S&P downgrades US debt; Justice Department retaliates, settles for $1.37B

[Dari]

Oh good, bankers aren't liars, they're just massively incompetent.



Leading banks knowingly packaged good loans with terrible loans and sold them to a secondary market branded as a lump of good loans. Other banks took said lumps at face value without really understanding what was in them. They were either incompetent or uncaring as long as the money kept flowing. The entire situation still screams for a need for tighter controls and more scrutiny. I do understand how onerous that tends to be (I've worked with/at banks), but they entirely deserve it.

How does that disprove what I said? So long as the overall package fell within a certain legal model then all was good. The problem was everyone was following the same model. Think about that.

 

[werepossum]

Agreed. IMO, S&P got off pretty light, just like other large institutions have gotten off pretty light considering the damage that was done. It obviously wasn't just one company doing something, it was a bunch of things coming together, including the type of shenanigans S&P was engaging in.

I have no problem with the DoJ going after S&P (and others) for their activities. I very much have a problem with using government agencies to punish political enemies or actions not liked by the white house. Geitner and his cabal threatening to come after them when they downgraded US debt rating smacks of political retribution. The message of "if you do something we don't like, you're going to feel the wrath of government" is loud and clear, and it should not be acceptable.

Holding companies accountable = good. Using the DoJ or IRS or any myriad of other agencies to punishing them over politics = bad.

I agree. But sometimes, punishing those who aren't cronies is the best for which we can hope.

This myth that banks committed vast amount of fraud which led to the financial crisis is insulting to people that work in finance and embarrassing to those who sing it. It's just plain wrong. There are far too many fucking analyses, books, and papers to refute this. Those that claim this to be true have never been friends of capitalism. Never. The flaw was in the math. The theories. Everyone believed the same black swan theory, thereby invalidating it. This is what happened.

Seriously, you guys should be ashamed of yourself for believing that bankers brought down the world economy. They didn't. The primary culprits were assholes living above their means and politicians encouraging those assholes. The secondary culprits were the mathematicians who pumped out the same models based on the same presumptions. Bankers were honest brokers in all this, listening to the scientists and being blackmailed by shameless politicians. We know this.

The crash was all of us, and bankers certainly caused their fair share. From using tame, in-house appraisers to knowingly inflate house prices above true value, to making loans the borrowers could not possibly pay back knowing the GSEs would buy them and it would become the taxpayers' problem, to bundling and highly rating mortgage securities knowing that the soundness of the individual components had been intentionally undermined, to exceeding prudent and even legal requirements on concentrating investments, bankers certainly deserve a share of the blame. And even though the GSEs dropped their requirements for any sanity in lending, that doesn't excuse bankers from not properly exercising due diligence. Just because you can sell a mortgage inflated far beyond the true value and/or the borrower's ability to pay it back doesn't make it morally or ethically right to make that mortgage. At least the GSEs had a noble goal, increasing home ownership among the poor and minorities. Bankers only had the profit motive, and while I'm a huge fan of profit and enlightened self interest, it's no excuse for fraud.

 

[alcoholbob]

Now if S&P had just behaved like Moodys or Fitch...sometimes you have to learn your lesson.

 

[Belegost]

This myth that banks committed vast amount of fraud which led to the financial crisis is insulting to people that work in finance and embarrassing to those who sing it. It's just plain wrong. There are far too many fucking analyses, books, and papers to refute this. Those that claim this to be true have never been friends of capitalism. Never. The flaw was in the math. The theories. Everyone believed the same black swan theory, thereby invalidating it. This is what happened.

Seriously, you guys should be ashamed of yourself for believing that bankers brought down the world economy. They didn't. The primary culprits were assholes living above their means and politicians encouraging those assholes. The secondary culprits were the mathematicians who pumped out the same models based on the same presumptions. Bankers were honest brokers in all this, listening to the scientists and being blackmailed by shameless politicians. We know this.

You forgot the /s there.

 

[nickqt]

I agree. But sometimes, punishing those who aren't cronies is the best for which we can hope.


