Twelve-hour flights are a chance
to catch movies you might not expect to be good entertainment – such as “Too
Big to Fail,” Hollywood’s take on the meltdown of Lehman Brothers Holdings.
I watched it while flying from
Tokyo to New York and kept thinking about what Lehman’s failure says about the
Olympus Corp scandal back in Japan. The off-balance-sheet risks, the tax
havens, the impenetrable accounting, the smarmy and delusional executives
saying all’s well, the hapless regulators.
Then it hit me. The world of
finance should become more like the movies, with a rating system that actually
makes sense.
In Japan, the public obsession is
with whether Olympus executives will get jail time, or whether a corporate icon
will be delisted. The real story, though, is how the business of finance gets
done in the age of globalization.
For all the talk about transparency
and the magic of markets, finance still thrives on opacity and public
relations. It’s an art form with a small army of bankers, accountants and
advisers moving complex, Dali-esque deals around the globe faster than even
they can follow. It’s not just that the average investor can’t make sense of
these transactions; they aren’t supposed to.
Rather than wasting taxpayer money
on investigations and new red tape, why don’t regulators convert themselves
into ratings companies? If the movies can red-flag objectionable or risky
material with its “XXX” and “R” ratings, our financial regulators can, too.
Let’s face it, with XXX you know what you’re going to get.
Let’s start with an XXX warning
label on any company incorporated by way of a post-office box in the Cayman
Islands, British Virgin Islands, Cook Islands, Jersey or any other kiss-
and-don’t-tell jurisdiction. The message would be if you invest in this outfit,
you may have no idea what this company is up to and you might lose your shirt.
If pension fund managers invest mom’s
life savings in companies with XXX ratings without shareholders knowing, they
go to jail. No exceptions. Instead, they would have incentives to invest in AAA
shops (those safe for grandma) that make no use of offshore counterparties
where it’s impossible to trace beneficiaries and that are fully compliant with
US, UK or other regulations and tax codes.
Ratings as far away from XXX as
possible would enjoy a sizable valuation premium. Not only would it scare up
mountains of missing tax revenue that sovereign-debt issuers so desperately
need, but it would make markets safer.
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Come on, can anyone really say our
global credit-rating system works? Look no further than Standard & Poor’s
downgrade of U.S. debt this year. Afterward, investors couldn’t get enough
dollar-denominated securities. Then there’s MF Global Holdings Ltd., which
S&P, Moody’s and Fitch Ratings all rated investment grade a week before
bankruptcy. Congress is right to investigate whether Jon Corzine’s star power
and political connections clouded judgments of the New York-based firm’s
viability.
Recent events say much about the
way markets continue to operate more than three years after Lehman blew up. Any
system that allows debt issuers to shop around for the best rating is destined
to be corrupt.
There’s lots of money to be made
from slapping the desired rating on this mortgage-backed security or that
sovereign credit. The combination of greed and creative analysis makes it hard
to know what is legal and illegal in an increasingly global world.
Our credit-rating system also
shows how little things have changed. It missed the Asian crisis 14 years ago
and Russia’s default a year later. It was asleep on the job when technology
stocks crashed, Enron Corp. imploded, the US housing bubble inflated, Wall
Street lost all sense of responsibility and Europe veered toward a financial
cliff.
So, really, when credit raters
raise China’s sovereign rating or bump Citigroup Inc. up a notch, it might be a
sign to sell and brace for trouble. If 2008 taught us anything it’s that
regulators are a few years behind the financial alchemists.
Had movie ratings for businesses
been in place, we might have been deprived of the terrific scene in “Too Big to
Fail” showing former Lehman Chairman Richard Fuld trying to sucker Korea
Development Bank into buying his train wreck of a firm. Korean officials, very
wisely as it turned out, sensed they were being played. Fuld, portrayed by the
brilliant James Woods, quickly gets on the phone to find an easier mark.
We have seen this picture before,
and a sequel may be in the works for 2012. We know how the first installment
turned out. Regulators can and should protect investors and entire economies on
the front end. If Hollywood can do it, the overseers of Wall Street can, too.
(William Pesek is a Bloomberg View
columnist. The opinions expressed are his own.)
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