The president's anti-Wall Street rhetoric is not good for the economy, and may hurt his party politically

Bonfire of the Populists. By KIMBERLEY A. STRASSEL
The president's anti-Wall Street rhetoric is not good for the economy, and may hurt his party politically.
WSJ, Jan 29, 2010

The problem with fires is that they can blow in any direction. Consider the White House, which is seeing a backdraft from the anti-Wall-Street flame it has been dousing with gasoline.

His agenda on the ropes, President Obama made a calculated decision to pivot to populism. The Massachusetts Senate race highlighted a fed-up public. The White House strategy: Channel that anger away from itself and to easier targets. Its opening shots were a new tax on banks, new restrictions on banking activities, and Mr. Obama roaring, "We want our money back!"

The president fed the fire with his State of the Union address. Americans are angry at "bad behavior on Wall Street." It is time to "slash the tax breaks for companies that ship our jobs overseas." Lobbyists are trying to "kill" financial regulation. American "cynicism" is the result of "selfish" bankers, CEOs who "reward" themselves "for failure" and lobbyists who "game the system." (No mention of Cornhusker Kickbacks or backroom union deals, but never mind.)

For an administration that claims to know its political history, the White House appears to have misread at least one decade. FDR was re-elected in 1936 for many reasons, but among them was his fiery denunciations of "economic royalists," "economic tyranny," and "economic slavery." Business knew it was in the president's crosshairs and put its capital on strike. The economy didn't recover until the war.

Team Obama is already witnessing a repeat. The U.S. economy ought to be flying out of recession. Yet bank lending is sluggish. Companies refuse to hire. Business is going elsewhere to raise capital: China last year outstripped the U.S. as a center for initial public offerings. The market gyrates on Washington's latest political drama.

A venture capitalist recently remarked to me that the uncertainty the administration has created is "nothing short of paralyzing." Nobody will invest in an industry that might be the next to be overtaxed, overregulated, or publicly disemboweled.

Add to that uncertainty the administration's new populist bent, and it's a recipe for a continued capital freeze. "People in the economy are thinking about whether to invest or take risks when what they are seeing are early signs of Hugo Chávez economics," says Wisconsin GOP Rep. Paul Ryan. With the White House's political fortunes fundamentally tied to economic recovery, this populist fire is an act of self-immolation.

The blowback is already hobbling the White House's own economic team. Senate Democrats, following presidential example, have been newly eager to skewer their own "symbol" of Wall Street. The nearest to hand happened to be Mr. Obama's own Fed chief, Ben Bernanke. Majority Leader Harry Reid spent two weeks putting down a reconfirmation revolt, helping save Mr. Obama from his own antibank rhetoric.

In the House, Treasury Secretary Tim Geithner was meanwhile called to answer questions about AIG disclosure and counterparties. He left accused by Democrat Edolphus Towns of aiding Wall Street banks in "looting the corpse" of the insurer. Talk about a populist liability. The two men survive only as damaged goods, more susceptible to congressional pressure, less able to make tough decisions. And should Mr. Obama cut Mr. Geithner loose, the White House's tough talk narrows the pool of experienced hands it can nominate as replacements.

Policy-wise, too, the administration is boxing itself in. In keeping with the populist swerve, a feisty Mr. Obama this week upped the ante on financial regulation, warning Congress he'd veto anything less than "real reform." Yet it is precisely a stick-it-to-them bill that will have the most trouble passing a frayed Congress in an election year. And heaven help the administration if there is another financial meltdown, one that truly poses systemic risk. Could this White House dare write another bailout check to "Wall Street"?

And for what? The administration made the mistake of leaking that its new strategy was pure politics, designed to re-energize the public and put Republicans on defense. That somewhat robbed it of its authenticity. Americans have also watched this White House prop up moribund auto makers, float Fannie Mae and Freddie Mac, and cut deals with pharmaceutical companies. The bank war appears a bit disingenuous. The country's growing investor class is not impressed by the sort of business mau-mauing that pummels their 401(k)s.

As for those Republicans, they are hardly cowering in fear. They watched Scott Brown bat away the president's bank tax, explaining it would be passed on to consumers and hurt lending. His victory suggested the public is open to free-market explanations, and the GOP is feeling more emboldened to make them.

Not all populism is bad. There is indeed an anti-establishment anger in the nation. But the majority of it is directed at a Washington that is foisting an unpopular agenda on the country, and at the cavalier treatment of the free market that creates jobs. The president might try tapping into that.

