Government gets something right

Key culprits

Today's SCMP has a lengthy Bloomberg story about the credit-rating weasels - Bringing Down Wall Street as Ratings Let Loose Subprime Scourge by Elliot Blair Smith:

"I view the ratings agencies as one of the key culprits,'' says Joseph Stiglitz, 65, the Nobel laureate economist at Columbia University in New York. "They were the party that performed that alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies.''

Driven by competition for fees and market share, the New York-based companies stamped out top ratings on debt pools that included $3.2 trillion of loans to homebuyers with bad credit and undocumented incomes between 2002 and 2007. As subprime borrowers defaulted, the companies have downgraded more than three-quarters of the structured investment pools known as collateralized debt obligations issued in the last two years and rated AAA.

Without those AAA ratings, the gold standard for debt, banks, insurance companies and pension funds wouldn't have bought the products. Bank writedowns and losses on the investments totaling $523.3 billion led to the collapse or disappearance of Bear Stearns, Lehman Brothers and Merrill Lynch and compelled the Bush administration to propose buying $700 billion of bad debt from distressed financial institutions.

Honestly, what is the point of having credit-rating agencies if they do this kind of stuff?

The second part of the Bloomberg story is here:

The world's two largest bond-analysis providers repeatedly eased their standards as they pursued profits from structured investment pools sold by their clients, according to company documents, e-mails and interviews with more than 50 Wall Street professionals. It amounted to a "market-share war where criteria were relaxed,'' says former S&P Managing Director Richard Gugliada.

"I knew it was wrong at the time,'' says Gugliada, 46, who retired from the McGraw-Hill Cos. subsidiary in 2006 and was interviewed in May near his home in Staten Island, New York. "It was either that or skip the business. That wasn't my mandate. My mandate was to find a way. Find the way.''


Feed You can follow this conversation by subscribing to the comment feed for this post.


One can make the argument that when the CDOs were rated, housing prices were rising, ie, they were more than the mortgage. As such, they were AAA, as even if mortgages were unpaid, a foreclosure would not result in a loss. The problem occurs when everyone forecloses, as this lowers prices. Then, the CDOs lose value. Ratings agencies aren't prophets; they rate investments for what they are.

What is most interesting is that you have various economists blaming various institutions for the failures and their viewpoints seem to match those with a similar political slant. The Fed (both Greenspan and Bernanke), ratings agencies, Congress and/or various Congressional figures, Freddie and Fannie, Bush, Clinton, lack of investment opportunities, "unfettered free markets" and plenty of others have been blamed and perhaps they all have some merit. It doesn't seem to sit well with me that any single one of these is to blame; sometimes there are no villains. Perhaps there is an emergent property of the system the United States has cobbled together, in which case, no one is really to blame.


funnily enough after the last crash and burn all the investment banks had to decouple their analysis teams - which were actually glorified rating agencies with their buy or sell advice, seems like its the same old smart ass MBA's behind this lot as well.

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Your comment could not be posted. Error type:
Your comment has been saved. Comments are moderated and will not appear until approved by the author. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.


Post a comment

Comments are moderated, and will not appear until the author has approved them.

Your Information

(Name and email address are required. Email address will not be displayed with the comment.)