Moody's ratings analyst talks: agency rotten to the core

[Darwin333]

Heh yeah it's common knowledge those agency have conflict of interest. But name one agency that is 100% neutral and 100% right all the time. And by the way these agencies are private companies and not public companies. If you don't trust their service, by all means, don't buy their service.

In addition, if you have problem with those ratings, feel free to play against the security they rate and if you are right, you have plenty of opportunities to make $$.

Fraud is a crime for good reason. If you disagree with fraud being illegal I would very much like to hear a more detailed reason.

 

[Craig234]

Heh yeah it's common knowledge those agency have conflict of interest. But name one agency that is 100% neutral and 100% right all the time.

Heh yeah it's common knowledge robbers who kill their victims are bad. But name one person who never does anything wrong all the time. Frickin ideologue apologists.

 

[Darwin333]

I thought something was wrong with the mortgage industry in 2004, both personally and professionally. I saw the writing on the wall.

However, I also worked at 3 different financial institutions and I saw how people weren't as "efficient" as efficient markets hypothesis would lead you to believe.

The single biggest issue is that the people who bought the houses, originated the mortgages, bought the mortgages, packaged the mortgages, rated the mortgages and bought the bonds didn't build in changing credit metrics or conservatism under leverage. It's easy to do that in a bubble. This ranges from the different mortgages used and the inability to change default expectations of the "new" mortgage technology, to increasing default expectations when leverage increases in the market.

The market fucked up, everybody is to blame.

I've seen how all of their other rating methodologies have held up in the credit downturn. Almost every other asset class held up very well. Sure, it could have been worse, but in almost all cases, AAA investors didn't take principal losses.

We aren't talking about being "as efficient as efficient markets hypothesis would leave you to believe", we are talking about relatively basic math.

I simply don't believe that you and I are both smart enough to figure out it was that bad but the people paid the big bucks to figure it out, and are rarely wrong (unlike us), screwed the pooch to the tune of trillions.

 

[LegendKiller]

We aren't talking about being "as efficient as efficient markets hypothesis would leave you to believe", we are talking about relatively basic math.

I simply don't believe that you and I are both smart enough to figure out it was that bad but the people paid the big bucks to figure it out, and are rarely wrong (unlike us), screwed the pooch to the tune of trillions.

It's not "relatively basic math", it's actually very complex math. Not when you have to compile all default history and analyze the entire mortgage market through decades and make statistically relevant analysis of the future. I can simplify the math below, but know that the analysis behind it is very complex.

For example - if you believe that a pool of mortgages originated in 2001 had a static pool default rate of .80% and a similar pool of mortgages had defaulted at .80% for the last 40 years, overall, but during economically stressful times they defaulted at 1.60%, then in order to protect a AAA bond, you need maybe 4x .80% or 3.20% of excess collateral (overcollateralization, equity, first loss...).

Now, let's say that in 2002, you change the way that pool is originated. No pool before was originated in the same way, so you assume that it will perform somewhat worse than the 2001 pool. Let's be "conservative" and say it performs 50% worse, or defaults at 1.20%. Furthermore, let's be conservative in our stress case and say 5x, or 6% total OC.

But what happens if there are other mortgages in the 2002 pool, or that stated incomes were wrong, or that the Option-Arms didn't perform the way you anticipated, or that no-doc loans were used as affordability tools rather than just for somebody who is self-employed and doesn't get a w2?

What happens if we don't make the wild-ass assumption that housing will go down?

Now, you didn't need to be prescient to realize that it's stupid to not consider all of that. However, many people didn't and that's EXACTLY how we ended up in this situation.

EMH says that "the market" will use available information to price risk/return. However, what happens if your psychology in a bubble alters your perception of what is actually possible? Shit, back in 2004, everybody was screaming that housing NEVER goes down, that nobody is making more of it, that you HAVE to buy in now.

Everybody was doing it, not just the NRSROs.

 

[rchiu]

Heh yeah it's common knowledge those agency have conflict of interest. But name one agency that is 100% neutral and 100% right all the time.