The Latest AIG Story - Regulators can't agree on what the real systemic threat was

The Latest AIG Story. WSJ Editorial
Regulators can't agree on what the real systemic threat was.
WSJ, Jan 28, 2010

Will regulators ever coherently explain why AIG could not be allowed to go bankrupt in September of 2008?

At yesterday's House hearing, Secretary of the Treasury Timothy Geithner and predecessor Hank Paulson said they didn't bail out AIG to save its derivatives counterparties. Instead, said Mr. Geithner, the now-famous 100-cents-on-the-dollar buyouts of credit default swap contracts were necessary to prevent a further downgrade of AIG by credit-ratings agencies.

This topic probably deserves another hearing on its own. Remember, the Federal Reserve Bank of New York, where Mr. Geithner was president, had by that time already seized AIG. We're guessing that a ratings agency is pretty comfortable with the creditworthiness of a firm 79.9%-owned by Uncle Sam. Yet Mr. Geithner is saying that the same credit raters that applied triple-A ratings to tranches of junk mortgages somehow got the yips when the world's most respected borrower was standing behind AIG.

If the agencies had applied to AIG the credit rating of its new owner, there wouldn't have been much need to send more collateral to such counterparties as Goldman Sachs. Instead, AIG could have demanded the return of some of the collateral it had already posted. Bad news for those counterparties.

More broadly, the hearing showed that the story of why AIG could not be allowed to fail continues to change, which inspires little confidence that Washington can be trusted with new powers to identify and address systemic risk. The original Beltway line was that the systemic risk was caused by AIG's inability to back up the credit default swap contracts it sold, thus endangering counterparties on the other end of these deals. In Washington's original telling, the company's insurance subsidiaries, heavily regulated by states, were safely segregated from the mess.

Yesterday, however, Messrs. Geithner and Paulson went further than ever in stating that the real systemic risk was to AIG's heavily regulated insurance businesses. Their testimony directly contradicts that offered to Congress by former New York Insurance Superintendent Eric Dinallo, who was AIG's principal insurance regulator at the time.

Last year Mr. Dinallo told the Senate that "The main reason why the federal government decided to rescue AIG was not because of its insurance companies." He was so confident in the health of the AIG subsidiaries that, before the federal bailout, he was working on a plan to transfer $20 billion of their excess reserves to the parent company.

Yesterday, Mr. Geithner said that the "people responsible" for overseeing the insurance subsidiaries "had no idea" about the risks facing AIG policyholders. He's talking about Mr. Dinallo here. Instead of being safely segregated, Mr. Geithner said the insurance businesses were "tightly connected" to the parent company. Mr. Paulson added that the healthy parts of AIG had been "infected" by the "toxic assets." He added, "One part of the company would have contaminated the other."

This raises some serious issues for financial reform. The Geithner and Paulson story now is essentially that the system of heavy state insurance regulation was a sham. When push came to shove, policyholders were not protected from a default by the parent company.

This also makes us wonder about all of the political and media chatter over the last year that derivatives were the doomsday machine that caused the meltdown. If this testimony is correct, then the systemic risk wasn't that if AIG collapsed it would infect Goldman and other financial companies like falling dominoes across the world.

The real risk was closer to an implosion of AIG that would have jeopardized millions of insurance policies. That's a big problem for insurance regulation. But if bad bets on derivatives would only have ruined AIG and its subsidiaries, that's not the same kind of danger to the entire financial system. And it suggests the need for different regulatory changes. We're not sure that policyholders were really in danger, but Mr. Dinallo and other state regulators deserve a chance to respond on the record, and under oath.

If yesterday's testimony is true, the real systemic risk was not in unregulated markets where the danger is obvious, but in markets where regulation created the illusion of safety.

The Harvard School of (Unscientific) Public Health (Activism)

The Harvard School of (Unscientific) Public Health (Activism). By Elizabeth M. Whelan, Sc.D., M.P.H.
ACSH, Jan 27, 2010

Why Do the Chinese Save So Much? A skewed sex ratio is fueling a highly competitive marriage market, driving up China’s savings rate

Why Do the Chinese Save So Much? By Shang-Jin Wei

A skewed sex ratio is fueling a highly competitive marriage market, driving up China’s savings rate and with it the global trade imbalance.
Columbia Business School Ideas@Work, Jan 22 2010

Much attention has been directed toward China’s high savings rate. Not only is the savings rate disproportionately high compared to virtually any other country, but it directly impacts China’s current account surplus and the U.S. consumer deficit. When national savings exceeds investment, the excess savings shows up in China’s current account surplus.

