It looks as if the three major agencies that rate Wall Street securities will wind up taking the fall for the wise guys who bilked investors of trillions through phony mortgage-based bonds. The agencies face massive litigation – even their own shareholders are suing them – and law enforcement officials are investigating them.
On PBS last night, former employees of Standard & Poor’s accused their employers of pressuring them to churn out ratings without the necessary data because the agency was making as much as $250,000 on a single deal (at about 20 deals a day). Because the mortgage securities were new and different (if you don’t already know how they were created, I won’t bore you with the incredibly complicated details), there was no track record to use in figuring out just how much risk was involved. So the agencies got some math geniuses to create “models.” Now, you and I know that higher mathematics is basically hocus-pocus, so it’s no surprise that the mathematical models gave the highest possible ratings to securities that weren’t worth the paper they were printed on.
The triple-A ratings lured such normally cautious investors as pension and retirement funds – and even countries such as Iceland (photo of Akureyri, Iceland at right). The securities were valued on the basic premise that real estate prices would always go up, and when the American housing bubble burst, the securities became worthless. Too bad for investors like Iceland who were stuck with bundles of “toxic” investments. A gleam of hope appeared momentarily when Treasury Secretary Hank Paulson talked Congress into giving him seven hundred billion dollars to buy up the “toxic” paper, but that quickly vanished when Paulson changed his mind and started distributing the money to his pals in the banking industry. Paulson also snuffed out any hope that the securities might one day regain some value by announcing he won’t take steps to prevent home foreclosures.
That set off a self-sustaining downward spiral: Prices of mortgage securities collapsed; bank equity shrunk; banks, with less equity capital, were forced to reduce all types of credit; financing, especially for residential mortgages, became harder to get; home prices plunged even lower; and mortgage securities became even more worthless (so that bank equity shrunk some more, etc.)
Paulson had attempted to address this problem by taking the money Congress gave him to buy up “toxic” mortgage securities and handing it to selected banks as “loans” (forgivable and otherwise) and “investments” (buying preferred shares at hugely inflated prices). When that didn’t work, he sort of said, oh what the hell, let Obama handle it, and disappeared from view. President Bush, meanwhile, is attending the Asia Pacific Economic Cooperation forum in Peru (where the Bush-era CIA used to help the government shoot down innocent airplanes because they thought they might belong to drug smugglers, remember? A U.S. missionary and her infant daughter were among the victims.)
Obama, of course, has no authority until noon on Jan. 20, so there’s not a whole lot he can do. He did about the only thing he could under the circumstances, announcing he would name his economic team on Monday. This gave Wall Street a (momentary?) shot in the arm. The Dow Jones stock index soared nearly 500 points when the team members’ names were “leaked” Friday.
Anyway, back to the credit rating agencies… The top bosses of Standard & Poor’s, Moody’s Investors Service and Fitch Ratings (from left in photo, Fitch Ratings’ Stephen Joynt, Moody’s Raymond W. McDaniel and Standard and Poor’s Deven Sharma) made about $80 million in a few months, so they shouldn’t complain about the heat they’re taking. But what about the government regulators who did not regulate them? What about the whiz-kids who made hundreds of millions (each) by stitching together those phony securities? What about Paulson and his high-powered staff (mostly Goldman Sachs alumni) who bungled the bailout? Is anyone going to investigate them? And what about the politicians (like Phil Gramm) who dismantled the government safeguards that might have prevented the disaster?
And was there anyone else? I can’t believe that so many people could be so incompetent, all at the same time, to make such a colossal mess. Could there be a mastermind somewhere coordinating the collapse in order to collect the billions that fall through the cracks? (So call me a conspiracy nut… but what if I’m right?)
UPDATE: (Nov. 26, 2008) “I tend to look at these final days as the BushCo crooks holding their final heist, taking advantage of the fact that something must be done immediately to keep the economy from hurling into a ditch. They have the ability to impede anything from happening, and they’re holding us all hostage and demanding the right to steal as the price of their acquiescence.” – Jane Hamsher, writing in the Huffington Post.