Heh yeah it's common knowledge robbers who kill their victims are bad. But name one person who never does anything wrong all the time. Frickin ideologue apologists.

Hey, sure I have no problem with you round up all the Moody, S&P analysts for conflict of interest, fraud and misleading/inaccurate rating. As long you do the same for Obama and rest of the politicians for the same conflict of interest deals they strike with their political donors, and every single undelivered/misleading political promises they made just to help them get elected.

 

[Michael]

"Heck, Arthur Andersen got creamed in the Enron debacle, it went to the Supreme Court and they were found to have made NO errors etc."

I don't think that they were found to have made no errors. The government never even did an investigation on errors that were or were not made. Arthur Anderson was convicted of obstruction of justice (shreding files) and that was what was reversed.

Their accounting judgement in Enron was terrible. It was far worse in Worldcom. They deserved their fate, but not for the reason it happened at the time.

Michael

 

[Ausm]

http://www.businessinsider.com/moodys-analyst-conflicts-corruption-and-greed-2011-8



Thought this was common knowledge, but someone from the inside finally admitted it.

Yeah it all one big huge clusterfuck that's why no charges have been levied on ANYONE involved in this mess. It boils down to how inept Congress is when they watered down all the regulation and they would have to be the first ones thrown behind bars and we all know that won't happen.

 

[Craig234]

Yeah it all one big huge clusterfuck that's why no charges have been levied on ANYONE involved in this mess. It boils down to how inept Congress is when they watered down all the regulation and they would have to be the first ones thrown behind bars and we all know that won't happen.

That's not correct, though. Congress isn't about to get 'thrown behind bars' for passing bad policies on this. That's not how it works.

Rather it's simply the political will to do their job and enforce the law against the private sector people who committed crimes, as we did convicting hundreds in the S&L scandal.

 

[Macamus Prime]

Is there no honor amongst thieves??

 

[Ausm]

That's not correct, though. Congress isn't about to get 'thrown behind bars' for passing bad policies on this. That's not how it works.

Rather it's simply the political will to do their job and enforce the law against the private sector people who committed crimes, as we did convicting hundreds in the S&L scandal.

I see your point it isn't illegal for being an idiot and allowing the loopholes that were exploited by Wall Street and Big banks.

 

[Darwin333]

It's not "relatively basic math", it's actually very complex math. Not when you have to compile all default history and analyze the entire mortgage market through decades and make statistically relevant analysis of the future. I can simplify the math below, but know that the analysis behind it is very complex.

For example - if you believe that a pool of mortgages originated in 2001 had a static pool default rate of .80% and a similar pool of mortgages had defaulted at .80% for the last 40 years, overall, but during economically stressful times they defaulted at 1.60%, then in order to protect a AAA bond, you need maybe 4x .80% or 3.20% of excess collateral (overcollateralization, equity, first loss...).

Now, let's say that in 2002, you change the way that pool is originated. No pool before was originated in the same way, so you assume that it will perform somewhat worse than the 2001 pool. Let's be "conservative" and say it performs 50% worse, or defaults at 1.20%. Furthermore, let's be conservative in our stress case and say 5x, or 6% total OC.

But what happens if there are other mortgages in the 2002 pool, or that stated incomes were wrong, or that the Option-Arms didn't perform the way you anticipated, or that no-doc loans were used as affordability tools rather than just for somebody who is self-employed and doesn't get a w2?

What happens if we don't make the wild-ass assumption that housing will go down?

Now, you didn't need to be prescient to realize that it's stupid to not consider all of that. However, many people didn't and that's EXACTLY how we ended up in this situation.

EMH says that "the market" will use available information to price risk/return. However, what happens if your psychology in a bubble alters your perception of what is actually possible? Shit, back in 2004, everybody was screaming that housing NEVER goes down, that nobody is making more of it, that you HAVE to buy in now.

Everybody was doing it, not just the NRSROs.