The prolonged period of low global interest rates has been attributed in large part to this surplus, and with the surplus come pros and cons. “In the context of the current crisis, the long period of low interest rates was linked to excessive risk-taking behavior in U.S. markets, especially where regulation has been lax or inadequate,” Professor Shang-Jin Wei says. “The upside is that with low interest rates comes a lower cost of capital, which is good for investment.”

Given its far-reaching effects, both private sector analysts and policy makers have attempted to trace the causes of China’s high savings rate and to predict how long it will last. Some have attributed the savings primarily to Chinese corporations rather than households. Others point to a precautionary savings motive: because Chinese people are worried about costs of healthcare, education and old-age pensions and are unsure about how much these costs might change over time, they respond by saving more. Other explanations point to habit formation or financial development.

“But these explanations do not tell the whole story, and possibly are not the most important part of the story,” says Wei. Instead, Wei hypothesized that an important social phenomenon is the primary driver of the high savings rate: for the last few decades China has experienced a significant imbalance between the number of male and female children born to its citizens.

There are approximately 122 boys born for every 100 girls today, a ratio that translates into cutting about one in five Chinese men out of the marriage market when this generation of children grows up. Three factors conspire to produce the imbalance. First, Chinese parents often prefer sons. Second, it has become increasingly inexpensive for even a relatively poor farmer to afford the $12 Ultrasound B, the most common technology used for learning the gender of a fetus.

Third, and perhaps most importantly, China’s stringent family planning policy limits the number of children a couple can have. The policy allows most couples to have only one child. But in some regions, if a couple’s first child is a daughter, the state permits the couple to have another child. Families with one daughter that become pregnant with another daughter are more likely to terminate the second pregnancy in hopes of producing a son later on. (India, Korea, Vietnam and Singapore also have sex ratio imbalances that favor male children despite the absence of these stringent family planning policies. It might be that in these countries people voluntarily want to restrict the number of children they have, and still prefer sons and have access to inexpensive selective abortions. The sex ratio imbalance is high in these countries but not as extreme as in China.)

“The increased pressure on the marriage market in China might induce men and parents with sons to do things to make themselves more competitive,” Wei says. “Increasing savings is one logical way to do that, to the extent that wealth helps to increase a man’s competitive edge. Parents increase household savings mostly by cutting down their own consumption.”

Wei worked with Xiaobo Zhang of the International Food Policy Research Institute in Washington, D.C., to see if his hypothesis held up, comparing savings data across regions and in households with sons versus those with daughters. “We find not only that households with sons save more than households with daughters in all regions,” Wei says, “but that households with sons tend to raise their savings rate if they also happen to live in a region with a more skewed sex ratio.”

The effect is significant. The household savings rate in China rose from about 16 percent of disposable income in 1990 to over 30 percent today, which is much higher than most countries. About half of the increase in the savings rate of the last 25 years can be attributed to the rise in the sex ratio imbalance. “It’s a very high ratio of savings to income,” Wei says. “The comparable savings rate in the United States would be 2 or 3 percent before the crisis, and about 6 percent since the crisis.”

Even those not competing in the marriage market must compete to buy housing and make other significant purchases, pushing up the savings rate for all households.

“While the conventional explanations for the high savings rate all play a role, they are not as important as people previously thought,” Wei says. “People had noticed the sex ratio imbalance as a social problem. Sociologists and other social scientists had looked at the phenomenon but had not looked at it in relation to the high Chinese savings rate.”

As economists and policy makers have looked with concern to the large Chinese current account surplus and large U.S. current account deficit, or global imbalances, much of their discussion has focused on changing exchange rate policy.

There are global economic implications if China continues to save at such a high rate, and Wei’s research highlights a connection between social policy, saving behavior and current account balances.

“Exchange rates might be part of the solution, but our work suggests they might not be the most important part,” Wei says. Because sex ratio imbalances that skew toward males are viewed as evidence of a society’s tendency to discriminate against women, it calls attention to the status of women and women’s rights. And China is not the only country where the sex ratio dynamic needs attention. “The effect of sex ratio imbalance on savings is not unique to China,” he says. “Many other countries with significant sex ratio imbalances also have relatively high current account balances.

