally irrelevant – with respect to their own liability toward investors.

These disclaimers/denials of “expertise” would have been highly significant if these same suit-stuffers would have made them while accepting their fat fees. Of course, it might have been tricky obtaining those fat fees, while telling the people writing the cheques that their opinions were worthless. Indeed, to now claim that they were only “pretending” to be experts would seem to be nothing less than an admission that they were defrauding the Wall Street banks who were paying for their services. Someone has been lied to.

Note that our legal systems (for better or worse) do allow people to pretend to be experts, hence the ever-popular “legal disclaimer”. If the ratings agencies wanted to get paid their fat fees while pretending to be “experts” (legally), here is how they could do so.

a) First they would have to let the bankers know that they were merely pretending to be experts. Arguably, this reality would have been understood given that the ratings agencies allowed Wall Street to dictate how these products would/should be valued.

b) Immediately underneath their rating, in clearly visible type, they would have been required to acknowledge in unequivocal terms that their “ratings” were not “expert assessments” of these financials but merely ornamental decorations – designed to make the financial product look nice, while having no meaning of any kind.

Understand that only the strongest, most unequivocal, highly visible “disclaimer” would be adequate in this scenario, for several reasons. First of all, they have taken $10’s of billions in fees for these “opinions”. The size of those fees alone creates an impression of expertise (and validity) in the eyes of the average investor.

Secondly, their ratings have quasi-official status with our media, our markets, our economies, and even our governments. When “the world’s only super-power” launches into a massive hissy-fit because just one of these ratings agencies gave it the tiniest downgrade possible, once again this implies an unparallelled level of expertise (and validity) in the eyes of the general public.

When Standard & Poors announced its “downgrade” of U.S. government debt, did anyone recall S&P issuing a simultaneous disclaimer that the downgrade was “merely an opinion, and no one should base any investment decision upon it”? If so, please forward it to me – as I’m not aware of any such disclaimer.

In short, these pseudo-experts are still, openly pretending to be experts. This would seem to make their denials during official testimony to the U.S. Congress yet more “lying under oath” – the sort of felony which gets professional baseball players into trouble, but where the rules (once again) don’t apply to Wall Street suit-stuffers.

The facts here are unequivocal:

1) The various officials for these ratings agencies portray themselves as experts all of the time (with the only exception being when they are trying to weasel-out of accountability for their actions). The fact that they broadcast their future intentions when they are simply pondering making a change in a particular rating is proof of their sense of self-importance – and is obviously reinforced by the lucrative fees they accept for making their decrees.

2) Their opinions are used every day as “inducements to purchase” on $billions of dollars of financial products. Many large funds and institutional investors are legally required to base their investment decisions upon the ratings assigned by these companies.

3) The people purchasing many of these financial products are totally reliant upon the purported expertise of these ratings agencies. Ask the average derivatives investor “what is a derivative?”, and most would be unable to answer. Ask them what the rating was on the derivative they purchased, and it is 100% certain that any/every investor will be aware of that one fact.

4) Given the quasi-official (and near “religious”) status that the ratings from these agencies represent, only the strongest, most-visible legal disclaimer would suffice if these ratings agencies sought to renounce their status as experts. Such disclaimers are never made.

These unequivocal facts, in turn lead to inevitable legal conclusions. First, the ratings agencies clearly receive and enjoy the status of “experts” in their professional niche of rating the quality of numerous financial products. This status is legally confirmed by the lucrative fees which they choose to accept for making their expert assessments, and by their universal, quasi-official status with markets and governments all over the world.

Based upon this holding out of expertise, every day investors rely upon these ratings (absolutely) in making purchases in the $10’s of billions. When experts offer their services to the public, accept lucrative fees for those services, and those services are relied upon (in absolute terms) by the public, then our law is crystal-clear: such experts are legal “fiduciaries”, and charged with a higher level of personal responsibility for their actions than any/all ordinary members of the general public.

In Part II, I will explain the significance of being a “fiduciary”, and demonstrate how the U.S. government and its bought-and-paid-for regulators are exhibiting a level of corruption never before seen in Western jurisprudence.

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