While relevent that is not what I am talking about. It is relatively simple math to prove that housing could not possibly continue rising at the rate that it was and that the market could not bear even the existing huge price ramps. This was made even more evident by the necessity of new loan products and a huge increase of non-traditional loans.

Those people screaming in 2004 were the people that were looking for somebody else to be the bagholder and people that had skipped school in 5th grade when they taught exponents.

Like I keep saying, you yourself took a look at them and knew they where bags of shit. I, along with many others, knew that it was a huge bubble. We even have documented proof that the people selling them thought they were indeed crap. We also have credible people saying the ratings agencies allowed themselves to be pressured into giving the ratings the people paying wanted (including people inside the ratings firms themselves).

Come on LK, you are a banker, what do you think of a market in which anyone can get a loan for more then they should because they can afford the payments on the initial "interest only" portion? Hell, what do you think of a market in which loans like that are so heavily advertised and used?


I am not trying to say that they are the only guilty party here but innocent they are not.

 

[Craig234]

I see your point it isn't illegal for being an idiot and allowing the loopholes that were exploited by Wall Street and Big banks.

Exploited by and requested by and lobbied for.

It's a simple formula.

Voters are convinced who to vote for more than anything by 30 second ads (and party loyalty); money pays for the ads; the interests supply millions, and are given billions.

Money is VERY effective at defeating how democracy should work, especially in today's mass market media, despite the radical right calling it speech.

 

[Craig234]

Come on LK, you are a banker, what do you think of a market in which anyone can get a loan for more then they should because they can afford the payments on the initial "interest only" portion? Hell, what do you think of a market in which loans like that are so heavily advertised and used?

The primary blame belongs with Wall Street.

They are the ones who created the schemes to profit from these misvalued products, they are the ones who failed to enforce the rules that are supposed to protect against these scams, they are the ones who pocketed the big checks and are sitting in oceanfront homes now not worried about the fallout, and they are the ones who pushed the bad loans.

Do banks normally offer people who are very high risk home loans that will default? No.

There are things built in the system to protect against that - if the bank making the loan will lose money, they won't make it.

But when the piece of crap loan can be put in a pretty package and sold for a fortune, Wall Street wants them, and that's what happened.

Remember a few things converged. First, America poured money into retirement and other investment accounts. Second, Wall Street lobbied for and got the rules relaxed from 'you can only invest these critical savings in super safe things, no way you can gamble with Wal Street schemes', to 'you MUST diversify your holdings, and things like safe real estate investments qualify'. So massive amounts of retirement and other money went desperately searching for things like those real estate investments.

Was Wall Street going to say 'no, sorry, we sold them all, you can't have any', and miss out on all the transactional profits? Ha. Ha.

They put out the word, and by word I mean massive financial incentives, to mortgage makers to give them new mortgages to re-sell in these scam investments.

These are transactional based - the bank making the mortgage quickly resells it for these derivatives, and they are paid for making the mortgage, not punished for making a bad loan. This is how you get all these super aggressive loans - because people were paid to make them, because Wall Street could profit from them, because they'd created huge demands of institutional investors having to buy AAA new types of investments - and gotten the credit ratings agencies to mis-rate these products.

Of course these were sub-prime - the average suburban homeowner doesn't move and take a new mortgage just because it'll make the bank money. Re-financing was already milked hugely - middle America mortgaged themselves hugely to get cash for their home's value already. They couldn't get much more. But all these sub-prime people, they were not yet sold mortgages, so they were the place to go.

Now, you tell a sub-prime type borrower 'you don't have to settle for a piece of crap, you can afford more', and they're supposed to be the experts, and there are supposed to be rules against loaning too much, and OF COURSE all kinds of these people are going to take the 'free upgrade' they're offered. They were told 'housing goes up, you'll make money' blah blah blah. They are not even close to the bad guys here.

That was the basic scam - along with it note a lot of people made a lot of money off it. Early returns to investors - which didn't last long - were fine, which is why investors demanded more of the products. That money was taken, and has not been returned. The nation is paying the bill.