The crash was all of us, and bankers certainly caused their fair share. From using tame, in-house appraisers to knowingly inflate house prices above true value, to making loans the borrowers could not possibly pay back knowing the GSEs would buy them and it would become the taxpayers' problem, to bundling and highly rating mortgage securities knowing that the soundness of the individual components had been intentionally undermined, to exceeding prudent and even legal requirements on concentrating investments, bankers certainly deserve a share of the blame. And even though the GSEs dropped their requirements for any sanity in lending, that doesn't excuse bankers from not properly exercising due diligence. Just because you can sell a mortgage inflated far beyond the true value and/or the borrower's ability to pay it back doesn't make it morally or ethically right to make that mortgage. At least the GSEs had a noble goal, increasing home ownership among the poor and minorities. Bankers only had the profit motive, and while I'm a huge fan of profit and enlightened self interest, it's no excuse for fraud.

You forgot bankers selling those mortgage-backed securities, and then placing bets against those very mortgage-backed securities that would net them money when the mortgage-backed securities that they themselves packaged and sold failed - as they were intended to do.

 

[Darwin333]

I'm also outraged. $1.6 billion seems awfully low considering the amount of fraud S&P was engaged in.

One of the best things in recent years has been Obama's aggressive crackdown on the banks. He still needs to step it up further though.

Hundreds of arrests and prosecutions of the banksters should have happened many years ago. Neither Bush nor Obama has given a shit about the rule of law as far as the elite banksters go but I'll agree that this is at least a step in the right direction.

 

[Spungo]

You're leaving out a few major things; like the "Greenspan Put", rates being held too low for too long creating a reach for yield, government policy that encouraged home ownership as a good thing in itself, bespoke financial products... I could go on but I think you get the point.

None of this excuses what S&P did. They said mortgages issued to drug addicts with no income were as safe as debt issued by the safest governments in the world. It was blatant fraud. They did this for the sole purpose of scamming muppet investors.

This myth that banks committed vast amount of fraud which led to the financial crisis is insulting to people that work in finance

Fake bond ratings = fraud. It would be equivalent to doing fake building inspections. A company pays an inspector to see if a building passes fire codes, the criminal inspector like S&P would say the building is up to current fire codes even though they never inspected the building. The building eventually burns down because it wasn't up to code. Who is at fault? The inspector. He said it was fine. He said he did the inspection. He was lying. It was all a fraud. People who lie about doing fire code inspections should be hung from a tree. People who lie about bond ratings should be hung from a tree.

 

[Dari]

You forgot bankers selling those mortgage-backed securities, and then placing bets against those very mortgage-backed securities that would net them money when the mortgage-backed securities that they themselves packaged and sold failed - as they were intended to do.

It's called hedging.

 

[fskimospy]

This myth that banks committed vast amount of fraud which led to the financial crisis is insulting to people that work in finance and embarrassing to those who sing it. It's just plain wrong. There are far too many fucking analyses, books, and papers to refute this. Those that claim this to be true have never been friends of capitalism. Never. The flaw was in the math. The theories. Everyone believed the same black swan theory, thereby invalidating it. This is what happened.

Seriously, you guys should be ashamed of yourself for believing that bankers brought down the world economy. They didn't. The primary culprits were assholes living above their means and politicians encouraging those assholes. The secondary culprits were the mathematicians who pumped out the same models based on the same presumptions. Bankers were honest brokers in all this, listening to the scientists and being blackmailed by shameless politicians. We know this.

Now this is some amazing self delusion. Unless it's a parody post?

In your world the real predators were the unscrupulous homeowners who tricked the poor, unsuspecting banks into giving them home loans they couldn't afford. Lol. Guess what, it takes two parties to sign a mortgage loan. Even if you ignore all the mountains of evidence that mortgage lenders were at a minimum complicit and in many cases actively encouraging fraud, your only other defense is that they were utterly incompetent and did no due diligence before lending hundreds of thousands of dollars to someone without a job.

I agree that when people talk about the causes of the crash that the fraud being committed by borrowers is often underplayed. You're just doing the exact opposite and trying to ignore the fraud committed by banks though, and there was a shitload of it.

 

[fskimospy]

It's called hedging.

nope. Fraud.

http://www.usatoday.com/story/money...ldman-trader-fabrice-tourre-reaction/2609717/

 

[Dari]

Now this is some amazing self delusion. Unless it's a parody post?

