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Re: Plane flying over Downtown JC -- Thanks for the Downgrade, You should all be fired...
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Agreed. 1000%.
Posted on: 2011/8/12 2:03
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Re: Plane flying over Downtown JC -- Thanks for the Downgrade, You should all be fired...
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I say there's the problem. Years of starving the SEC and keeping them leashed under Bush. And probably under previous administrations but to a lesser extent. I've said this before, if a Vegas casino spent as little of their cashflow on security as our financial markets do, they'd be robbed blind and out of business. Wall Street is nothing but a casino, but without the eyes in the sky the predictable keeps happening. Duh! I tell my 12 year old son: only stupid thieves use guns, the smart ones go to Wall Street, and even when they're caught they rarely go to jail, and usually get to keep most of what they stole. Only the reckless of them get caught. It reminds me of when a friend worked at Tower Records. All the employees were taking home CDs every day. But just 1 or 2. They're working barely above minimum wage and it was tolerated. One guy gets reckless and greedy and starts taking dozens, and gets caught and a crackdown ensues. After it blew over the moderate pilfering started anew. Sound familiar? I'm no analyst, but I frankly believe most of these hedge funders are insider trading in one form or another.
Posted on: 2011/8/12 1:23
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Re: Plane flying over Downtown JC -- Thanks for the Downgrade, You should all be fired...
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It's the AAA tranches that got all the headlines. They didn't just slap AAA on everything. A slice at the top of the structure got AAA and between 80% and 90% - sometimes as much as 95% - of the rest of it got lower ratings. Look - they deserve to be beaten up. I would even say that there needs to be far greater consequences for their role in things - regardless of the cause. My belabored point in all this is that in order to bring about real change and get to a system that functions properly, there needs to be a clear understanding of what the real problems are. The SEC doesn't know. Congress doesn't know - they are looking to tweak things around the edges. Listening to Meredith Whitney, Joe Kernan and the screaming guy on the CBOT floor (can't remember his name) - and even Krugman and Gretchen Morgenson- say over and over "the issuer pays model is the problem" is so disheartening. If the people doing the work aren't competent, does it matter who is paying them to do their flawed work? Yes - there were a couple of instances where analysts expressed concern (there was also the quote about "they could bring a cow in here and we'd slap a AAA on it.") The few who understood that there might be a problem left. None of this is to excuse anything - the rating agencies have been a festering backwater for a long time and no one cared to do anything about them until it was too late. And still no one is bothering to do the heavy lifting of a complete overhaul. @crazy chet: the underlying assumptions for future performance of the asset class do matter. Ratings are supposed to be forward looking. No one at the agencies was looking at (nor do I believe they had access to) individual loan data within a pool. They had summary level statistics. You couldn't rate something like a CDO/CLO without having a view on asset performance in the future.
Posted on: 2011/8/11 23:53
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Re: Plane flying over Downtown JC -- Thanks for the Downgrade, You should all be fired...
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That's very well written and compelling, except when you boil it down to this: they were being asked to rate something they didn't know how to rate, so they gave it AAA instead of handing it back. The reason was they wouldn't get paid if they handed it back. So they plead incompetence instead of malfeasance? What difference does it make in the end? They got paid to let the banks run rampant. Had they done their job properly the banks shenanigans would have been stopped before it started.
Posted on: 2011/8/11 21:47
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Re: Plane flying over Downtown JC -- Thanks for the Downgrade, You should all be fired...
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Just can't stay away
 
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Here's a link to the SEC's investigation of the credit agencies from 2008, before the whole thing really blew up...
http://www.sec.gov/news/studies/2008/craexamination070808.pdf EDIT* Footnote on page 12: "Email No. 1: Analytical Staff to Analytical Staff (Apr. 5, 2007, 3:56 PM). In another email, an analytical manager in the same rating agency?s CDO group wrote to a senior analytical manager that the rating agencies continue to create an ?even bigger monster ? the CDO market. Let?s hope we are all wealthy and retired by the time this house of cards falters.;o).? Email No. 2: Analytical Manager to Senior Analytical Manager (Dec. 15, 2006, 8:31 PM)."
Posted on: 2011/8/11 20:26
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Myth: Pancakes are for breakfast.
Fact: There are no rules when it comes to pancakes. |
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Re: Plane flying over Downtown JC -- Thanks for the Downgrade, You should all be fired...
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Home away from home
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The ratings agencies should not have even been concerned with where home prices were heading. A true credit rating is based on the ability of the homeowners to repay their current mortgages. They were giving top ratings to pools of mortgages where many of the underlying notes were 20 or 30 times the homeowner's income. The fact that they would eventually just refinance should not have been part of a credit analysis. An $800,000 mortgage for someone earning $40k a year is not a good investment. Put a bunch of these together and it is a recipe for disaster. Unless you're John Paulson and you figure out how to bet against it.
Posted on: 2011/8/11 19:48
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Re: Plane flying over Downtown JC -- Thanks for the Downgrade, You should all be fired...
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Honestly, this would be a lot simpler (and cleaner) if that were true. Believe me when I tell you that a heaping dose of incompetence combined with a unique, but potent, blend of hubris is what did them in. They really and truly didn't understand, in the large sense, what they were doing. All three agencies (lump Fitch in there) subscribed to the "housing prices never go down across the board" without ever once questioning it. They were hidebound in their criteria - which really doesn't accommodate structured finance and sovereign ratings; it's the corporate methodology repurposed to fit other applications. Both Moody's and S&P admitted to major modeling errors (in the case of S&P, much of their modeling work gets done in India where most of the people don't have firsthand knowledge of the U.S. housing market and wouldn't recognize what is and isn't a realistic input.)
