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Dos Hombres: Market Stabilization, Rage Against the Ratings Agencies

Fin - Breakout - US

Yesterday on The Daily Ticker, Nesto and I sat with Aaron Task to discuss the implications of Raj Rajaratnam's conviction on insider trading charges. We expressed some skepticism that Rajaratnam's conviction would change "business as usual" on Wall Street.

Judging by the reaction, you'd think we condoned insider trading and then set an American flag on fire. Nothing could be further from the truth. The reality is that Rajaratnam is small potatoes. He's nothing but a photo opportunity for the government. A "shot across the bow" of corrupt traders? Sort of. A blow against systemic economic destruction? Not in the least. Rajaratnam is a patsy. A distraction to assuage individual investors' feeling that the trading game is rigged. Raj's conviction is a good thing but the impact is being wildly overstated by The Machine.

The real story is buried on the back page of business newspapers. Literally. Chances are Rajaratnam is on your local front page, as is the case here in New York. Raj was also the lead story for almost 24 hours on financial television. While we're all force-fed breathless reports ("he's still convicted but may appeal!"), a story near the last page of the Wall Street Journal announced that the ratings agencies at the center of the financial crisis are off the hook for their actions.

To quote the WSJ: "While the ratings firms may have taken an active role in developing the mortgage-backed securities, the judges found that the companies weren't liable because they didn't act as official underwriters."

If you aren't infuriated, please read that paragraph again. If you still aren't enraged, allow me to clarify. The ratings agencies -- Moody's (MCO), Fitch and Standard & Poor's -- worked with the investment banks to create products that the agencies could classify as investment grade. The agencies were paid by the banks for this service. The banks made a ton of money selling these bogus, literally over-rated mortgage-backed securities, which were attractive solely because of the investment rating. The more faked ratings the agencies dished out, the more money they and the banks made.

The U.S. Court of appeals ruled that the ratings agencies were innocent of the ensuing fallout because they are protected by the First Amendment. You and I, the tax-paying citizens of the United States, were on the hook for saving the world from economic Armageddon. I'm not sure if you in any way got paid off for this, but I sure didn't. I don't like paying for parties I didn't attend, and I'm sure you don't either.

The popular thing for Breakout, and for me, to do would be to spend time and energy vilifying Rajaratnam. Raj and Galleon were in the business of making themselves and other rich people richer. I'm glad he's in jail but I'm under no illusion that his imprisonment is any sort of fix for a corrupt system. Truthfully, I don't much care about Rajaratnam. You shouldn't either.

Convicting Rajaratnam was akin to cutting the finger off a terminal cancer patient. The real tumors are Moody's, Fitch and Standard & Poor's. Their stupidity, corruption and culpability impacted you, me and anyone else living in a capitalist society. Galleon is dead, but it's business as usual for the real enemies of free markets. If you're looking for someone to pretend otherwise, Breakout is the wrong place for you to get your market insight.

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