In your world the real predators were the unscrupulous homeowners who tricked the poor, unsuspecting banks into giving them home loans they couldn't afford. Lol. Guess what, it takes two parties to sign a mortgage loan. Even if you ignore all the mountains of evidence that mortgage lenders were at a minimum complicit and in many cases actively encouraging fraud, your only other defense is that they were utterly incompetent and did no due diligence before lending hundreds of thousands of dollars to someone without a job.

I agree that when people talk about the causes of the crash that the fraud being committed by borrowers is often underplayed. You're just doing the exact opposite and trying to ignore the fraud committed by banks though, and there was a shitload of it.

Yes, there was incompetence. But it was on the part of the model-makers. All those MBSes were meant to meet certain criteria. In the end, the models were wrong, not ignored.

 

[fskimospy]

Hundreds of arrests and prosecutions of the banksters should have happened many years ago. Neither Bush nor Obama has given a shit about the rule of law as far as the elite banksters go but I'll agree that this is at least a step in the right direction.

I agree that the fact that basically no one went to jail over this is absolutely insane. Although I know criminal prosecution for cases like these is hard, it is mind boggling that they basically couldn't find anyone.

Even the settlements haven't been nearly as big as they should have been, although I do appreciate that the SEC has started to demand that the banks admit fault instead of the usual "we will pay you $1 billion but still maintain we did nothing wrong" bs.

 

[fskimospy]

Yes, there was incompetence. But it was on the part of the model-makers. All those MBSes were meant to meet certain criteria. In the end, the models were wrong, not ignored.

Except of course that this specific case shows otherwise. You also conveniently forgot the total lack of due diligence of any kind. This is all well documented. The idea that the banks didn't know anything beggars belief.

By the way, incompetence is in many ways even worse. A corrupt and criminal industry can be brought to heel. An industry that at its base is so incompetent that it can mistakenly crash the world economy now and then out of sheer stupidity is one that should be dismantled and replaced with an alternative means of providing financing.

 

[yllus]

Except of course that this specific case shows otherwise. You also conveniently forgot the total lack of due diligence of any kind. This is all well documented. The idea that the banks didn't know anything beggars belief.

I have to create and audit estimates all the time and I wish I could take this excuse. "But I trusted someone else's model and numbers! No, I didn't bother trying to understand them!"

 

[First]

For such an effusive person, Pres. Obama has been a real dick when it comes to attacking the free market. He has used the Justice Department to go after his enemies in business.

link

You realize this has been debunked already and that S&P dropped the whole credit downgrade bullshit angle, yes?

http://www.bloomberg.com/news/artic...woes-with-1-5-billion-penalty-with-u-s-states

Yes, there was incompetence. But it was on the part of the model-makers. All those MBSes were meant to meet certain criteria. In the end, the models were wrong, not ignored.

No, many bankers committed fraud and this isn't even disputed by the very companies that committed it (Countrywide, for example). I'm sure there were many bankers that saw their competitors making big bucks using a particular model, and believed that model had to be good, and eventually this greed either overwhelmed their better judgment or they allowed their self-delusion to go on, and they therefore overlooked massive flaws in the model. But either way, being totally greedy, totally incompetent or totally fraudulent isn't much of a defense. I guess the moral of the story is, don't go into banking unless you're experienced and well-intentioned.

This myth that banks committed vast amount of fraud which led to the financial crisis is insulting to people that work in finance and embarrassing to those who sing it. It's just plain wrong. There are far too many fucking analyses, books, and papers to refute this. Those that claim this to be true have never been friends of capitalism. Never. The flaw was in the math. The theories. Everyone believed the same black swan theory, thereby invalidating it. This is what happened.

Seriously, you guys should be ashamed of yourself for believing that bankers brought down the world economy. They didn't. The primary culprits were assholes living above their means and politicians encouraging those assholes. The secondary culprits were the mathematicians who pumped out the same models based on the same presumptions. Bankers were honest brokers in all this, listening to the scientists and being blackmailed by shameless politicians. We know this.

It's amazing you can be a booster for capitalistic meritocracy while simultaneously claiming that these same capitalists "CANNOT!" be held responsible for actions they took that were not in any way coerced. Nobody told these numbnuts to use particular mathematical models. Nobody told them to ignore historical housing data. They decided this on their own, with the help of other like-minded greedy fools, for the most part.

 

[First]

LOL, government commits bigger fraud on a nearly daily basis than banks could possibly conceive of. Talk about picking the wrong horse in the race, people rate HIV more favorably than Congress.

As far as S&P and other ratings agencies committing "fraud," I'm unsure what standard you expect to realistically hold them to since the entire financial market basically imploded. When even commercial paper and money markets lose liquidity and stop trading you're honestly complaining about how a CDO tranche didn't perform up to it's billed rating? That's like levying a fine on a wallpaper maker because it's product wasn't as waterproof as thought, as demonstrated by how it performed in a rainstorm after the roof of the house was ripped off by a tornado and the walls left exposed to the elements for a week.

S&P was slapping AAA ratings on sub-prime MBS that was CDO^2, i.e. S&P was more or less supporting the investing institutions' schemes to package the same CDO again which contained the same risky sub-prime MBS to junior lienholder investors as if they were getting an investment grade senior MBS (like, say, an 80% LTV mortgage). By slapping on the AAA rating, they were making it that much easier to peddle these turdy assets off to unsuspecting junior lienholders.

Have you even read the Statement of Facts?

Basically your argument boils down to this:

1. S&P didn't go/no-go an update to its rating system quickly enough (regardless of whether there were any technical reasons for this)

2. S&P didn't place a sufficient number of issues on Credit Watch per your 20/20 hindsight POV

3. S&P didn't use evaluation criteria it was still evaluating and hadn't even approved yet to rate issues between Feb-Jun 2007 and instead used existing criteria. Edit: When doing so would itself been a violation of Reg FD if the ratings change for old issues wasn't changed at the same time.


Shit, by your amazing standards of fining companies who not only don't predict the future perfectly but do it sufficiently far ahead of time, we should be placing fines against all kinds of businesses. Instead of bailing out Chrysler we should have fined them billions of dollars for building too many cars ahead of the recession and not changing their fleet mix quickly enough to more fuel efficient cars.

Your post literally makes no sense. S&P has admitted they slapped investment grade ratings on assets that didn't deserve it, and that they did so for profit reasons instead of sound, principled investment-grade reasons. Get it? Geez I hope so.

 

[First]

Slightly edited post of mine from last year:

What law existed on the books in the run-up to 2008 that allowed:

1. Robo-signing of mortgage docs?
2. No-doc loans? i.e. no employment, credit or VOD due diligence?
3. Interest-only loans for anyone who would take it?
4. Spreading toxic CDO's without verifying senior tranches as high-quality?
5. Ignoring Fannie underwriting standards generally?

What statue said this was ok? Did HUD ever explicitly say this was OK?

Government did indeed fail, though not in the way some may think. They failed by letting these banking turds have a multi-year (some would say multi-decade) run of unrestricted freedom in their activities, without concluding that perhaps because banks and many other private businesses are out for themselves (as they should be), they don't really care (or can't possibly do anything about) their impact on the public. So because these corp's mostly unrestricted freedoms lacked public policy forethought (because they're out to make a buck, duh!), good public policy forethought is supposed to be the duty of governments/regulators, especially in an industry as critical and far reaching as financial services.

None of this is new or requires a degree in rocket science. Brushing up on the history of, say, the S&L crisis might be a good start.

 

[glenn1]

S&P was slapping AAA ratings on sub-prime MBS that was CDO^2, i.e. S&P was more or less supporting the investing institutions' schemes to package the same CDO again which contained the same risky sub-prime MBS to junior lienholder investors as if they were getting an investment grade senior MBS (like, say, an 80% LTV mortgage). By slapping on the AAA rating, they were making it that much easier to peddle these turdy assets off to unsuspecting junior lienholders.

Not going to argue their business practices but you're also somewhat missing my point. When the crunch came, none of the models from anyone performed. Entire "safe" asset classes like money markets and commercial paper froze solid. In the environment of a complete and systematic failure, the entire premise of anything being "AAA" rated made no sense since nothing was worth anything since if it's illiquid it's "mark to market" value is zero. It's like suing a car company for "lying" that their vehicle should have gotten only a 3 star safety rating instead of 5 star, after both failed to keep their occupants safe when a nuclear bomb was detonated on the roof.