“None of the discussion about global imbalances has brought family planning policy or women’s rights to the table, because people do not see these issues as related to economic policy,” Wei says. “Our research suggests that this is a serious omission. You can only implement the right policy when you get the diagnosis correct, and fruitful policy dialogue has to include discussion on these issues.”

Shang-Jin Wei is the N.T. Wang Professor of Chinese Business and Economy in the Finance and Economics Division and director of the Jerome A. Chazen Institute of International Business at Columbia Business School.

Restricting loans to real estate virtually guarantees another bank crisis in the future

The President's Bank Reforms Don't Add Up. By Peter J Wallison
Restricting loans to real estate virtually guarantees another bank crisis in the future.
WSJ, Jan 25, 2010

After the Democrats' disaster in Massachusetts last Tuesday, President Obama appears to be flailing. Gone is the cool and measured demeanor that made him look presidential when the financial crisis struck during the 2008 campaign. Instead, the financial reform proposals he advanced later in the week seem to reflect political panic—a desperate attempt to appeal to the populist sentiment against Wall Street. Unfortunately, they also reflect a limited understanding of good financial or banking policy.

First, Mr. Obama has proposed to limit the size of banks or their holding companies, or both. The trouble with limiting the size of these institutions is that no one has the faintest idea what the right size is. What's more, if the purpose of the size limit is to prevent a bank or bank holding company from being or becoming too big to fail, we have to know what size would cause a failed institution to cause a financial train wreck. No one knows that, either. Under these circumstances, it's hard to take such a proposal seriously.

Second, Mr. Obama says that some firms should be prohibited from engaging in "proprietary trading." The White House announcement seems to apply to both banks and bank holding companies, but there is a huge difference between them. A bank is chartered by the government, its deposits are insured, it can participate in the U.S. payment system, and it has access to the Fed's discount window. None of these things is true of a bank holding company—which is an ordinary corporation that controls a bank.

Because banks are government-backed, and privileged in many ways, their activities are limited by law and regulation. They are restricted in how they can use their insured deposits. The Glass-Steagall Act, despite what we constantly hear in the media and from people who should know better, still applies to banks; it forbids them from engaging in underwriting or dealing in securities. This should prohibit them from engaging in proprietary trading to the extent that this is dealing in securities. Bank holding companies, however, because they are not banks and not government-backed, can engage in any financial activity, including securities dealing. Why would we prohibit them from doing so when they are using their own funds?

Apparently, Mr. Obama is arguing that bank holding companies should be prohibited from proprietary trading because it's too risky. The trouble is that proprietary trading is a profitable business for many bank holding companies, and there is no evidence that it caused serious losses for either banks or bank holding companies in the recent financial crisis.

There are strong firewalls between the holding companies and the banks they control that prevent the activities of the holding companies from affecting their bank subsidiaries. If Mr. Obama's plan is adopted, many bank holding companies will have to give up profitable businesses or sell off their banks. But even that wouldn't really solve the problem, since some would contend that large financial institutions like Goldman Sachs and Morgan Stanley, even if they ceased being bank holding companies, would still be too big to fail.

But if we are going to stop Goldman Sachs and Morgan Stanley from taking risks in securities trading generally because they are too big to fail, why not stop securities trading by all large financial firms, such as investment banks or insurance companies? Even for a newly minted populist, this is a bit much.

There is one more factor to consider. Banks have been committing themselves increasingly to financing real estate. The reason for this is simple. Because they cannot underwrite or deal in securities, they have been losing out to securities firms in financing public companies—that is, most of American business other than small business. It is less expensive for a company to issue notes, bonds or commercial paper in the securities markets than to borrow from a bank.

Where, then, can banks find borrowers? The answer, unfortunately, is commercial and residential real estate.

Real-estate loans rose to 55% of all bank loans in 2008 from less than 25% in 1965. These loans will continue to rise in the future, because only real-estate, small business and consumer lending are now accessible activities for banks.

This is not a good trend, because the real-estate sector is highly cyclical and volatile. It was, indeed, the vast number of subprime and other risky mortgages in our financial system that caused the weakness of the banks and the financial crisis. Requiring banks to continue to lend to real estate, because they have few other alternatives, virtually guarantees another banking crisis in the future.