There are many problems with the agencies: they shouldn't be public companies (or major components of public companies) with public-company earnings pressure - which causes them to pursue "new earnings opportunities" like the mortgage-backed CDOs headlong and in a way that is as margin-friendly as possible. The vast majority of the middle level managers and above have never worked anywhere else - for them, a lot of the issues the rating process entails are theoretical. This includes the functioning of the capital markets. They can't pay even a quarter of what the top banks pay, so anyone who shows a hint of promise gets hired away - meaning you have the institutionalized management, a continual flow of freshly minted MBAs and not much else. This was particularly true in the structured groups - turnover among the analysts in those groups approached 100% in those groups in '05 and '06. I know it's trendy to say the agencies "caused" the current mess and that the issuer pays model is to blame. That is simply too simplistic and factually not correct. The truth is, there is no one issuer (or group of issuers) that constitutes a meaningful concentration of business. Sure, they should have been able to figure out what was going on. But that doesn't mean the agencies are corrupt or were bought off. More than anything, it's a broken model that either needs major overhaul or to be scrapped altogether. They really should only rate corporates, for starters. Look at Lehman and Bear. Both agencies had them with investment grade ratings the day before they filed. Lehman was an A+ the day before it filed. You know what happens when you downgrade an investment bank with a big trading operation to below investment grade - even just to BB+? You put it out of business. Same was true with Enron. Downgrading it to junk would have triggered collateral posting requirements for its trading businesses that would have choked most states, let alone a company.
Posted on: 2011/8/11 19:07
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Re: Plane flying over Downtown JC -- Thanks for the Downgrade, You should all be fired...
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The "asleep" analogy doesn't work, they got paid to look the other way. That makes them full accomplices.
Posted on: 2011/8/11 18:06
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Re: Plane flying over Downtown JC -- Thanks for the Downgrade, You should all be fired...
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Unfunded liabilities have always been a part of ratings analysis - be it corporations with underfunded pensions and OPEBs, financial guarantees, etc. or goverments with similar types of liabilities under different names. That's not new. Of course there is a discount to reflect the diminished present value, but they do factor into total liabilities - to the extent they are underfunded. (The fact that social security has been under siege - raided now for three decades+ to pay for other things - certainly has made a strong, albeit misguided, case that social security needs to be "reformed".)
S&P didn't "cause" anything, whether you are talking about the U.S. downgrade or the mortgage-backed security mess. Yes, the ratings were wrong. Yes, they were in over their heads in terms of understanding what they were rating and who they were up against at the banks. There are a variety of reasons for that - some of them cultural, some regulatory, some commercial. But cause? I would say the better analogy is they are the sheriff and fell asleep in the diner while bankers stole their cruiser and then crashed it into a packed playground. The agencies didn't "rob" anyone, nor did they "arrest" anyone - evidenced by the overly generous ratings they gave out.
Posted on: 2011/8/11 14:52
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Re: Plane flying over Downtown JC -- Thanks for the Downgrade, You should all be fired...
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With this downgrade, S&P can no longer be considered a serious source of credit ratings. Not that they were already after the mortgage bond ratings debacle. If anything, an entity with the ability to tax and print money should be rated AAAA. Instead of making accurate, thoughtful credit ratings, S&P is now choosing to make statements and influence policy.
Comparing Social Security total liabilities to current GDP is only relevant if everyone were to suddenly be eligible to collect Social Security.
Posted on: 2011/8/11 13:52
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Re: Plane flying over Downtown JC -- Thanks for the Downgrade, You should all be fired...
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Quite a regular
 
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I recommend taking this argument to Twitter.
When I found out that the government monitors Twitter, I signed up and began tweeting hate sound bites to all of the wankers like Eric Cantor who participated in this melodrama. That's me, doing my patriotic duty @GOP LEADER.
Posted on: 2011/8/11 13:25
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Re: Plane flying over Downtown JC -- Thanks for the Downgrade, You should all be fired...
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Just can't stay away
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Moody's did not downgrade...too bad everyone is focusing on S&P's decision and not Moody's. Good read: The Big Short, by Michael Lewis.
Posted on: 2011/8/11 11:12
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Re: Plane flying over Downtown JC -- Thanks for the Downgrade, You should all be fired...
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True.. but considering we are $100 trillion in the hole.. do you really need to question the fact that we are no longer AAA? BTW, we joined Japan (who also got downgraded some years back) of having a debt to GDP ratio exceed 100%.
Posted on: 2011/8/11 3:35
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Re: Plane flying over Downtown JC -- Thanks for the Downgrade, You should all be fired...
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No, but they did give inaccurate ratings to a lot of assets.
Posted on: 2011/8/11 3:29
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Re: Plane flying over Downtown JC -- Thanks for the Downgrade, You should all be fired...
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They created? Unfunded liabilities for Social Security and Medicare are over $100 trillion. The GNP of the United States is nowhere near that. The S&P didn't create that... we did over four generations of a welfare state that has made promises that cannot be met. Welcome to Hell my friend... things are going to get really interesting over the next 18 months...
Posted on: 2011/8/11 3:06
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Re: Plane flying over Downtown JC -- Thanks for the Downgrade, You should all be fired...
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Not. S&P is like the sheriff locking you up for vagrancy after he's robbed you and burned down your house. "just doin my job" S&P, Moodys and Fitch should all be under indictment, but the crisis they created was so bad regulators thought doing so would destroy all remaining faith in the markets.
Posted on: 2011/8/11 1:51
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Re: Plane flying over Downtown JC -- Thanks for the Downgrade, You should all be fired...
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S&P is just the messenger...
Posted on: 2011/8/10 23:36
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Plane flying over Downtown JC -- Thanks for the Downgrade, You should all be fired...
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Home away from home
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Posted on: 2011/8/10 22:37
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