Looks like phase two is taking longer than I thought. Or maybe it's just overlapping with stage three.

1) Denial (This is gone for good)
2) Anger (This is definitely present)
3) Bargaining (I can see some of this)
4) Depression (Not around yet)
5) Acceptance (Long way to go)

I kind of like Frank Partnoy's concept.

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Some inefficency to it, but hell...beats what we have now, right?

Someone please correct me if Im woring, but rating agencies, in teh past, have said they dont do due diligence. I think there are two problems here. If they dont do the due diligence, the originator of the deal is responsible for supplying the info. The other half is, its should be the rating agency who asks the appropriate questions, shich they didnt. The other comment I have is, if they dont provide any meaningful info or due diligence and they dont ask the right questions for the sake of collecting fees, then why is it that they exist and why is it that companies count on their word. The answer to that question is that people and companies want to make it seem as though they do the right thing when investing but when shit hits the fan, no one wants the blame.

sorry for the spelling mistakes. trying to do 2 things at once.

Does anybody really think that better disclosure at the prompting of the SEC would have made any difference? Purchasers were relying on the ratings, not reading the prospectus. In other words, the ratings were just a short-cut for doing any due diligence whatsoever.

But is it not clear that if there was no criminal fraud, there was at least a wish to gild the lily, that at every possible point the opinion would be tweaked on the upside, toward the positive rather than the negative. In short, that the whole process was foolishly optimistic?

The agencies would have had to send investigators and appraisers into the field to turn up reliable evidence of the fraud and collusion that was going on. A firestorm of litigation is on the way, though, and many a pound of flesh will be carved. The investors will go after the funds, the funds will go after the securitizers, the securitizers after the originators, and the originators after the brokers. Thy will also bring in the borrowers, even if judgment-proof, to give them maximum incentive to point their grubby little fingers at the brokers (which is where the 'insurance money' will be.)

I find it amazing that Congressmen are so willing to allow "sophisticated" institutional investors to abdicate their responsibilities to third party rating agencies with no money (only reputation) on the line.

I also find it amazing that the investment banks, who actually do have the responsibility to perform due diligence over the underlying mortgage origination process, are completely overlooked in the Ackermman rant.

If anyone has a viable way to measure the difference between collusion and mismanagement, here's where you become a millionaire.

Is it criminally negligent for Fitch to create a risk model that assumes risk does not exist? I sincerely think it is, and I hope some number of ratings execs are introduced to Messrs. Skilling and Lay in the spacious confines of the Lewisburg prison.

God help us all if we get US governmental regulation to determine the rating for a security...

Thank you, Tanta. It is nice to see that you have returned from The Dark Side.

Perp walks that led to no convictions got Rudy G. where he is today.

Come now.

I knew in 2005 that real estate prices were bubbling.

But they all thought "if we don't buy XYZ now we will miss the rise.

XYZ could be snake oil for all they care.

Ackerman has it absolutely right, and he's a pretty good read as well. SEC has long been in collusion with sleazy Wall Street fraud and graft mafias -- I've had my own experiences with that. SEC, like the rating and enabling companies, always seems to get religion after the problems are everywhere in the 6 PM news and front page of the dailies -- like so , who cares at that point?

SEC, as well as many in Washington DC, are right out of the Wall Street con game, are fully versed in its practices, deceits, and language of subterfuge -- there is no excuse, but an apathetic, semi-literate country in denial (and sequestered from true and honest information) is content to just let them go on operating their ponzi schemes and mafia scams -- until it hits hard in their wallets and gets into the news with a bang.

The SEC, like the AMA, is NOT a regulatory agency, it is a trade protection agency for the banking and in-securities industries and it should be treated as such.

At the onset of any financial crisis - regardless of the presence of a panic - a common pastime of economists and market participants is finger pointing, or attempting to find a culprit to blame who caused whatever mess is in question.
But it becomes a question of causa proxima (speculation and extended credit) versus causa remota (an incident that snaps the confidence of the system, makes people think of the possibility of failure and move from speculative instruments back to cash). It is easy to blame the rating agencies in retrospect (which is not to say that some form of moral hazard didn’t existed in their "consultation" with the issuers as to how to best structure these new debt products in order to attain the desired price point), but do you think that the investors are to blame for any of this (i.e., speculative tendencies during a boom, a lowering of standards for good investments). Not too long ago, the market looked at these "new" investments as the best thing since sliced bread, and everyone jumped on board ("When the rest of the world are mad, we must imitate them in some measure" -Martin, c.1720s).
Also, is it the RA's job to forecast future economic conditions that may or may not change the (perceived or actual) quality of the credit under question (i.e., Are they expected to have foreseen the likelihood of everyone defaulting at once? or the likelihood that these CDOs & CLOs would become so illiquid so quickly?), or is their job simply to look at the instrument at a particular point in time and assess its risk given whatever information is available (historical trends, current payout/tranching structure of the instrument, etc.)? While I understand the case for the aforementioned moral hazard, stemming from the RA's participation in the issuance and structuring of these instruments, I am not sure that additional regulation or the like would have prevented a similar "fraud" from occurring. Any thoughts? The propensities to swindle and be swindled run parallel with the propensity to speculate during a boom. Are these types of situations almost to be expected, because, lets face it - we are all still human.

I don't have an opinion on fraud, but you asked the more general question of whether there's something wrong with a purely transparent rating system. And my example is abstract, I don't pretend to know much (other than what I've read of yours) about how MBS's are constructed, it's just intended to show conceptually how transparent rules are gamed, particularly if there is any range to them (e.g. an average FICO of X gets the same rating as X+/-Y). If the rating process is entirely post facto, e.g. the pool is constructed with no input from the agency, then it's probably safe to assume that in general you'll hit the middle of ranges.

Given pools formed like "July 2006 Second Liens from New Century" makes me think that the issues had more to do with lack of diversity (and improper models of resulting risk) and some lag in the updating of criteria in the face of deteriorating macro factors.

Seems to me that rating these derivatives as "investment grade" was akin to loaning J6P half-a-mil on a SISA; they knew they'd blow up, it was just a matter of collecting fees.

CourtTV better start staffing up.

CDOs were invented by Drexel Burnham Lambert. Y'all remember them, eh?

The basic problem is that CDOs can't really be rated for credit default risk because in modeling the risk of credit default risk in the CDO, one is really modeling the model that goes into structuring the CDO, which is either redundant or would involve a much larger and dynamic set of assumptions about broader market and economic conditions, which would be beyond the purview of specific credit risk analysis.

An AAA rating is supposed to be depression-proof, but how could one assign such a rating to a structure that mixes together and redistributes and disperses risks of much riskier underlying assets? There inevitably remains the underlying pool of risks, which will be what they'll be, whether accurately modeled and predicted or not, and the resulting toxic equity tranche, which must be tucked away somewhere. Far from increasing efficiency by spreading risks and redistributing them to where they can be best borne, CDOs render risks all the more opaque and concentrated, (since the same banks that issue them are lending to the hedgies and SIVs that use leverage speculation to buy them, even while moving bank liabilities off the books and tacitly dilluting their capitalization). It's financial alchemy, converting lead into gold, which, er, can't be done.