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Thread: The Housing Crash Revisited

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    Cat-tastic Babba's Avatar
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    The Housing Crash Revisited

    The fact that this was legal and still continues is something I find mind boggling. The ratings agencies were not only allowed to rate things AAA when they weren't anything of the sort, but they were paid to do so by the banks asking for the ratings rather than the prospective investors in the securities. Which in effect meant, as Sen. Carl Levin put it, "It's like one of the parties in court paying the judge's salary."

    This is a very difficult and complex issue to understand and I don't claim to understand it fully. But I've been upset about this since it all came down. And the HoR refuses to do anything about. Probably because it's too damn difficult for their pea brains to comprehend. Idiots. Ultimately, it is the fault of Congress for making this crap legal when in the 90s the banksters essentially bribed them into relaxing regulations that had been in place since the Great Depression for damn good reasons. They called it "modernization" and Congress bought it. Bill Clinton admits now that all that went waaaaaaay too far.

    This is kind of a long read, but an important and substantial piece of the story about how our economy was brought down. If you are simply going to come on and spout crap about how it's the fault of all the stupid people who took loans they couldn't possibly pay off because the Democrats forced the banks to give out bad loans, please don't bother. Start your own thread. I don't need to read more of your simple-minded BS. I've heard it all before. Try reading this article and learning something instead.

    But what about the ratings agencies? Isn't it true that almost none of the fraud that's swallowed Wall Street in the past decade could have taken place without companies like Moody's and Standard & Poor's rubber-stamping it? Aren't they guilty, too?

    Man, are they ever. And a lot more than even the least generous of us suspected.

    Ratings agencies are the glue that ostensibly holds the entire financial industry together. These gigantic companies – also known as Nationally Recognized Statistical Rating Organizations, or NRSROs – have teams of examiners who analyze companies, cities, towns, countries, mortgage borrowers, anybody or anything that takes on debt or creates an investment vehicle.

    Their primary function is to help define what's safe to buy, and what isn't. A triple-A rating is to the financial world what the USDA seal of approval is to a meat-eater, or virginity is to a Catholic. It's supposed to be sacrosanct, inviolable: According to Moody's own reports, AAA investments "should survive the equivalent of the U.S. Great Depression."

    Internal Morgan Stanley memorandums show that the bank knowingly stuffed mortgages in the SIV whose borrowers were, to say the least, highly suspect. "The real issue is that the loan requests do not make sense," complained a Morgan Stanley employee back in 2005. He noted loans had been made to a "tarot reading house" operator who claimed to make $12,000 a month, and a "knock off gold club distributor" who claimed to make $16,000 a month. "Compound these issues," he groaned, "with the fact that we are seeing what I would call a lot of this type of profile."

    No matter – into the soup it went! Morgan sold mountains of this crap into Cheyne's SIV, where it was destined to be sold off to other suckers down the line. The only thing that could possibly get in the way of the scam was some pesky ratings agency.


    Fortunately for the bank and the hedge fund, these subprime SIVs were a relatively new kind of investment product, so the ratings agencies had little to go on in the area of historical data to measure these products. One might think this would make the ratings agencies more conservative. In fact, caution in the face of the unknown was supposed to be a core value for these companies. As Moody's put it, "Triple-A structures should not be highly dependent on untestable assumptions."


    But when it came to the Cheyne SIV, Moody's punted on caution. In an e-mail sent to executives from both Morgan Stanley and Cheyne in May 2005, David Rosa, a Moody's senior analyst, admitted that when it came to this SIV, he had nothing to go on.


    "Please note that in relation to assumed spread [volatility] for the Aa and A there is no actual data backing up the current model assumptions," he wrote. In lieu of such data, he went on, "We will for now accept the proposal to use the same levels as [residential mortgage-backed securities] given that this assumption is supported by the analysis of the Aaa data . . . and Cheyne's comments on their views of this asset class."


    Translation: We have no historical data, so we'll just accept your reasoning for the time being, even though you have every incentive in the world to lie about the quality of your product.

    It was no better at Moody's, where in June 2007, executives were internally discussing "increased amounts of lying on income" and "increased amounts of occupancy misstatements" in mortgage applications. Clarkson, who would become president two months later, was told the week before Rhinebridge launched that "most players in the market" believed subprime would "perform extremely poorly," and that the problems were "quite serious."

