MC.no.spin

I have just concluded a lengthy independent investigation (read: I've just killed a few hours researching this stuff while watching football, and want to post my findings) into the housing crisis matter and have found the exact person responsible for allowing it to occur.

First, it is important to consider responsibility and Adam Smith's invisible hand, showing how we all act in our self-interest. While it is obvious mortgages were being handed out like candy to people who had no business buying a home, what fueled it was that there was deception in the securities markets that these were AAA securities.

In other words, fraud.

To make matters worse, the people furthest out of touch with the b.s. going on at ground zero level with these reckless home loans were foreign investors, who bought these C.D.S. (basically insurance - a hedge bet - against mortgage defaults, though also bought on pure speculation as well, gambling that the market would collapse) and C.D.O.s (bonds backed by these mortgages which relied on their income to pay on the bonds) thinking the C.D.O.s were AAA.

Who is responsible for this deception?

Follow the money.

From 2002 to 2006, Moody’s profits nearly tripled, mostly thanks to the high margins the agencies charged in structured finance. In 2006, Moody’s reported net income of $750 million.

Moody's and the other top ratings agencies relied on their income from banks. They were hired out to rate these securities. The banks relied on the agency hired to give a high rating so that the security could be easily sold for a profit. The competition between agencies fueled catering to the banks so that their services were used.

This is a major conflict of interest.

Instead of staying abreast of irresponsible lending practices at ground zero level increasing the likelihood of default, these agencies stood on a platform of not being in that part of the business and only being able to rely on the past. The earlier models were of course comparing apples with oranges.

The agencies are private companies, and Adam Smith's invisible hand philosophy holds - they acted in their self-interest. They pulled this feigned ignorance in many ways, including having seperate teams rate C.D.O.s from the team that rated the initial mortgage backed security. So even when they started reducing the credit ratings when defaults started increasing, the C.D.O.s were still operating on AAA ratings, even though they were still buying these lower rated securities to back their bonds.

The fact these C.D.O.s were acquiring these high risk securities was not transparent, thanks to earlier successful lobbying by Securities Industry and Financial Markets Association, the leading lobbyist of Wall Street firms.

Here again, the SEC failed to act and get such transparency mandated. Why?

But despite this cover-up, the ratings agencies failed to act neutrally in doing their job of assigning proper ratings to these C.D.O.s.

Here again, the SEC failed to act and get such ratings adjustments enforced. Why?

Late in 2006, Moody’s rated a C.D.O. with $750 million worth of securities. The covenants, which act as a template, restricted the C.D.O. to, at most, an 80 percent exposure to subprime assets, and many other such conditions. “We’re structure experts,” Yuri Yoshizawa, the head of Moody’s’ derivative group, explained. “We’re not underlying-asset experts.” They were checking the math, not the mortgages. But no C.D.O. can be better than its collateral.

Moody’s rated three-quarters of this C.D.O.’s bonds triple-A. The ratings were derived using a mathematical construct known as a Monte Carlo simulation — as if each of the underlying bonds would perform like cards drawn at random from a deck of mortgage bonds in the past. There were two problems with this approach. First, the bonds weren’t like those in the past; the mortgage market had changed. As Mark Adelson, a former managing director in Moody’s structured-finance division, remarks, it was “like observing 100 years of weather in Antarctica to forecast the weather in Hawaii.” And second, the bonds weren’t random. Moody’s had underestimated the extent to which underwriting standards had weakened everywhere. When one mortgage bond failed, the odds were that others would, too.

Moody’s estimated that this C.D.O. could potentially incur losses of 2 percent. It has since revised its estimate to 27 percent. The bonds it rated have been decimated, their market value having plunged by half or more. A triple-A layer of bonds has been downgraded 16 notches, all the way to B. Hundreds of C.D.O.’s have suffered similar fates (most of Wall Street’s losses have been on C.D.O.’s). For Moody’s and the other rating agencies, it has been an extraordinary rout.

