Self-Dealing in CDOs Exposed (no big surprise)

[Craig234]

For once, I agree with you.

Now, which political group would be most likely to make that happen:

Republicans, tea party, blue dog dems, or progressive dems?

 

[Mursilis]

I have read plenty of articles stating that whistle blowers at the rating agencies were in on the gig. They get paid by the banks to rate the stuff, if the banks don't get the ratings they want they take their business to the next rating agency who knows that if he wants to keep their business he has to give them the rating they want. Also keep in mind that we are talking about some of the largest accounts in the industry so losing them was pretty much not an option if you wanted to keep your job.

The entire thing was a big ass fraud and it worked unbelievably well.

That, or the rating agencies pretty much just took the banks' word on what sort of loans were backing a security, without much actual checking, and stamped "AAA" on the whole steaming pile. There was little to no incentive to look for the actual truth.

 

[Mursilis]

Now, which political group would be most likely to make that happen:

Republicans, tea party, blue dog dems, or progressive dems?

My first thought is of course none of the above, since there's little chance any of them would do anything. However, of that motley lot, I'd have to go with progressives, who I'd like better if only they weren't so flat wrong on so many other things. But I digress . . . after all, what are the odds progressives ever gain power. You yourself just said above that voters are idiots (in so many words), and you were right. They can barely manage their own lives, let alone something as important as picking people to run the country.

As for what to do about Wall Street running wild and imperiling the entire economy, it's a complicated problem with no easy solution. My only good solution is to jack up taxes on these rats (for example, the marginal rate on income over $10M should be at least 50%) to de-incentivize their greed. This would have the added bonus of addressing our budget issues as well.

 

[heyheybooboo]

If it makes you feel any better one of those oversight "bosses" is now our Sec. of the Treasury. Oh wait, thats not a good thing is it?

I don't believe oversight fell under the purview of the Fed.

The bosses I was referring to were the VPs, CEOs and board members that turned a blind eye to all of this.

And, in case you missed it: The Commodity Futures Trading Commission (specific individuals: Brooksley Born and to a lesser extent, Sheila Bair) was raising red flags in the late 1990s.

See Frontline: The Warning




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[werepossum]

werepossum

Many of those analysts and even state regulators did go to the government about the banks (mortgage and investment), Maddoff, brokers, etc. and were ignored. Those stories trickled out one by one, and were covered on backpages like it was minor news.

If politicians and reporters had any principles, then these people would be trotted out and lauded as they deserve, so that next time their warnings would carry more weight than the word of those who insisted there were no problems.

The credit rating agencies were all in on this scam and issued AAA ratings to this stuff, knowing it to be complete shit. IIRC not a single person has been held accountable over there, they've basically been ignored completely.

Probably true. These are the people who need to appear before Congress to explain why they ignored such grossly bad practices.

Nobody's independent. Remember, in this weird industry, analysts are paid by the sellers. They were paid to make positive recommendations. The buyers rarely used separate analysts and even when they did, most didn't know what was going on.

True, and good points. One of the worst things about the mortgage industry is the degree to which financial incest skews the facts.

CDOs, synthetic CDOs, and related credit derivatives are some of the most esoteric and complex financial products on Wall St. This wasn't a mom & pop product -- these are institutional-only products requiring sophisticated models and some bright individuals to structure, analyze, and trade them. I'm not at all surprised the regulators were in over their heads and ill equipped to monitor this stuff. They still are.

I'm not overly surprised that the regulators didn't catch this stuff, as they are government employees and therefore largely outside any correlation between performance and job security. I am surprised that those in the private sector who jobs are (at least theoretically) tied to their job performance didn't catch this. And I am shocked that those bureaucrats whose regulators DID flag this activity would ignore their warnings - not that the bureaucrats are necessarily lacking in unconditional job security, but they should at least recognize that the regulator making claims of economic danger are more qualified to judge that danger and thus, the warnings should be taken seriously. The worst part is that as far as I can tell these incestuous relationships and institutional incompetence are largely intact just like before. Worse, we've incentivized these behaviors by bailing out those corporations engaged in them. If we truly had to bail out these entities that are "too big to be allowed to fail" we should have at least forced them to enter bankruptcy first (to break the contracts calling for bonuses if nothing else) and then broken them into units that aren't "too big to be allowed to fail" to avoid repeating the whole mess.

I would like to know though if these behaviors were actually illegal. This whole situation is man-made, both by government and by the private sector, and anyone whose part was in any way illegal needs to be aggressively prosecuted.

 

[Jhhnn]

Here's a piece of the puzzle-

http://www.bbc.co.uk/news/business-11147475

It was just a bug in the programming, honest... of course, we thought it was a really spiffy feature when we were making money hand over fist using it...

Dis-incentivize greed, Mursilis? Not likely. What you suggest will merely force the greedy to share, which is what they hate more than anything else. I think it's a good idea, anyway, just not for the reasons you offer...

 

[Narmer]

Why should anyone go to jail? Nothing illegal was done. Blame government for failing to do its job. Perhaps Democrats should do as the Conservatives are doing now (replacing traditional republicans with Tea-partiers who really believe in small government). Just a thought.

 

[brencat]

I'm not overly surprised that the regulators didn't catch this stuff, as they are government employees and therefore largely outside any correlation between performance and job security. I am surprised that those in the private sector who jobs are (at least theoretically) tied to their job performance didn't catch this.

Working on an institutional trading desk is not like being a broker to retail clients. Retail brokers have the luxury of being able to look at a wide variety of investments, take a long term investment view, and make recommendations to their clients based on suitability. They can also work 3 days a week if they want if that gives them enough commission revenue to live the lifestyle they choose.

People working on a trading desk however are paid to squeeze blood from a stone. They have to make money every day to keep the lights on and year-end bonuses are determined by profitability of the desk, profitability of the firm, and individual performance. The head of a typical bulge bracket investment firm doesn't care if the headwinds for making money are strong. If the message comes down from top mgmt that Revenue is to grow 15% and ROE is to be > 20%, then department heads are charged with making that happen. This leads to added risk taking, leverage, and financial innovation. You wonder why the traders of these complex products didn't see the danger. I think they did. The problem is that they don't have the luxury of underperforming their peers if they choose to take the other side of the trade and it ends up being the wrong view relative to their competition.

Similar incentives on the buy side for portfolio managers (i.e. outperform your benchmark and 50% of your peers or you're out of a job within 2 yrs) are the reason why correlation among risk assets is at an all time high, and why everyone seems to be piled into the same trade, and consequently, rushes for the exit at the same time during a downturn.

We must change these short term performance incentives or we will continue to have these booms and busts.