Your post literally makes no sense. S&P has admitted they slapped investment grade ratings on assets that didn't deserve it, and that they did so for profit reasons instead of sound, principled investment-grade reasons. Get it? Geez I hope so.

So again the takeaway for S&P is to sandbag their ratings next time like Moody's and Fitch did, because it's better to be more lenient all the way along than be stricter. You both lose business to your competitors who do use looser standards, and then get fined anyway when you try to make your ratings more accurate while they keep them loose.

 

[glenn1]

Slightly edited post of mine from last year:

What law existed on the books in the run-up to 2008 that allowed:

1. Robo-signing of mortgage docs?
2. No-doc loans? i.e. no employment, credit or VOD due diligence?
3. Interest-only loans for anyone who would take it?
4. Spreading toxic CDO's without verifying senior tranches as high-quality?
5. Ignoring Fannie underwriting standards generally?

What statue said this was ok? Did HUD ever explicitly say this was OK?

Government did indeed fail, though not in the way some may think. They failed by letting these banking turds have a multi-year (some would say multi-decade) run of unrestricted freedom in their activities, without concluding that perhaps because banks and many other private businesses are out for themselves (as they should be), they don't really care (or can't possibly do anything about) their impact on the public. So because these corp's mostly unrestricted freedoms lacked public policy forethought (because they're out to make a buck, duh!), good public policy forethought is supposed to be the duty of governments/regulators, especially in an industry as critical and far reaching as financial services.

None of this is new or requires a degree in rocket science. Brushing up on the history of, say, the S&L crisis might be a good start.

Government failed because they focused on microprudential regulation rather than macroprudential. Those "no doc" loans might have made sense in the portfolio of a single institution and passed regulatory muster, but been a problem once every bank had them in their portfolios. Each bank might have passed their individual stress tests and appeared to be adequately capitalized, but not once you considered them in the aggregate with other banks and many having similar risk portfolios and similar types of assets. That's exactly the reasoning that gave birth to Dodd-Frank and will hopefully prevent a recurrence in the future.

 

[First]

Not going to argue their business practices but you're also somewhat missing my point. When the crunch came, none of the models from anyone performed. Entire "safe" asset classes like money markets and commercial paper froze solid. In the environment of a complete and systematic failure, the entire premise of anything being "AAA" rated made no sense since nothing was worth anything since if it's illiquid it's "mark to market" value is zero. It's like suing a car company for "lying" that their vehicle should have gotten only a 3 star safety rating instead of 5 star, after both failed to keep their occupants safe when a nuclear bomb was detonated on the roof.

I'm saying before mark-to-market, forget that whole fantasy for a second. I'm saying the fundamentals of investing were ignored pre-2008, two things in particular;

1. Low down payments from crappy borrowers. The notion that somehow tranches would lessen this reality ran rampant. A sub-prime mortgage whose borrower is in a low-pay job, little to no assets, middling credit score and who puts down a sub-20% downpayment (and worse, perhaps no VODs or other verifications are done!) cannot possibly be rated AAA in the vast, vast majority of scenarios. It's just simple fundamentals. PMI would improve your case, since it's sub-20%, but it's still not AAA.

2. Pretending housing prices would continue steady acceleration, and even worse, having very little to no capital or hedges to plan for a future where housing prices fall. Obviously, hedges at AIG were not smart hedges.

So again the takeaway for S&P is to sandbag their ratings next time like Moody's and Fitch did, because it's better to be more lenient all the way along than be stricter. You both lose business to your competitors who do use looser standards, and then get fined anyway when you try to make your ratings more accurate while they keep them loose.

I don't believe ratings agencies would be fined for making their ratings more accurate. The statue, as far as I'm aware, is not written in stone. Just like you can get a variance on zoning laws, you can get an exemption to ratings standards through regulatory bodies, but I'll stop there since it's for sure outside my area of expertise.

 

[First]

Government failed because they focused on microprudential regulation rather than macroprudential. Those "no doc" loans might have made sense in the portfolio of a single institution and passed regulatory muster, but been a problem once every bank had them in their portfolios. Each bank might have passed their individual stress tests and appeared to be adequately capitalized, but not once you considered them in the aggregate with other banks and many having similar risk portfolios and similar types of assets. That's exactly the reasoning that gave birth to Dodd-Frank and will hopefully prevent a recurrence in the future.

Indeed I think we agree here. What took regulators by surprise, and even guys like Greenspan, is that the whole industry could be so blinded by speculation and greed that almost all of them would forgo the fundamentals and due diligence that have worked so well in mortgage financing for roughly 100+ years.

 

[HomerJS]

Yeah let those middle age white guys who commit massive fraud in NYC get away with it while a black guy selling a loose untaxed cigarette in NYC gets killed.

Hey OP, get a grip.

 

[glenn1]

I'm saying before mark-to-market, forget that whole fantasy for a second. I'm saying the fundamentals of investing were ignored pre-2008, two things in particular;

1. Low down payments from crappy borrowers. The notion that somehow tranches would lessen this reality ran rampant. A sub-prime mortgage whose borrower is in a low-pay job, little to no assets, middling credit score and who puts down a sub-20% downpayment (and worse, perhaps no VODs or other verifications are done!) cannot possibly be rated AAA in the vast, vast majority of scenarios. It's just simple fundamentals. PMI would improve your case, since it's sub-20%, but it's still not AAA.

The rationale was that even in a MBS consisting of a bundle of low-quality loans, the default rate would not be 100%. Let's say you presume a 90% default rate for all mortgages in the instrument. If you're holding one of the senior tranches you would be presumed to capture the bulk of the 10% of the payment stream from the mortgages that *were* performing. It's like the old joke about outrunning a bear; I don't have to outrun the bear, just outrun you if you're also running from the bear.

Of course in the end, that entire premise was faulty for the reasons I already described. Once the SHTF it wasn't a matter of the senior tranches being "safer" than the junior tranches, they all became illiquid and effectively worthless. Just like your "AAA" rated corporate paper, or your "AAA" rated money markets. If you weren't in cash or Treasuries you were effectively made insolvent by the systematic failure.

2. Pretending housing prices would continue steady acceleration, and even worse, having very little to no capital or hedges to plan for this future.

Everyone was in this boat as I said earlier. Everyone knew a top was coming, but no one could know when.

I don't believe ratings agencies would be fined for making their ratings more accurate. The statue, as far as I'm aware, is not written in stone. Just like you can get a variance on zoning laws, you can get an exemption to ratings standards through regulatory bodies, but I'll stop there since it's for sure outside my area of expertise.

Then why weren't Moody's and Fitch fined a billion then also?

 

[werepossum]

It's called hedging.

In principle I'd agree, but when the bets are this high it's far beyond hedging. Given that S&P (among others) helped create and rate these mortgage-based securities, hard for me to see how that could not be fraud. If you rate securities as AAA and then structure your own investments so that you lose your ass if they perform like AAA securities but make out like a bandit if they perform like junk bonds, you lose plausible deniability.

You realize this has been debunked already and that S&P dropped the whole credit downgrade bullshit angle, yes?

http://www.bloomberg.com/news/artic...woes-with-1-5-billion-penalty-with-u-s-states

No, many bankers committed fraud and this isn't even disputed by the very companies that committed it (Countrywide, for example). I'm sure there were many bankers that saw their competitors making big bucks using a particular model, and believed that model had to be good, and eventually this greed either overwhelmed their better judgment or they allowed their self-delusion to go on, and they therefore overlooked massive flaws in the model. But either way, being totally greedy, totally incompetent or totally fraudulent isn't much of a defense. I guess the moral of the story is, don't go into banking unless you're experienced and well-intentioned.

It's amazing you can be a booster for capitalistic meritocracy while simultaneously claiming that these same capitalists "CANNOT!" be held responsible for actions they took that were not in any way coerced. Nobody told these numbnuts to use particular mathematical models. Nobody told them to ignore historical housing data. They decided this on their own, with the help of other like-minded greedy fools, for the most part.