    Yet the two ratings agencies not only kept those concerns private, they both took outlandish steps to declare just the opposite.


    In a pair of matching public papers, both Moody's and S&P proclaimed that summer that while subprime might be going to hell, subprime-packed investments like SIVs might be just fine. The Moody's report on July 18th read "SIVs: An Oasis of Calm in the Sub-prime Maelstrom," while an S&P report on August 14th, 2007, was titled "Report Says SIV Ratings Are Weathering Current Market Disruptions."
    The Last Mystery of the Financial Crisis | Politics News | Rolling Stone












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    A Blue Dog Jets Fan Jets's Avatar
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    This is kind of a long read, but an important and substantial piece of the story about how our economy was brought down. If you are simply going to come on and spout crap about how it's the fault of all the stupid people who took loans they couldn't possibly pay off because the Democrats forced the banks to give out bad loans, please don't bother. Start your own thread. I don't need to read more of your simple-minded BS. I've heard it all before. Try reading this article and learning something instead.

    Ouch.

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    Veteran Member bajisima's Avatar
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    It really isn't anything that most observant people didn't realize was happening. The banks and credit agencies get what they want and politicians help them get it. I used to watch Dylan Ratigan way back when he was on CNBC (I know Babba is a fan too) and he talked about this for years. In fact I believe he even was one who predicted the whole thing potentially causing a world crisis. He was often mocked by his colleagues that said the housing market would forever improve. It also shows how these credit agencies have almost unlimited powers and seem to go unchecked. I wonder who kept these agencies from going public with their information? Now that would be a scandal!
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    Cat-tastic Babba's Avatar
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    Quote Originally Posted by bajisima View Post
    It really isn't anything that most observant people didn't realize was happening. The banks and credit agencies get what they want and politicians help them get it. I used to watch Dylan Ratigan way back when he was on CNBC (I know Babba is a fan too) and he talked about this for years. In fact I believe he even was one who predicted the whole thing potentially causing a world crisis. He was often mocked by his colleagues that said the housing market would forever improve. It also shows how these credit agencies have almost unlimited powers and seem to go unchecked. I wonder who kept these agencies from going public with their information? Now that would be a scandal!
    Yes, Dylan was on this early on. I wonder what he's up to these days?

    I think the banking and finance industries take advantage of the complexity of all of this in order to horns-waggle both Congress critters and the American people.
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    Quote Originally Posted by Babba View Post
    The fact that this was legal and still continues is something I find mind boggling.
    To issue pro-issuer bond ratings that the ratings agency knows will be relied on by the investing public? Its not legal actually, it works a fraud in the inducement. It even amounts to a conspiracy no less....

    Quote Originally Posted by Babba View Post
    The ratings agencies were not only allowed to rate things AAA when they weren't anything of the sort,
    Allowed to? No, they just did it anyway.

    Quote Originally Posted by Babba View Post
    but they were paid to do so by the banks asking for the ratings rather than the prospective investors in the securities.
    Yes, that's right. This is the inherent flaw in the issuer-pay model. The bond issuer goes to the credit agencies and says, we'd like to issue these bonds. We'd like to pay you to rate them and if you're paying, you definitely don't want to pay to have third parties to say something bad about you. The investor-pay model is obviously better because the investors have a better incentive to accurately rate the bonds. The problem is that the investors are diffuse and its not like they're going to be lining up to rate the bonds on their own initiative.

    Quote Originally Posted by Babba View Post
    Which in effect meant, as Sen. Carl Levin put it, "It's like one of the parties in court paying the judge's salary."
    An apt description.

    Quote Originally Posted by Babba View Post
    This is a very difficult and complex issue to understand and I don't claim to understand it fully.
    Its not difficult to understand at all. Its a basic conflict of interest. The bias of the ratings agency is obvious in taking money from what is being rated.

    Quote Originally Posted by Babba View Post
    But I've been upset about this since it all came down.
    You should be because we bailed out this mess

    Quote Originally Posted by Babba View Post
    And the HoR refuses to do anything about. Probably because it's too damn difficult for their pea brains to comprehend. Idiots.
    The laws exist, this is illegal, its a fraud. Personally I would be asking where the Justice Department is.