Experts say there were crimes; they're not prosecuted (the Senate did a good investigation and gave the report to the Justice Department, nothing happened). Regulation clearly needs to be put in place, too big too fail needs to end - nothing much has happened, the interests don't want it and they pay the bills, BECAUSE they have the money, BECAUSE the rules are in their favor.

If people voted progressive, it'd help. Not much else can help.

Save234

 

[HendrixFan]

If people voted progressive, it'd help. Not much else can help.

Baloney. I agree with your lengthy analysis but this part is pure crap. The Obama administration has done absolutely zero to punish the people involved in the scam. The always divided Democrats, who can't band together to get any type of legislation passed, have been unable or unwilling to muster up any kind of meaningful reform in response to this entire housing collapse.

Who will be on the ballot next year that is offering any kind of fix?

 

[Hayabusa Rider]

Baloney. I agree with your lengthy analysis but this part is pure crap. The Obama administration has done absolutely zero to punish the people involved in the scam. The always divided Democrats, who can't band together to get any type of legislation passed, have been unable or unwilling to muster up any kind of meaningful reform in response to this entire housing collapse.

Who will be on the ballot next year that is offering any kind of fix?

In another thread we have someone stumping for the same people who are in bed with those who are "at fault".

The whole process has become terribly amusing in a black humor way.

 

[Craig234]

Baloney. I agree with your lengthy analysis

Glad to hear that.

but this part is pure crap. The Obama administration has done absolutely zero to punish the people involved in the scam. The always divided Democrats, who can't band together to get any type of legislation passed, have been unable or unwilling to muster up any kind of meaningful reform in response to this entire housing collapse.

Who will be on the ballot next year that is offering any kind of fix?

I didn't say Democrats, did I? The progressives are a specific faction, and quite different than the rest of the Democratic party.

Obama is FAR from progressive. He's a moderate Republican corporatist IMO.

With all due respect I think you are just not informed about the issue of progressives and their legislation, based on your comments.

Nancy Pelosi's House was much more progressive than the Senate, and they had many far stronger bills passed that the Senate did not pass, whether from too many more conservative Democrats allying with Republicans, or Republicans abusing the filibuster when Dems didn't help.

And the progressive caucus wanted a far different agenda than even what was passed in the House.

Progressives have been right all along on this. They're the ones who had caution on excessive free trade, not protecting American workers; had concerns on de-regulation in the finance industry; strongly oppose the corrupt practices on Wall Street that have taken them from 10-15% of the economy's profits to 40%, shifted from constructive finance to gambling and parasitical draining of wealth, and causing great harm.

Progressives are the ones who want the regulations you say you want.

Do you watch Bernie Sanders (co-founder of the progressive Caucus) about finance? That would inform you about my statement that progressives are what would help.

Here's a sample article from "The Progressive" from 2009 contrasting Sanders and Obama, who you lump together, with progressive opinion:

On Saturday, I heard Senator Bernie Sanders speak about the criminal acts that occurred on Wall Street, which created last year’s crash.

Sanders said he wanted to see some of the criminals behind bars.

And he also said he was sick of the expression “too big to fail.” If banks are too big to fail, he said, they’re too big to exist. So he demanded that we dismantle them into smaller units.

Two days later, Barack Obama went to New York to give his big speech on financial reform.

Unlike Sanders, Obama didn’t threaten Wall Street execs with jail.

And he didn’t talk about busting up the bank holding companies.

He even praised the “Administration”—that would be George W. Bush and Henry Paulson—for taking the “difficult but necessary actions” once the crisis hit. I assume he includes in that praise the obscene bailout of the banks they designed with virtually no strings attached.

And Obama praised his current team of Geithner and Summers, et al.

He also genuflected on the altar of the free market. “I have always been a strong believer in the power of the free market,” he bleated. “I believe that jobs are best created not by government, but by businesses and entrepreneurs willing to take a risk on a good idea. I believe that the role of government is not to disparage wealth, but to expand its reach.”

Those sentences could just as easily tripped off the tongue of George W. Bush or Ronald Reagan.

Obama did excoriate Wall Street for the “reckless behavior and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses.”

And Obama did get around to urging stronger rules of the road and tighter regulation of Wall Street, which we really need.

As he put it, “we should not be forced to choose between allowing a company to fall into a rapid and chaotic dissolution that threatens the economy, or alternatively, forcing taxpayers to foot the bill.”

But his proposals have been around for months now, and there’s no progress being made on Capitol Hill, which the Democrats ostensibly control but Wall Street appears to have conquered.

So Obama was left to plead for more individual responsibility on the part of Wall Street CEOs.

But pleading won’t get it done.

Because they still are motivated by the quick kill and the bloated bonus.

http://www.progressive.org/wx091509.html

I'm surprised at your post - it tells me a lot of people seem to still lump Democrats together, progressives and corporatists and 'conservatives'.

 

[the DRIZZLE]

Putting politics aside another thing to consider is that the people who work at the ratings agencies are outmatched intellectually by the bankers creating the securities. If you are bright and work in finance it's much more lucrative for a bank than a ratings agency. The people rating the debt are almost by definition not as smart as those creating it. Just something to think about.

 

[Fern]

"Heck, Arthur Andersen got creamed in the Enron debacle, it went to the Supreme Court and they were found to have made NO errors etc."

I don't think that they were found to have made no errors. The government never even did an investigation on errors that were or were not made. Arthur Anderson was convicted of obstruction of justice (shreding files) and that was what was reversed.

Their accounting judgement in Enron was terrible. It was far worse in Worldcom. They deserved their fate, but not for the reason it happened at the time.

Michael

I never worked for AA, but if anybody should've been convicted etc, it was the lawyers and the GAAP gods.

My understanding (and it's been a while now) was that Enron was hiding losses and debt in offshored partnerships. had these been fully consolidated into the financial statement this would have been known. However GAAP said you don't consolidate them, you leave them as a single line item.

I don't remember who knew what (not sure I ever knew), but if the AA partner knew what was in those foreign partnerships he's fully culpable. He and his fellow partners the price too.

IMO, this whole event serves to underscore the basic and perhaps fatal flaw in auditing - collusion. If those in the audited company work together, as Enron's lawyers and acct/finance exec(s) did, to defeat the auditors they will likely succeed.

(Note: Not an auditor, I'm a tax guy)

Fern

 

[freegeeks]

I thought something was wrong with the mortgage industry in 2004, both personally and professionally. I saw the writing on the wall.

However, I also worked at 3 different financial institutions and I saw how people weren't as "efficient" as efficient markets hypothesis would lead you to believe.

The single biggest issue is that the people who bought the houses, originated the mortgages, bought the mortgages, packaged the mortgages, rated the mortgages and bought the bonds didn't build in changing credit metrics or conservatism under leverage. It's easy to do that in a bubble. This ranges from the different mortgages used and the inability to change default expectations of the "new" mortgage technology, to increasing default expectations when leverage increases in the market.

The market fucked up, everybody is to blame.

I've seen how all of their other rating methodologies have held up in the credit downturn. Almost every other asset class held up very well. Sure, it could have been worse, but in almost all cases, AAA investors didn't take principal losses.

so you knew that something was rotten but all these highly paid analysts from 3 different rating agencies didn't know? We both know that there is a serious conflict of interest between the rating agencies and the financial institutions that pay them to rate their securities. That was clearly demonstrated during the whole subprime crisis and their pathetic defense ("we only give an opinion")

 

[Fern]

Hey LegendKiller.

A question for you and/or other banking types.

I have to wonder if the balloon wasn't seen by any/all of our gov agencies that should regulate stuff like that, can we really expect these 3 (smaller) private companies to?

If the agencies had seen this before anybody else (Fed/Treasury/Congress etc) and then unilaterally killed that market by drastically lowering the ratings would people have screamed bloody murder?

If they had seen it and dropped the ratings, wouldn't it have just blown up the market anyway (as eventually did happened )?

Aside from some early firms that saw it coming and reacted to protect themselves (instead would have taken it in the shorts too), what would have been the difference?

TIA

Fern

 

[zinfamous]

The system is completely analogous to (and worse than) the Grammys.

Only problem is, the Grammys don't matter.

 

[zinfamous]

Hey LegendKiller.

A question for you and/or other banking types.

I have to wonder if the balloon wasn't seen by any/all of our gov agencies that should regulate stuff like that, can we really expect these 3 (smaller) private companies to?

If the agencies had seen this before anybody else (Fed/Treasury/Congress etc) and then unilaterally killed that market by drastically lowering the ratings would people have screamed bloody murder?

If they had seen it and dropped the ratings, wouldn't it have just blown up the market anyway (as eventually did happened )?

Aside from some early firms that saw it coming and reacted to protect themselves (instead would have taken it in the shorts to), what would have been the difference?

TIA

Fern

One of the problems is that many supposed peons within these agencies saw this balloon and tried, rather vigorously, to pull the brakes.

They were summarily shouted down or fired. On paper--these agencies are certainly seen as the most culpable entity in the mess, but in name only.

In a way, it's kind of like Chernobyl--a disaster that didn't have to happen and was preventable at the time, but the person in charge is unwilling to do anything about it, as admitting to a failure, however disastrous, is admitting to the failure of the entire system (the personality cult that was the USSR; the greed cult that demands a bubble be played for the short term).

 

[Darwin333]

The primary blame belongs with Wall Street.

One small correction that applies to your entire post, for the most part we are talking about a narrow sector of Wall Street that I prefer to call "Banksters".

They are the ones who created the schemes to profit from these misvalued products, they are the ones who failed to enforce the rules that are supposed to protect against these scams, they are the ones who pocketed the big checks and are sitting in oceanfront homes now not worried about the fallout, and they are the ones who pushed the bad loans.

I truly believe that this was planned out from virtually the beginning. There are simply way to many "coincidences" and way to much info that has come out for me to believe it was one big ass industry wide best experts in the world "ooops".

Do banks normally offer people who are very high risk home loans that will default? No.

There are things built in the system to protect against that - if the bank making the loan will lose money, they won't make it.

Of course, that built in mechanism is business 101, both sides are supposed to lose when they enter into a bad agreement. Only one side lost this go-round and ironically they lost twice when their tax dollars were used to cover the other side of the bet.

These are transactional based - the bank making the mortgage quickly resells it for these derivatives, and they are paid for making the mortgage, not punished for making a bad loan. This is how you get all these super aggressive loans - because people were paid to make them, because Wall Street could profit from them, because they'd created huge demands of institutional investors having to buy AAA new types of investments

Technically nothing wrong with the above, its how a lot of banking works. If banks were unable to sell loans then you would quickly be forced to get a loan from only the uber-banks (as in the ones I refuse to do business with). Nothing wrong with an investor purchasing a loan either.

- and gotten the credit ratings agencies to mis-rate these products.

Pretty sure we call that fraud, both on the banksters for saying that its a box of chocolate instead of dog turds dipped in chocolate so that it passes the initial smell test and on the rating agencies for saying that it is pure 100% chocolate.

Of course these were sub-prime - the average suburban homeowner doesn't move and take a new mortgage just because it'll make the bank money. Re-financing was already milked hugely - middle America mortgaged themselves hugely to get cash for their home's value already. They couldn't get much more. But all these sub-prime people, they were not yet sold mortgages, so they were the place to go.

Now, you tell a sub-prime type borrower 'you don't have to settle for a piece of crap, you can afford more', and they're supposed to be the experts, and there are supposed to be rules against loaning too much, and OF COURSE all kinds of these people are going to take the 'free upgrade' they're offered. They were told 'housing goes up, you'll make money' blah blah blah. They are not even close to the bad guys here.