It's easy to just blame the false credit ratings as to why the bubble grew so big, but that's not the full picture yet. Further, this doesn't get at the root of the problem: WHY ARE WE NOT CLOSELY SUPERVISING PRIVATE RATING COMPANIES TO MAKE SURE THEY ACCURATELY RATE THESE SECURITIES, WHEN AFTER ALL THEY WERE HIRED BY THE ENTITY THAT DEPENDS ON A HIGH RATING?

These private credit rating companies have been government certified for years and thus gave investors a false sense of securitiy that they were reliable.

WHY WERE THEY GOVERNMENT CERTIFIED WHEN AN OBVIOUS CONFLICT OF INTEREST EXISTS FOR THESE COMPANIES?

In effect, the government outsourced its regulatory function to three for-profit companies. S.&P., Moody’s and Fitch. And then failed to make sure they did an honest job.

By government, I mean SEC.

After Enron blew up, Congress ordered the S.E.C. to look at the rating industry and possibly reform it. The S.E.C. ducked. Congress looked again in 2006 and enacted a law making it easier for competing agencies to gain official recognition, but didn’t change the industry’s business model.By then, the mortgage boom was in high gear. From 2002 to 2006, Moody’s profits nearly tripled, mostly thanks to the high margins the agencies charged in structured finance. In 2006, Moody’s reported net income of $750 million.

The SEC two months ago finally got on the ball and proposed legislation to eliminate the reference to ratings of NRSROs, way late in the game (and more or less a cop out):

SEC Proposal to Eliminate References to Ratings of NRSROs

In 2006, the following bill S.3850 was made into law, introduced by the supposed de-regulating Republican Party, to help try to put a stop to these practices. The language of the bill shows that the SEC failed to uphold its responsibilities in compliance:

S. 3850 [109th] - Summary: Credit Rating Agency Reform Act of 2006 (GovTrack.us)

The culprit of this mess is SEC chairman Chris Cox for failing to DO HIS JOB.

__________________
"The guy’s a phony. He has no experience, he has no record; he’s not nearly ready to be commander in chief."
Bill Clinton on Obama (from the book Game Change)

obvious Child

Wait, it's Mr. Cox's fault for stopping Moody's from its selling of ratings but it's not Moody's fault for selling its ratings?

So if I shoot someone, it's not my fault that I shot someone, it's the gun manufacturer's fault since they didn't stop me from buying the gun?

How about MC.no.spin, you just own up to the real problem?

We all did this. From the Bush Administration which attacked the the down payment, to the fed who kept rates low, to the investment houses which bought this crap without looking at the revenue streams behind it, to the policies of Freddie/Fannie, to the rating agencies who sold ratings, to your local bank which gave out loans they shouldn't have done so. To the idiots with no income, no job and no assets who went and got loans. To all of us who sat by and watched as the crisis built from at at least 2005 on. Stop trying to blame a single person. This mess is of our own creation. All of us.

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MC.no.spin

I think it's lazy to toss this off as no one being responsible - how would you prevent it in the future? You have to narrow the target. You do that by applying Adam Smith.

Of course Moody's is accountable. Hello? I just showed you why. The SEC failed to ACT.

Of course the banks tried to capitalize on the false AAA ratings. Yes they should be held accountable. Who failed to do so? The SEC failed to ACT.

This is why you delegate responsibility. You've got somebody to hold accountable when things go wrong.

Chris Cox betrayed our trust.

__________________
"The guy’s a phony. He has no experience, he has no record; he’s not nearly ready to be commander in chief."
Bill Clinton on Obama (from the book Game Change)

obvious Child

You can't prevent it. Human history is full of these bubbles. From the tech, to the railroad to the Mesopotamian land grab back during Babylonian times. You're kidding yourself if you think we can prevent future crisises caused by bubbles. At best we can HOPE to learn from the irrational exuberance and take measures against it. The crowds and masses will always be swayed by an easy dollar despite the risks. But what you forget is that these crisises promote opportunities.

