Instead of allowing the sceptics to have a voice the regulators forcefully correlated the financial markets to some few credit rating agencies.

Sir from “Genesis of the debt disaster” May 2, an extract from “Fool’s Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and unleashed a Catastrophe” it is clear that Gillian Tett has written a great book that starts going to the root of the issues. It is sad though to think that a great reporter like her might now have become useless by correlating herself to what she wrote in her own book. (The same way another opinion-maker has correlated himself to explaining all in terms of the economic imbalance among surplus and deficit countries.)

Tett does indeed tell us a lot about one of the seeds of the debt disaster but, as someone who has recently even acquired a license as a mortgage loan officer in the US in order to better understand what happened, I believe that it was really the environment that mattered for that seed to bloom into something really bad. More detailed information on the amounts of mortgages awarded to the subprime sector and that were securitized on year by year or even better month by month basis is useful to understand it all and I hope Gillian Tett has provided that in her book.

My explanations for the crisis is much simpler. In synthesis, the financial regulators in Basel correlated the world to the opinions of just three credit rating agencies… and with that they weakened or even displaced from the market the voice of all the many healthy sceptics like Terri Duhon and Krishna Varikooty and the reduced the market weight of more careful individual investors.

The International Convergence of Capital Measurement and Capital Standards in July 1988, even though the minimum capital requirements there are based on risk, they do not even mention the credit rating agencies and the risk weight for all claims on the private sector is 100% and they therefore require the 8% of capital.

By contrast the International Convergence of Capital Measurement and Capital Standards of June 2006 1988 is all about the credit ratings… and for instance the corporations that are rated AAA to AA- are risk-weighted at 20% and so do only generate a capital requirement of 1.6%. And, from that moment on the road to “fool’s gold” was determined to go thru the credit rating agencies.