They aren't the bad guys but they did in fact make bad decisions. Stupid is supposed to hurt. In this case both sides were stupid so both sides should have been hurt in the transaction but amazingly only one side got screwed. The other side continues to screw us to this day.

That was the basic scam - along with it note a lot of people made a lot of money off it. Early returns to investors - which didn't last long - were fine, which is why investors demanded more of the products. That money was taken, and has not been returned. The nation is paying the bill.

Experts say there were crimes; they're not prosecuted (the Senate did a good investigation and gave the report to the Justice Department, nothing happened). Regulation clearly needs to be put in place, too big too fail needs to end - nothing much has happened, the interests don't want it and they pay the bills, BECAUSE they have the money, BECAUSE the rules are in their favor.

Laws were clearly broken, as you state no prosecutions have happened. The vast majority of ill-gotten gains have not been clawed back so we have not only allowed it to happen but we have provided even more incentive to do it again.

Besides the reinstatement of glass-stegall I fail to see how more regulation will help when the old ones were not enforced and blatant criminal actions have not been prosecuted. What is the point of even more laws that they will not be held accountable to?

 

[Darwin333]

Hey LegendKiller.

A question for you and/or other banking types.

I have to wonder if the balloon wasn't seen by any/all of our gov agencies that should regulate stuff like that, can we really expect these 3 (smaller) private companies to?

If the agencies had seen this before anybody else (Fed/Treasury/Congress etc) and then unilaterally killed that market by drastically lowering the ratings would people have screamed bloody murder?

If they had seen it and dropped the ratings, wouldn't it have just blown up the market anyway (as eventually did happened )?

Aside from some early firms that saw it coming and reacted to protect themselves (instead would have taken it in the shorts too), what would have been the difference?

TIA

Fern

The problem could have NEVER gotten even close to as bad as it did without that AAA stamp on it. That stamp increased the pool of purchasers and therefor the demand exponentially.

 

[LegendKiller]

Hey LegendKiller.

A question for you and/or other banking types.

I have to wonder if the balloon wasn't seen by any/all of our gov agencies that should regulate stuff like that, can we really expect these 3 (smaller) private companies to?

If the agencies had seen this before anybody else (Fed/Treasury/Congress etc) and then unilaterally killed that market by drastically lowering the ratings would people have screamed bloody murder?

If they had seen it and dropped the ratings, wouldn't it have just blown up the market anyway (as eventually did happened )?

Aside from some early firms that saw it coming and reacted to protect themselves (instead would have taken it in the shorts too), what would have been the difference?

TIA

Fern

I think that nobody thought the worst would happen. As I said, I worked at 3 financial institutions, all 3 had very smart people working at them, but all of them weren't pricing in the negative scenarios. It was universal. I think there were some people like me, or maybe the lower analysts at the NRSROs, but yes, they did get smacked down. I don't think they did because people were thinking that "who cares, if it goes to hell, I got mine", I think it was more along the line that people just thought that things would keep going OK and thus they told the peons to get back to their desks and work.

Perhaps I have a different view of things, maybe even a naive one. However, what many attribute to malice, I attribute to human hubris. It's also why I accuse EVERYBODY of being guilty of the same hubris.

I know way too many people who thought they were going to "get rich quick" off of housing speculation. Did those people think that everything was going to fall? Did they know that they were screwed? Did they consider the downside?

Not everybody who took out a huge option arm liar loan had an IQ at or below room temperature.

Absolutely, as said above, had they dropped the ratings and/or raised OC requirements, it would have killed the market. Nobody thought it was needed though. The AAA ratings did help perpetuate the market.

It would have reduced the amount of leverage provided by RMBS, resulting in reduced profitability and you would have seen lower demand for the CDOs.

However, that may not have been true, considering the number of people who bought AAA synthetic CDOs or the amount of demand out there for less than AAA CDO paper. There was a lot.

People LOVED making 15%+ on sub-AAA paper.