Since banks can never be let out of these restrictions as long as they are government-backed, one solution for banking organizations is to center their activities in the bank holding company which—because it is not government-backed—does not have to limit its range of activities. The fact that Mr. Obama now proposes to close off this one avenue through which banking organizations can be profitable is strong evidence that neither he nor his advisers, in attempting to lash out at banks, have thought through the long-term prospects and needs of the banking industry.

That might make good populist politics, but it is not responsible policy. Instead of trying to punish the banking industry, Mr. Obama should try to understand why banks have become so heavily invested in real estate.

Banks must remain restricted in their range of activities, but bank holding companies are not banks. The solution to the long-term problems of the banking business is not to narrow the activities of bank holding companies, but to broaden them.

Mr. Wallison is a senior fellow at the American Enterprise Institute.

Basel Committee publishes assessment methodology for compensation practices

Basel Committee publishes assessment methodology for compensation practices
BIS January 22, 2010

The Basel Committee on Banking Supervision today issued Compensation Principles and Standards Assessment Methodology. The Methodology seeks to foster supervisory approaches that are effective in promoting sound compensation practices at banks and help support a level playing field.

Mr Fernando Vargas, Chairman of the Basel Committee's Task Force on Remuneration and Associate Director General of Banking Supervision at Bank of Spain, explained that "the Methodology provides a comprehensive set of tools for supervisors to assess compensation practices in an effective and consistent manner."

The Methodology will help supervisors assess a firm's compliance with the Financial Stability Board's "Principles for Sound Compensation Practices" and related implementation standards. This will contribute to ongoing implementation of the Principles and Standards, including the FSB’s current thematic review of national and firm implementation. Consistent with the FSB "Principles for Sound Compensation Practices", the Methodology is structured based on the following themes:

1. Effective governance of compensation
2. Effective alignment of compensation with prudent risk taking, and
3. Effective supervisory oversight and engagement by stakeholders.

Mr Nout Wellink, Chairman of the Basel Committee and President of the Netherlands Bank, stated that "use of the Methodology will promote appropriate compensation practices that create the right incentives for effective risk management and avoiding excessive risk-taking." He noted that "the Basel Committee's work on compensation issues is ongoing. It is likely that the Methodology will expand and change over time as more practical experience is gained."

A Free Speech Landmark - Campaign-finance reform meets the Constitution

A Free Speech Landmark. WSJ Editorial
Campaign-finance reform meets the Constitution.
The Wall Street Journal, page A18, Jan 22, 2010

Freedom has had its best week in many years. On Tuesday, Massachusetts put a Senate check on a reckless Congress, and yesterday the Supreme Court issued a landmark decision [see slip op.] supporting free political speech by overturning some of Congress's more intrusive limits on election spending.

In a season of marauding government, the Constitution rides to the rescue one more time.

Justice Anthony Kennedy wrote yesterday's 5-4 majority opinion in Citizens United v. Federal Election Commission, which considered whether the government could ban a 90-minute documentary called "Hillary: the Movie" that was set to run on cable channels during the 2008 Presidential campaign. Because it was funded by an incorporated group and was less than complimentary of then-Senator Hillary Clinton, the film became a target of campaign-finance limits.

The 2002 Bipartisan Campaign Finance Act, aka McCain-Feingold, banned corporations and unions from "electioneering communications" within 30 days of a primary or 60 days of a general election. Yesterday, the Justices rejected that limit on corporate spending as unconstitutional. Corporations are entitled to the same right that individuals have to spend money on political speech for or against a candidate.

Justice Kennedy emphasized that laws designed to control money in politics often bleed into censorship, and that this violates core First Amendment principles. "Because speech is an essential mechanism of democracy—it is the means to hold officials accountable to the people—political speech must prevail against laws that would suppress it by design or inadvertence," he wrote. The ban on corporate expenditures had a "substantial, nationwide chilling effect" on political speech, he added.

In last year's oral argument for Citizen's United, the Court got a preview of how far a ban on corporate-funded speech could reach. Deputy Solicitor General Malcolm Stewart explained that, under McCain-Feingold, the government had the authority to "prohibit the publication" of corporate-funded books that called for the election or defeat of a candidate.

That was a shock and awe moment at the Court, as it also should have been to a Washington press corps that has too often been a cheerleader for campaign-spending limits. Mr. Stewart was telling a truth already familiar to campaign-finance lawyers and the speech police at the Federal Election Commission. Former FEC Commissioner Hans von Spakovsky recalled yesterday that in 2004 the agency investigated whether a book written by George Soros critical of George W. Bush violated campaign laws. Liberals as much as conservatives should worry about laws that allow such investigations.

