The regulators justified their reliance on the OECD Country Risk Classifications -- rather than on Standard & Poor's, Moody's, or Fitch, which together are known as the Nationally Recognized Statistical Rating Organizations (NRSROs) -- by saying that the OECD "is not subject to the sorts of conflicts of interest that affected NRSROs because the OECD is not a commercial entity that produces credit assessments for fee-paying clients, nor does it provide the sort of evaluative and analytical services as credit rating agencies." The regulators added that they were "considering additional measures that could supplement the CRCs to determine risk-weighting factors for sovereign debt positions."
It's a good thing they're considering "additional measures," since, according to a report from Oct. 28, available on the OECD website, the United States and Germany both had Country Risk Classifications of zero, but so did Greece.
FBR Capital Markets analyst Paul Miller pointed out that while federal regulators have been "talking tough on tangible common equity," and have excluded various types of equity, including most trust preferred stock, from regulatory capital calculations, "on the flip side, nobody can really calculate risk-weighted assets," which is why many investors "still look at financials as a black box."
It's been great fun bashing the ratings agencies over the past several years, especially because of their outrageous conflicts of interest when they were assigned AAA ratings to some questionable mortgage paper, for fees.But applying a zero percent risk-weighting to investments in the sovereign debt of troubled countries is a complete farce. S&P downgraded its sovereign rating for Greece to a below-investment grade BB-plus, in April of 2010. In June of this year, Greece's S&P rating was downgraded to CCC, with default of some debt appearing "increasingly likely." S&P would appear to be ahead of the curve, or at least ahead of the OECD and federal bank regulators, on this one. According to Bloomberg, the current composite sovereign debt rating for Greece is CC+, and two-year Greek notes closed Thursday at 26 cents on the dollar. In comparison, two-year notes issued by Spain closed at 98 cents on the dollar. So, by the new capital rules, sovereign paper trading at a 74% discount, would still have a zero percent risk-weighting.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV