Wall Street Hoped They'd Be "Wealthy And Retired" Before The House of Cards Fell
If you're wondering why all these supposedly smart people bought bullsh*t securities made up of pools of overpriced mortgages given to broke people with crap credit -- it's time for you to meet the rating agencies. Rating agencies are the folks who decide the "quality" of investments. They're the ones who decided that these securities deserved a AAA (read: awesome) rating. Did they know that they were passing junk off as gold? Um, yeah, according to reports from Bloomberg and the New York Times. It looks like they sorta did.
In recent months, Moody's and S&P have been forced to downgrade the ratings of mortgage-backed securities as delinquencies soared and the housing market crashed. But why were they so highly rated in the first place? According to Bloomberg, the SEC found that "credit-rating companies improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds."
An e-mail that a S&P employee wrote to a co-worker in 2006, obtained by committee investigators, said, ``Let's hope we are all wealthy and retired by the time this house of cards falters.''
The New York Times says that one former S&P executive, with the all-too-perfect name of Mr. Raiter, claimed that old, outdated models were used to rate the bonds and that newer more accurate estimates were avoided due to "budgetary concerns."
Mr. Raiter said that the residential mortgage rating group at S.& P. had captured the largest market share among its main competitors — 92 percent or better — “and improving the model would not add to S.& P.’s revenues.”
...
Mr. Waxman’s committee also cited an internal e-mail exchange between Mr. Raiter, who had been asked to rate a collateralized debt obligation called “Pinstripe,” and Richard Gugliada, an S.& P. managing director. Mr. Raiter had requested highly detailed data about each individual loan, known as loan level tapes, to assess the creditworthiness of the loans in the security, but Mr. Gugliada wrote: “Any request for loan level tapes is totally unreasonable!!! It is your responsibility to provide those credit estimates and your responsibility to devise some method for doing so.”
Another former credit-rating company employee told the committee that the companies pushing these mortgage-backed securities "typically chose the agency with the lowest standards, engendering a race to the bottom in terms of rating quality.'' Credit ratings are paid for by the companies that are offering the securities -- a system that causes a conflict of interest.
Still, others blame the investors for listening to the credit rating companies when they understand the nature of the relationship:
Asked how to fix the problem of potential conflicts among rating agencies, Mr. Egan, of Egan-Jones, said change would come only if institutional investors no longer made investment decisions based on ratings produced by agencies that take money from issuers. “Institutional investors know darn well that ratings are paid for by the issuers,” he said, “so why do they have all their investment guidelines geared to conflicted ratings?”
Credit Rating Agency Heads Grilled by Lawmakers [NYT]
Credit-Rating Companies `Sold Soul,' Employees Said (Correct) [Bloomberg]
(AP Photo/Lawrence Jackson)
Post a comment
Comments:
Surprise? Not.
Never assume the other guy is "smart".
Caveat Emptur? There better be many scapegoats sent to jail for this.
Criminal charges?
Those were just their computer picks and the computer only hits 52%. If you want our best picks you have to pay us.
- Sports Handicapper Guy
I think the quote "Let's hope we are all wealthy and retired by the time this house of cards falters" really sums up trickle-down economics as practiced by Wall Street.
But I thought it was Bush's fault.
Pitchforks, people! Don't let the overwhelming amount of this stuff desensitize you. These people need to go to jail!
The New York Times says that one former S&P executive, with the all-too-perfect name of Mr. Raiter, claimed that old, outdated models were used to rate the bonds and that newer more accurate estimates were avoided due to "budgetary concerns."
I guess that says it all. All crooks and scammers know that what they are doing is wrong. This is the typical double speak of lawyer misdirection. Translate the above it says we knew we were lying and screwing but we did it for a profit so thats ok in this day and age.
How is this fraud not criminal why are these people not in jail. Why are you not stomping private Pyles guts out etc...
@Vhalkyrie: But it's so hard to build up so much rage every day... every day something new comes up and it's... I'm so tired, man. Can I take a nap before the tarring-and-feathering?
@Red_Flag: yes, everybody stops caring about a negative situation if it's "past their time." does your local mall have a curfew for those under the age of 18? does your town have a teen center? do you or anyone you know "not care" because you're old enough to go to bars and drink, or you have your own place to party? i can't tell you how many people i know have said things like 'well, i don't care because i'm over 18.'
i know that the housing market situation is way more serious than building a teen center, but yes, human nature is selfish.
The smarter investors already look deeper than the ratings anyway.
Everyone and their dogs knew the ratings weren't accurate at least 18 months ago, maybe even longer than that, and paid no attention to them. Legislators are WAY behind the curve on this.
I read somewhere that when the revolution comes the lawyers would be first on the wall.
I'm thinking that was wrong and that these greedy morons should be put up first.
Who are you kidding? While it's a nice idea, here's what would have to happen.