The Court's opinion is especially effective in dismantling McCain-Feingold's arbitrary exemption for media corporations. Thus a corporation that owns a newspaper—News Corp. or the New York Times—retains its First Amendment right to speak freely. "At the same time, some other corporation, with an identical business interest but no media outlet in its ownership structure, would be forbidden to speak or inform the public about the same issue," wrote Justice Kennedy. "This differential treatment cannot be squared with the First Amendment."

For instruction and sheer entertainment, we also recommend Justice Antonin Scalia's concurring opinion that demolishes Justice John Paul Stevens's argument in dissent that corporations lack free speech rights because the Founding Fathers disliked them. "If so, how came there to be so many of them?" Mr. Scalia writes, in one of his gentler lines.

The landmark decision—which overturned two Supreme Court precedents—has already sent the censoring political class into orbit. President Obama was especially un-Presidential yesterday, putting on his new populist facade to call it "a major victory for big oil, Wall Street banks, health insurance companies" and other "special interests." Mr. Obama didn't mention his union friends as one of those interests, but their political spending will also be protected by the logic of this ruling. The reality is that free speech is no one's special interest.

New York Senator Chuck Schumer vowed to hold hearings, and the Naderite Public Citizen lobby is already calling for a constitutional amendment that bans free speech for "for-profit corporations." Liberalism's bullying tendencies are never more on display than when its denizens are at war with the speech rights of its opponents.

Perhaps one day the Court will go even further and overturn Buckley v. Valeo, the 1976 decision that was its original sin in tolerating limits on campaign spending. The Court did yesterday uphold disclosure rules, so a sensible step now would be for Congress to remove all campaign-finance limits subject only to immediate disclosure on the Internet. Citizens United is in any event a bracing declaration that Congress's long and misbegotten campaign-finance crusade has reached a Constitutional dead end.

Why Rating Requirements Don't Make Sense - The market—not government mandates—should decide the value of our work

Why Rating Requirements Don't Make Sense. By DEVEN SHARMA
The market—not government mandates—should decide the value of our work.
WSJ, Jan 19, 2010

Some very eminent voices, including this newspaper, have called for repealing regulations that directly or indirectly require certain investors to hold debt evaluated by rating agencies. They argue this government mandate interferes with the free market and encourages undue investor reliance on credit ratings.

We at Standard & Poor's could not agree more. We support removing investor rating requirements and believe the market—not government mandates—should decide the value of our work.

We have always measured our success by the value we bring investors. We offer our ratings as a view of relative credit risk—not as a buy, hold or sell recommendation. But we recognize that rating mandates may have prompted some investors to use ratings in ways they were never intended.

S&P is one of 10 firms considered by the Securities and Exchange Commission to be "Nationally Recognized Statistical Rating Organizations" (NRSROs). Various federal and state regulations prevent certain banks, public pension funds, money market funds, and other regulated entities from investing in securities unless they have NRSRO ratings.

These regulations may have led some investors to confuse NRSRO ratings with a government seal of approval or to inappropriately use ratings as a short cut for gauging investment suitability, rather than as just one of many tools that investors can use in independently analyzing credit risk.

Now Congress is considering legislation that would subject rating agencies to discriminatory liability standards because of their NRSRO status.

Currently, rating agencies face the same liability standards as accountants and securities analysts. If the proposed legislation becomes law, rating agencies would be subject to discriminatory, more onerous, liability standards than other capital markets participants. The proposed legislation could also make it difficult for new or small rating agencies to enter the market.

Worse, the proposed standards could deter firms from rating new debt, which would restrict the amount of capital available to new enterprises and technologies—capital that is critical to job creation.

Ratings are a valuable benchmark for investors. With respect to the assumptions underlying our ratings of U.S. residential mortgage securities in recent years, yes, we and others, including banks and regulators, failed to anticipate how steep the fall in house prices would be.

We have learned from this harsh lesson and have made significant revisions to our rating approach. Those revisions include modifying our methodologies and criteria to better account for a possible period of severe economic stress. Our ratings should now be more stable, comparable and transparent than before.

For instance, our criteria for rating a security as AAA (our highest designation) include consideration of what could happen to a security if the country faces an economic scenario on par with the Great Depression.