Adam smith would have us do nothing and let the market decide entirely. If we applied Adam Smith, Cox is not at fault since he let the market decide. He let the invisible hand work. Now if we applied Keynesian, Cox is clearly at fault as he did not practice one of the key 4 parts of Government; maintain the framework for stability.

You made it clearly sound like Cox, not Moody's was at fault. That Cox was a fault because he failed to stop them, not that Moody's was at fault because they sold ratings.

That doesn't address the origins of the problem and who caused it.

This mess is of our own creation. All of us.

Don't forget that.

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No, cops cannot threaten to rape and murder your family during interrogations.

MC.no.spin

No offense but companies and countries would collapse under your guidance.

Bubbles can be slowed and curbed. This particular bubble was falsely pumped up, among various ways, through bogus credit ratings betraying the public trust. Investors thought they were looking at a rating by a credit rating agency certified by the government and regulated by them.

The responsbility for ensuring bogus ratings do NOT occur rests with the SEC.

Moving on.

You missed my point on Adam Smith. Re-read the post.

Mainly, get over the idea you can butter the idea of fault across the globe and improve this situation and make sure it never happens again. We are barely averting a 1930's scenario thanks to this mess. A "**** happens" attitude is best left off the investigation and policy recommendation protocol.

But by all means, enjoy your philosophic and managerial blunder. Chris Cox would heartily agree with you, so you are not alone.

__________________
"The guy’s a phony. He has no experience, he has no record; he’s not nearly ready to be commander in chief."
Bill Clinton on Obama (from the book Game Change)

obvious Child

Because? Value investment houses made a killing doing what I just stated. One of them had 35% returns when the market as a whole went down 15%. That's a 50% differential. Bubbles and their popping cause people to act stupidly, causing discounts and price distortions. Investment houses are extremely heavy on financials because the average moron in the market is undervaluing them. Thus when the market rallies, these investment houses make a killing because they bought them at ridiculously low prices. AIG for example. It is SO worth more then $2 but people are scared. Why do you think huge volumes of it are moving into investment houses? Because the bubble popping has caused it to be undervalued. Stop focusing so much on the risk and focus on how to get filthy rich. "Be greedy when others are fearful and be fearful when other are greedy" - Warren Buffet. I got no problems doing the opposite of the crowd for a simple reason: There are far more poor people then wealth ones.

True, but bubbles will always be pumped up some way or another. The only way around this is a command economy. And I'm pretty sure neither you nor I want that. Bubbles have existed since mankind stood on two legs. Get over it. But just because someone says the rating is good doesn't mean it is. Enron clearly taught us that all audits are not the same. And with these kind of 'assets' it should be relatively easy to trace their revenue or lack there of. The lack of effort done by those buying these securities is really pathetic.

Perhaps you stated it poorly.

Come again? You can't ensure reasonably that it won't happen again. An the simple fact of the matter is that fault is shared across a wide variety of people. Blaming one person does not cause us as a society to learn, see the signs of distress and act accordingly. If we are to curtail bubbles or even stop them, we need as a society to change how we view the world. Blaming one person does not do this.

And quite frankly, I don't want bubbles to stop happening. We got a glut of rail roads after that bubble. Bandwidth exploded after the tech. We'll have millions of houses on the market after this one with a stronger financial sector that is far more prudent. A golden age tend to be built upon the ashes of the bubble. This is progress. No one said it would be painless.

Not at all. 1930 was much worse. First, we have agencies that insure funds. Bank runs are played up but otherwise not occurring. Margin selling is far smaller then in the 30s. And the rest of the world has trillions in currency that is pouring in. We are well averting a 1930's senario. And to counter your point, has the regulation of the past prevented future bubbles? History tends to say otherwise. Granted, we should have some regulation but the idea of regulating to the point of stopping bubbles? That's ridiculous.

Hey, I'm a free market Capitalist. What can I say?

And I'm following the philosophy of Buffet and value investment houses. Please, follow the masses. I certainly won't be doing so.

