The Wall Street Journal-20080206-breakingviews-com - Financial Insight- Sarkozy- Model of Letdown- Haphazard Meddling Casts French President as Failure In the Eyes of Big Business

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breakingviews.com / Financial Insight: Sarkozy, Model of Letdown; Haphazard Meddling Casts French President as Failure In the Eyes of Big Business

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Nicolas Sarkozy's popularity is in free fall. Pollsters say it's the result of the overexposure of his private life. But for their part, industrialists and bankers couldn't care less about the French president's jet-set friends, flashy ways or new wife, if only he delivered what they expect and what he promised: a growth-friendly environment, budget discipline and structural changes that France needs.

What a disappointment. Business expected Mr. Sarkozy the free- marketer. Instead, it has had to contend with Sarko the haphazard interventionist.

Four years ago, as finance minister, Mr. Sarkozy wrestled the European Union into allowing him to funnel taxpayer money into Alstom, the near-bankrupt turbine maker. He now presents Alstom's turnaround story as an example every time he wants to justify his meddling in industrial matters. He did it again this week at a photo-op at a loss- plagued Arcelor-Mittal steel plant in eastern France that the company wants to close. Mr. Sarkozy went so far as saying that to keep jobs, he would be ready to invest public money in the plant.

Last week, Mr. Sarkozy attempted to unseat the chairman of Societe Generale while trying to engineer a state-sponsored merger with larger bank rival BNP Paribas. The week before, he was railing against "financial capitalism," whatever that may be, and asking for Europe- wide measures to curb it. Last month, he warned that he would call on state-owned bank Caisse des Depots to "protect" French industry from foreign takeovers.

Nine months into the job, there is a lot Mr. Sarkozy hasn't done -- address the deficits and reform the bloated government machine. Even more worrisome is what he threatens to do.

The Moody's Scale Problem

Credit-rating providers are assiduously bolting the stable doors. Last month, for instance, Standard & Poor's changed its rating methods for the subprime mortgage-backed debt securities known as collateralized debt obligations -- a move Jamie Dimon, chief executive of J.P. Morgan Chase, dismissed as coming "a day late and a dollar short." Now, Moody's is asking whether it should rate structured- finance securities-bonds backed by pools of assets or debt -- using something other than the triple-A to single-C rating scale it uses for corporate bonds.

The answer is probably "yes," for at least three reasons. First, structured-finance ratings behave differently -- as investors have now realized, with recent history showing they are subject to more sudden downgrades than conventional bonds. Second, the ratings depend more heavily on quantitative models, as opposed to market prices or other observable criteria, and the assumptions used in them. And third, a change might force investors to buy only securities they can understand for themselves.

Moody's has floated five options. They include creating a different scale altogether, adding qualifiers to existing ratings and sticking with the existing ratings but publishing more explanatory material. There is almost certainly some backside-covering going on here, along with a bid to rebuild confidence in structured finance for good business and reputational reasons.

For rating volatility risks, how about borrowing from the tobacco industry? Moody's could try a general health warning -- "CDO buying may be hazardous to your bonus," for instance -- plus "full flavor," "mild," "extra mild" and so on. That might not do it, though. As with cigarettes, a country such as Australia might forbid such distinctions, favoring instead the idea that "all CDOs are toxic." And for a new scale altogether, the Department of Homeland Security's color-coded threat level system could be a model. Such a scheme could run from red (severe risk of blow-up) through orange, yellow and blue to green.

The rating providers deserve a certain amount of mockery. They should have been much more cautious, much sooner, with structured- finance ratings. Still, the Moody's initiative may help avoid a repeat of the subprime debacle. For that reason, it is better late than never.

-- Pierre Briancon and Richard Beales

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This column is by breakingviews.com, an online financial commentary site.