Turn every prison in America into a Maximum Security prison, with 23 hr a day lockdowns. Next, it doesn't matter if you stole US$250 from a liquor store or US$250,000 dollars, you get the same XX year sentence. Logically it works out well. The first threatened the lives of maybe a dozen people, the second threatened the lives of dozens, if not more. How so? What's it like to suddenly be broke? What about food, doctors, et al?
Treating white collar crime like a joke is what has caused messes like this. Start applying some RICO like seizure statutes and you'd see more of these people NOT doing this because it will strip them (and their wives / children) of everything.
Nothing scares a moneyed individual more than being poor and in jail.
@Veeber: Individual investors don't have access to investing in these sorts of securities, it wouldn't be terribly unreasonable for an institutional investor to pay for the rating. It would at least do away with the conflict of interest.
Lesson learned: People are UNIVERSALLY GOOD at making excuses and usually horrible in FIXING PROBLEMS THEY STARTED.
Can someone please remind me why public executions are no longer legal?
Sounds like they're suggesting a sorta Consumer's Report
rating system. Hopefully, we will see them behind us on the bread line. As this market fiasco unfolds, I want to see jail time and civil judgments enforced against these bastards. The trickle down theory smells like an alley on skid row right now.
@ionerox: Completely agree. I'm just wondering if they are going to set it up as a "Oh you want me to rate this? Sure just cough up $$$" Or they would rate everyone and the institutions just pay a subscription fee to have access.
The guy's name really is "The Fons" ??
I wonder if he used the term "Jump the Shark" in his statement.
"The smarter investors already look deeper than the ratings anyway.
Everyone and their dogs knew the ratings weren't accurate at least 18 months ago, maybe even longer than that, and paid no attention to them. Legislators are WAY behind the curve on this. "
That's true, but the problem is all types of relationships were structured based on these ratings. i.e. bank capital requirements, interest rates, collateral requirements. AAA rated instruments could be leveraged astronomically since they were considered a low-risk asset. I think the silly thing is that the system depends so much on ratings that are so obviously flawed.
best IM from S&P analysts:
"Shannon Mooney: we rate every deal
Shannon Mooney: it could be structured by cows and we would rate it"
And we can't put these people in Jail?? Seriously??
@HIV 2 Elway Resurrected: Bush encouraged the cycle of evil with the credit ratings agencies in 2 ways: he totally failed to regulate the obvious crap that was coming out, and in fact encouraged deregulation. He also started the "homeowners initiative" which encouraged people who couldn't really afford it to buy rapidly price-inflating real estate.
NPR has a good news piece explaining how the mortgage industry kept expanding into more and more reckless territory, like how they got to the point of giving someone a quarter of a million dollar home loan with no verification of assets or employment. Look under the "Fresh Air" show. It unbelievably enlightening.
As for the white collar crooks, they need to do to them what they do to drug dealers and as previously mentioned under RICO. Strip them of all of their assets AND toss them in jail. Being poor scares these crooks more than jail time does.
Ratings? Paleeese! Most of the people in the biz knew of this years ago (no surprise). There are terms like NINJA loans (No Income, No Job or Assets), yes the whole industry was built on cards. That's not the bad part though, what's really hard to swallow is the "regulators" knew all of this too. It gets worse, they (the regulators) didn't just turn a blind eye to the problem, they encouraged it with their policy (read about Greenspan's mea culpa). lest you forget Fannie Mae and Freddie Mac who were instrumental in this collapse. I could go on and bore you to sleep.
What does everyone think about a government-run ratings agency, to keep this from happening in the future? Too much corruption potential?
@arl84: LOL!!
Well, it's a good thing that Congress didn't get corrupted with cheap mortgages (Sen Dodd), Fan/Fred donations (Sen Obama) or $$ from credit card companies (Sen Biden, the Senator from MBNA). I'll leave it to another reader to supply the Republican names, I'm sure there are some.
The only way to make ratings work well is to appeal to the raters' greed to do good - put them in the same financial boat as the investors. Greed is a natural part of human nature - most people lust after stuff, and they will do what they have to do to get it - whether money or a nice dacha on the Black Sea. The trick is to build a system where the greed of different groups more or less nets out. Trying to design one super-regime won't work, because when it breaks, then EVERYTHING breaks.
My sentiments exactly! Do the Deed - Get the Punishment - no matter who you are! No on is above the law!
@frodo_35: Remember Arthur Andersen. The name of S and P will also be remembered only in the history books. The goodwill value of S and P was its reputation. If one of the biggest and respected ratings agency could not keep up with best practice and latest technology, then that is as you say, double speak of lawyer misdirection.
![[www.sinfest.net]](http://www.sinfest.net/comikaze/comics/2008-10-08.gif){kind=link}
So they're suggesting that individual investors pay for the ratings? Maybe that might be feasible for the large funds to do, but not for an individual investors.
It might make sense to change the market around though and have the data users pay a fee to have access to the ratings reports, so that it's not dependant on the sellers of the securities to fund their operations.