    Quote Originally Posted by Babba View Post
    Ultimately, it is the fault of Congress for making this crap legal when in the 90s the banksters essentially bribed them into relaxing regulations that had been in place since the Great Depression for damn good reasons.
    First off, inflating bond ratings is and was illegal. The issuer-pay model was and remains legal and it wasn't Congress that made that legal in the 1990s. The issuer-pay model goes back to the 1970s.

    Quote Originally Posted by Babba View Post
    They called it "modernization" and Congress bought it. Bill Clinton admits now that all that went waaaaaaay too far.
    Does It Matter Who Pays for Bond Ratings? ? The Harvard Law School Forum on Corporate Governance and Financial Regulation

    "In our paper, Does It Matter Who Pays for Bond Ratings? Historical Evidence, forthcoming in the Journal of Financial Economics, we examine whether charging issuers for bond ratings is associated with higher credit ratings employing the historical setting wherein S&P switched from an investor-pay to an issuer-pay model in 1974, four years after Moody’s made the same switch."

    "Overall, the evidence regarding firms that received different initial ratings from the two agencies indicates that the issuer-pay model leads to higher bond ratings, and that this increase in ratings derives from inherent conflicts of interest."
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    Senior Member Raoul_Duke's Avatar
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    What specific piece of the 90's era deregulation led to the rating agencies being able to do this?

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    Veteran Member bajisima's Avatar
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    Quote Originally Posted by Babba View Post
    Yes, Dylan was on this early on. I wonder what he's up to these days?

    I think the banking and finance industries take advantage of the complexity of all of this in order to horns-waggle both Congress critters and the American people.
    It seems Dylan Ratigan has given it all up and gone quietly into business for himself and others.

    MSNBC anchor Dylan Ratigan gives up fame and fortune to become a farmer | MNN - Mother Nature Network

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    Quote Originally Posted by Jets View Post
    This is kind of a long read, but an important and substantial piece of the story about how our economy was brought down. If you are simply going to come on and spout crap about how it's the fault of all the stupid people who took loans they couldn't possibly pay off because the Democrats forced the banks to give out bad loans, please don't bother. Start your own thread. I don't need to read more of your simple-minded BS. I've heard it all before. Try reading this article and learning something instead.

    Ouch.
    it's said with good reason, when people try to take the discussion off into BS RW talking points about the CRA or Fannie and Freddie.
    Thanks from Babba

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    Quote Originally Posted by NewPublius View Post
    To issue pro-issuer bond ratings that the ratings agency knows will be relied on by the investing public? Its not legal actually, it works a fraud in the inducement. It even amounts to a conspiracy no less....



    Allowed to? No, they just did it anyway.



    Yes, that's right. This is the inherent flaw in the issuer-pay model. The bond issuer goes to the credit agencies and says, we'd like to issue these bonds. We'd like to pay you to rate them and if you're paying, you definitely don't want to pay to have third parties to say something bad about you. The investor-pay model is obviously better because the investors have a better incentive to accurately rate the bonds. The problem is that the investors are diffuse and its not like they're going to be lining up to rate the bonds on their own initiative.



    An apt description.



    Its not difficult to understand at all. Its a basic conflict of interest. The bias of the ratings agency is obvious in taking money from what is being rated.



    You should be because we bailed out this mess



    The laws exist, this is illegal, its a fraud. Personally I would be asking where the Justice Department is.



    First off, inflating bond ratings is and was illegal. The issuer-pay model was and remains legal and it wasn't Congress that made that legal in the 1990s. The issuer-pay model goes back to the 1970s.



    Does It Matter Who Pays for Bond Ratings? ? The Harvard Law School Forum on Corporate Governance and Financial Regulation

    "In our paper, Does It Matter Who Pays for Bond Ratings? Historical Evidence, forthcoming in the Journal of Financial Economics, we examine whether charging issuers for bond ratings is associated with higher credit ratings employing the historical setting wherein S&P switched from an investor-pay to an issuer-pay model in 1974, four years after Moody’s made the same switch."

    "Overall, the evidence regarding firms that received different initial ratings from the two agencies indicates that the issuer-pay model leads to higher bond ratings, and that this increase in ratings derives from inherent conflicts of interest."
    Great post.

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    Quote Originally Posted by Raoul_Duke View Post
    What specific piece of the 90's era deregulation led to the rating agencies being able to do this?
    Leaving something unregulated can't be the same as deregulating something?

    The wing nut approach of blaming government for the market failures of the private sector shows the flaws in the your NeoMarxism.

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