S&P was slapping AAA ratings on sub-prime MBS that was CDO^2, i.e. S&P was more or less supporting the investing institutions' schemes to package the same CDO again which contained the same risky sub-prime MBS to junior lienholder investors as if they were getting an investment grade senior MBS (like, say, an 80% LTV mortgage). By slapping on the AAA rating, they were making it that much easier to peddle these turdy assets off to unsuspecting junior lienholders.

Your post literally makes no sense. S&P has admitted they slapped investment grade ratings on assets that didn't deserve it, and that they did so for profit reasons instead of sound, principled investment-grade reasons. Get it? Geez I hope so.

I think these two posts capture the bankers' part of the crash. Bad enough that the GSEs dropped sane requirements to buy loans, but banks and mortgage companies could have continued their customary business practices. The GSEs never mandated that such "outdated metrics" as employment, income and credit history NOT be verified, they simply stopped making that a requirement to purchase them. Had banks and mortgage companies continued their customary business practices, there would have been no crash, period. Instead they used their newfound freedom to make loans that patently could not be paid back, loans to people who almost definitely wouldn't pay them back, loans far in excess of true value. They weren't forced to do this, they were merely allowed, by the GSEs and by the regulators. Then they doubled down and bundled these mortgages as AAA securities, allowing them to sell not only to the GSEs but also to investors. Then they tripled down and bet on those AAA securities to fail. That's far beyond normal, healthy greed and well into fraud, and here I agree with Eskimospy that the federal government should be going after criminal indictments on individuals. Companies don't decide to break laws, people do, and those people need to be held accountable. I understand that it's difficult to prove such cases and that ethically it's not black and white since Congress, the White House (via regulators), and the GSEs were also complicit. But there should be enough pieces (like this case) that individually ARE black and white to send a clear signal that this behavior is not okay.

I blame us all for the crash - homeowners taking out loans they can't repay, the GSEs for dropping sane borrowing guidelines, Congress for setting unreachable goals and not addressing the problem when it became clear, Bush for rightfully pushing for a legislative solution while wrongfully ignoring what he could have done via Executive Order and Presidential Directive to the regulators, the regulators for not raising Holy Hell at what was being done. But nobody has nearly as much blame as the banks (and mortgage companies) who willingly made loans that could not be paid back, inflated home values to make more money selling the mortgages, bundled and sold near-worthless mortgages as AAA securities, and then bet against them.

 

[First]

The rationale was that even in a MBS consisting of a bundle of low-quality loans, the default rate would not be 100%. Let's say you presume a 90% default rate for all mortgages in the instrument. If you're holding one of the senior tranches you would be presumed to capture the bulk of the 10% of the payment stream from the mortgages that *were* performing. It's like the old joke about outrunning a bear; I don't have to outrun the bear, just outrun you if you're also running from the bear.

Well sure, agreed. Except when the junior tranches are being sold as high-grade, when in fact the underlying security is still crap. There were a whole swath of junior tranches that were simply inaccurately rated by S&P, with no excuses for it other than they wanted market share and profit. Ratings agencies receiving compensation is relatively new, btw, as recently as the 1970's. And plenty will tell you it makes them incapable of being impartial. To be fair, a lot of bankers knew the ratings agencies didn't really mean much, so I don't want to over inflate their impact.

Of course in the end, that entire premise was faulty for the reasons I already described. Once the SHTF it wasn't a matter of the senior tranches being "safer" than the junior tranches, they all became illiquid and effectively worthless. Just like your "AAA" rated corporate paper, or your "AAA" rated money markets. If you weren't in cash or Treasuries you were effectively made insolvent by the systematic failure.

So I probably mostly agree with this, but that still means S&P didn't properly rate securities based on their fundamentals like they should have. They let market share and profit overshadow statutorily mandated ratings standards. That's my point here.

Everyone was in this boat as I said earlier. Everyone knew a top was coming, but no one could know when.

Yes, and that's why you're supposed to have capital, insurance and other hedges. Goldman bet against sub-prime in 07, and convinced the greatest investor of all time to throw in billions during the height of the 08 panic. They saw the writing on the wall, they looked at the fundamentals (of course, they were also guilty themselves of other injustices).

Then why weren't Moody's and Fitch fined a billion then also?

Who says they won't be?