If You Give a Cow a C.D.O.

A House Budget Committee hearing today into the role of the credit ratings agencies in the financial crisis is making much of a 2007 email from a Standard & Poor's analyst to a colleague: "We rate every deal. It could be structured by cows and we would rate it."

There have been hundreds of billions of dollars of losses on collateralized debt obligations and other forms of structured finance that were created by Wall Street firms and rated by S&P and Moody's. More losses are coming. So how badly could the cows do in comparison?

After all, as producers of an important commodity, cows have a better understanding of how to value an underlying asset. And their grazing is infinitely cheaper and less wasteful than that of Wall Street bankers.

Milk, as cows know, can go bad. Indeed, this summer, someone describing UBS' structured financial instruments to HedgeWorld News, compared the bank's troubled portfolio to "having an inventory of old milk."

A speech by Annette Nazareth, a former Securities and Exchange commissioner, suggested that deals structured by cows would not be that far off the mark.

Speaking before the Los Angeles bar association a year ago, she cited the children's book If You Give a Mouse a Cookie, by Laura Numeroff, in describing the turmoil in the credit markets at that time:

"You might want to keep the plot of this delightful tale in mind if my descriptions of collateralized loan obligations and quant funds become too much to bear. In the book, a very demanding little mouse asks for a cookie. Of course, if you give a mouse a cookie, he's going to ask for a glass of milk. And when you give him the milk, he'll probably ask you for a straw. I think you probably are beginning to get the drift of the plot.

"While some have asserted that the book is an extended allegory for industrial capitalism and others for the dangers of giving in to terrorism, my take is more straightforward. I see the story as an introduction into the lessons of cause and effect."

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