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MC.no.spin

This had nothing to do with the topic, but okay.

A free market economy with limited central planning - also with due vigilance to avoid over-regulation and government take-over, is the best template to use. Otherwise, too much corruption and fraud enters into the market, destroying economic growth.


Perhaps you failed to read it.

You are again missing the point. Please re-read the post, or we can just agree to disagree and wait to see how others view this topic.

England, Australia, and other countries were able to stop the housing bubble in their countries. What we are experiencing is not at all desirable. Many families have sufferred great economic stress because of the inactions of those in charge. It should have been prevented.

Which is exactly what I said, even using the same word: averting. Do you actually read my posts or just refer to some talking points list?

Please quote my post where I said bubbles could be completely stopped. Thanks in advance.

That you have failed to study History?

And I'll be striving for reform so that families and investors don't have such an economic crisis again. I have a populist Teddy Roosevelt streak in me that I love, as do those I rally for - in this case, the people.

__________________
"The guy’s a phony. He has no experience, he has no record; he’s not nearly ready to be commander in chief."
Bill Clinton on Obama (from the book Game Change)

obvious Child

You claimed that businesses would collapse under my Philosophy. That ain't true.

Care to point to one of those in modern history?

Maybe. No one said it would be painless. But you are ignoring the upside of bubbles.

Incorrect. I stated that your position that we are averting a 1930's event is wrong. We aren't even close to a 1930's event. The similarities are few in the sequence of events prior to the reaction by the fed. I agree that we are averting a worse crisis. I disagree we are averting a 1930's event. Do you actually read my posts or just refer to some talking points list?

You seem to have suggested that bubbles should be prevented.

Are you saying that free market capitalism has failed? History shows that bubbles occur outside of a command economy (hell, it might even happen in those as well).

At the cost of some of your principles. I don't think people who deserve to be taken for a ride should be bailed out. Call me a cold heart-ed capitalist, but that's what I am. Populism is dangerous.

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No, cops cannot threaten to rape and murder your family during interrogations.

Onion Eater

"The investment houses which bought this crap without looking at the revenue streams behind it" and "the idiots with no income, no job and no assets who went and got loans" are actually responsible for distinct parts of the problem.

I already used this same quote to try to help placate an argument between SgtRock and SouthernDemocrat at http://www.debatepolitics.com/econom...ng-crisis.html

Hopefully, it will placate your argument too - just call me "peacemaker" today!

Clearly mortgages weren't the only thing being handed out like candy - those AAA ratings were going fast too! Chris Cox is, basically, involved in fraud, as MC.no.spin said. However, Obvious Child also has a point - putting one guy's head on a stake and thinking that clears things up is a bit simplistic.

Incidentally, I mock AAA ratings at my Devil's Dictionary of Economics:

AAA-Rated Securities: The new word for what used to be known as sub-prime mortgages or, more colloquially, as worthless crap. See Fool’s Gold.

Fool's Gold: What the dollar is backed by – the assets of the Federal Reserve, composed mostly of AAA-Rated Securities, which are about as marketable as the chocolate-covered cotton balls that Milo Minderbinder was trying to foist on people in Catch 22. “The Fed’s balance sheet is getting corrupted with junk that others won’t buy or lend against,” observes Robert Robb.

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MC.no.spin

I don't think it clears things up - it points to the exact issue, that if corrected, will avert this bubble from reaching the proportions it reached here.

Notice how the Adam Smith factors start to all fall into place once these securities are properly rated and known: NOBODY WANTS THEM.

This immediately raises standards on lending, which is ultimately what has to change so that only people who can actually afford the home are the ones getting them.

The make-break point of the housing market is the SEC DOING ITS JOB, including making the purchase of these securities fully transparent, let alone ensuring that credit-ratings agencies are grading them appropriately.

__________________
"The guy’s a phony. He has no experience, he has no record; he’s not nearly ready to be commander in chief."
Bill Clinton on Obama (from the book Game Change)