While we believe these and other enhancements will create more forward-looking ratings, it is still true that a credit rating is not intended to be, and must never be used, as the sole determinant of how well an investment meets an investor's needs.

That is why we believe rating mandates should be removed and why other rating firms that have made important changes in response to the financial crisis should also embrace removing rating mandates.

Standard & Poor's traces its origins back 150 years, long before any rating mandate, and would certainly be able to compete in an open market, as it does now overseas. We deploy over 1,300 credit rating analysts to provide investors with ratings that represent a common risk benchmark across industry sectors and geographic regions, as well as over time.

The administration and Congress aim to prevent another financial meltdown by increasing regulatory oversight and transparency for rating agencies, derivatives and mortgage underwriting practices. They also aim to diminish systemic risk. We support these reforms insofar as they create a level playing field that ensures that capital markets return to sustainable growth.

Irrespective of regulatory reforms, our most important audience will remain the marketplace. If our ratings are valuable, people will use them. If not, market participants should not be forced to use them. We should be judged by the quality of our products and the value investors derive from them.

Mr. Sharma is president of Standard & Poor's.

To Help Haiti, End Foreign Aid

To Help Haiti, End Foreign Aid. By Bret Stephens
For Haitians, just about every conceivable aid scheme beyond immediate humanitarian relief will lead to more poverty, more corruption and less institutional capacity.
WSJ, Jan 19, 2010

Course unclear for Japan-U.S. alliance

Course unclear for Japan-U.S. alliance. By Takehiko Kajita
Japan Today, Jan 17, 2010

TOKYO — Despite last week’s accord between Foreign Minister Katsuya Okada and U.S. Secretary of State Hillary Clinton to further deepen the Japan-U.S. alliance, it is unclear what will actually be achieved in light of a disagreement over a U.S. military air base that has strained bilateral relations.

Both the top Japanese and U.S. diplomats spoke highly of the bilateral alliance, saying it has underpinned security in the Asia-Pacific region for the past 50 years.

They formally agreed to launch talks to further deepen the alliance, with foreign and defense ministers from the two nations holding a meeting in the first half of this year for a midterm review and seeking a final conclusion in November.

Noting that this year marks the 50th anniversary of the current bilateral security arrangements, Clinton said, ‘‘It is an opportunity to mark the progress we have achieved together for our people and for the people of the region and the world.’‘

Okada said he hopes the upcoming talks will result in a new document replacing the 1996 Japan-U.S. security declaration, which expanded the scope of the bilateral alliance from one configured for the Cold War era to one encompassing the entire Asia-Pacific region.

But questions arise on whether the project will proceed as hoped for, in light of the tension spawned by the bickering over where the U.S. Marine Corps’ Futenma Air Station in Okinawa Prefecture should be relocated.

Prime Minister Yukio Hatoyama of the Democratic Party of Japan has delayed the decision on the relocation issue until May, indicating that Tokyo could renege on the previously agreed plan to transfer Futenma’s helicopter functions to another site in Okinawa by 2014.

There is no guarantee, however, that the Tokyo government and the ruling coalition can reach a decision by then because the Social Democratic Party, a minor coalition partner, insists that the air base facility be moved off the southernmost island prefecture entirely.

Hatoyama appears determined to keep the three-way coalition intact, which also includes the People’s New Party, another small party, as the DPJ lacks a majority in the House of Councillors even though it is an overwhelmingly dominant force in the more powerful House of Representatives.

Another reason for doubts is Okinawa’s lingering resentment about what its residents see as an unfair burden in maintaining the Japan-U.S. alliance. Okinawa hosts about half the 47,000 U.S. military personnel in Japan.

While the city of Nago has offered to be home to the facility to Futenma, a mayoral election there on Jan 24 could turn the tide. In the election, an incumbent who accepts the relocation plan under a 2006 bilateral deal will face off with a contender who is opposed to it.

Should the central government decide to go ahead with the Nago plan by the election, it would face difficulties in carrying it out because environmental assessment procedures at the planned transfer site in a coastal area will likely be disturbed by local protests.

‘‘I’m afraid the net result of what the Hatoyama government is doing would be that the Futenma base will remain put permanently,’’ said a Japanese government official who requested anonymity.

Apart from the Futenma dispute, there is another source of doubt about the alliance talks—why it is necessary at this point and in which direction Japan wants to navigate them.

The Hatoyama government has pledged to deal with the United States on a more ‘‘equal’’ basis, while emphasizing closer relations with China.

After the talks with Clinton, Okada was vague about what will be among major elements to be considered to strengthen the alliance. He said security environments in East Asia, including China’s moves, should be scrutinized, but admitted it is difficult to predict how the talks will evolve.

Asked about his own vision for a future alliance with the United States, he said only, ‘‘It may be better for you to pose the question to the prime minister.’’

Haitian Amnesty - A humane decision for temporary refuge in America

Haitian Amnesty. WSJ Editorial
A humane decision for temporary refuge in America.
WSJ, Jan 16, 2010

The Obama Administration acted properly, and humanely, late yesterday in extending temporary amnesty to Haitians who were illegally inside the U.S. before this week's catastrophic earthquake. Some 30,000 Haitians had been awaiting deportation but will now be allowed to stay in the U.S. and work for another 18 months.

You might even call this amnesty of a sort, if we can use that politically taboo word. But we hope even the most restrictionist voices on the right and in the labor movement will understand the humanitarian imperative. The suffering and chaos since the earthquake should make it obvious that Haiti is no place to return people whose only crime was coming to America to escape the island's poverty and ill-governance.

For that matter, we don't mind if they stay here permanently. Haitian immigrants as a group are among America's most successful, which demonstrates that Haiti's woes owe more to corruption, disdain for property rights and lack of public safety than to any flaw in its people. Their remittances to Haiti also help to sustain the impoverished population. Haitians received some $1.65 billion from overseas in 2006, according to the Inter-American Development Bank.

We can argue later about whether to make this temporary amnesty permanent, but for now the U.S. decision to let the Haitians stay is evidence of the generosity that Americans typically show in a crisis.

FDA Decision on Chemical BPA Gets Mixed Review: "ACSH scientists are glad a ban was avoided but remain disappointed"

FDA Decision on Chemical BPA Gets Mixed Review: "ACSH scientists are glad a ban was avoided but remain disappointed."
ACSH, January 15, 2010

New York NY -- January 15th, 2010. The American Council on Science and Health applauds today's decision by the Food and Drug Administration (FDA) not to ban the plastic hardener bisphenol-A (BPA). Despite heavy pressure from various activist "environmental" groups, the FDA has not placed any restrictions on the chemical's use in consumer products but rather decided to "support" industry's decisions to reduce exposure to BPA in food-related products aimed at infants and children. FDA is also "facilitating" the development of alternatives to BPA in infant formula cans.

FDA stopped well short of a ban on this common and useful chemical, which has been in safe use in a wide spectrum of consumer products for over 50 years. ACSH scientists are pleased but remain disappointed that the FDA review and recommendations deviated at all from sound science -- by showing concern for hypothetical and non-existent health risks. ACSH's medical director, Dr. Gilbert Ross, said: "BPA has been among the most well-studied substances known to man, and repeated evaluation by respected scientific bodies worldwide has without fail deemed BPA safe as typically used. Our publication on BPA remains quite relevant today: we found that BPA is safe for all ages, including infants and children."

Another key fact is that since BPA became commonplace in the lining of canned goods, foodborne illness from canned foods -- including botulism -- has virtually disappeared. Any possible new replacement could not have the same record of testing and safety as has been shown for BPA.

ACSH's president, Dr. Elizabeth M. Whelan, added, "The fear campaign against BPA promoted by a few activist groups has been based solely on flimsy animal research. Recently, lacking real science to support their alarmist claims, some labs have tried 'novel approaches to test for subtle effects,' as the FDA report states. This is not how human risk assessment should be carried out. If there were any real adverse health effects from exposure to BPA, such effects would have become manifest long ago and would not have required bizarre tests in a few advocate's labs."

ACSH's associate director, Jeff Stier, pointed out: "This finding should put the matter to rest. The current FDA is very cautionary. After taking all this extra time to re-study the issue, the fact that they are keeping BPA on the market speaks volumes about the safety of the product. If BPA were endangering children, they'd have never left it on the market."

See also: ACSH's earlier official statement on The Facts About Bisphenol A.


For media contact, including interviews, please call:

Dr. Elizabeth Whelan (WhelanE[at]ACSH.org): 917-439-8043
Dr. Gilbert Ross (RossG[at]ACSH.org): 516-581-8400
Jeff Stier (StierJ[at]ACSH.org): 646-245-1443