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Free market is working. If there is more money to be made by dishonesty then dishonesty will rise. Also, during certain periods the honest loose out big to the dishonest in getting the business. In a secular society morality gravitates towards the lowest common denominator -- TRASH. America is going down the toilet because of moral corruption. Evildoers Greenspan, Bush and Bernanke have led the way. There is no going back until prolonged misery brings the old-time religion back in America.
Um, I don't accept the `garbage in, garbage out' defense of the rating agencies. They helped to develop the pricing models and were de facto co-underwriters. The models blew up when house prices declined, not when delinquencies started to rise (if price appreciation had continued, the collateral would be appreciating). The RA models made no provision whatsoever for declines and wouldn't even accept negative pricing as a parameter.
Moodys monitors began to make inquiries with the lender and were shocked by what they heard. Some properties lacked sod or landscaping, and keys remained in the mailbox; the buyers had never moved in. The implication was that people had bought homes on spec: as the housing market turned, the buyers walked.
Could be fraud, too. I've read about some large, gutsy mortgage fraud rings around here.
What a mess is right. It was no secret to anybody in the industry that recent vintage loan quality was poor. Moodys should have known, and in fact I think they probably did. I know people who work there and have dealt with them professionally. I just don't buy this ignorance they're feigning.
how could Moody's not recognize that credit conditions and terms that these loans were granted under had changed SO DRASTICALLY over the past several years that their historical statistics were almost useless because they were based on a totally different subset of borrowers, terms, and credit conditions. It was using statistics about apples in order to draw conclusions about oranges.
she quipped "we're not loan officers, we're statisticians". well maybe you should have taken a look at the ridiculous terms, credit scores, etc. of the underlying paper and borrowers and compared them to the terms of 5, 10, 25 years ago.
what a lame after-the-fact excuse to deflect blame for missing this bomb as it ticked right next to their HP calculator.
Ive seen similar types of things happen before, first hand. It doesnt matter if some of the analysts say, look, here is how this model will work, because in the end, they dont decide how the model gets built. Their "teams" will not be picked by them, but they will have important players who rule out brining in information that would give a result that doesnt maximize the firm's profits. The question is, over what time frame. Short term, profits boom, but long term, kaboom. Analysts might look at the longer picture of reality, but the business decisions will be made on the short term, and denial of important but uncomfortable truths will be part and partial to the end result.
I can tell you that in my first hand experience, no one wanted to believe house prices could go down, and showing them information that proved that they HAD gone down historically was not enough to convince anyone that it had ever happened. Because, if you argument is that house prices always go up, you have to deny those facts. And so it was...
Someone may have already mentioned this but, Pension Funds have to mark to market and these down grades are going to hurt. This paper was widely held and governments with defined benefit plans are going to be scrambling for money at a time when there is no money. Good luck to all!
I think Piter is exactly right. I wonder how this system is going to survive.
The US has been operating on 20 year credit expansion odyssey that is now ending. I have multiple friends with mutliple homes and we are in our mid twenties. How is this sustaiable? There is WAY too much leverage going on. The US goverment, consumers, corporations cannto support this amount of leverage and credit growth period.
ipodius writes:
Moodys did what they were supposed to do: they took the historical data and they build models on it. Neither they, nor anyone else for that matter, was prepared for what happened to the chain. And frankly none of them were interested in the chain because, well, they had the models.
I agree that they weren't interested, but they certainly could have been more prepared for what happened. Ill venture that most readers here were. Even a mediocre modeler goes beyond simply fitting (historical) data to consider underlying principals and fundamental logic. This wasn't done because the conclusions were incompatible with maintaining the short-term profits. After all, if you can make enough in a few years to throw in the towel, why worry about the future?
So either Bush needs to be impeached and convicted for violating his oath of office, or civil service laws need to provide a better firewall against political appointees interfering with enforcement of laws that have already been enacted, or we need to cover the financial industry with so much red tape that it looks like Silly String[tm]. The 'or's are not exclusive.
So what if Bush-like politicos appoint the civil servants and make it so they are 'independent' of future elected officials? Then you have just institutionalized non-enforcement.
The people are the only check-n-balance that works. If you want good government you have to elect good governors. No if and or buts. Fail to do that and you get what we got.
In California there are 2 types of Loan brokers,those who hold a real estate sales or brokers license,or a finance lenders license through the dept of corporations.both have to pass a criminal background check.A real estate sales licensing test is a basic vocabulary and math skills test with a bit of real estate and agency law tossed in with a taste of appraisal technique.Hopefully you have an honest and competent Broker who will take the time to teach you the way the business works,but if you are not out hustling for the biz the lenders want you will not last long enough to exercise your curiousity.And if you question the conventional wisdom,you are demonstrating the kind of negative attitude that is Anathema to a culture based on selling blue skies and sizzle.There was a good deal of negative selection in Real Estate the last few years,and it is not the only field where that took place.As far as "Fiduciary Duty" The agency relationships in Real Estate are murky,to sale the least,if you select a Broker to find you a house,and they do,they are usually a sub agent of the listing Broker,they owe you full disclosure of material facts,and fair dealing,but there is no enforcement.
Sometime early in 2005, I was at a neighbor's party, in Newport Beach, CA. My new neighbor was a successful mortgage broker who had just bought a house on the harbor with a dock, he paid about $4M at the time, which was a lot of money back then.
As I came to find, there were a number of successful mortgage brokers at the party. But at the time I had no idea what 'subprime' was.
One broker that I was talking with told me of the 8 properties he had bought in Phoenix in 2004. He mentioned they were "income properties" and and I mistakenly assumed they were rental apartments and so I asked some sort of question regarding the rental market in AZ. He laughed and said, "No, I don't rent them. They are high-end houses and renting them only depreciates their value. I refinance them."
Soon after that conversation I started shorting home builders.
So what if Bush-like politicos appoint the civil servants and make it so they are 'independent' of future elected officials? Then you have just institutionalized non-enforcement.
That's why people like Monica Goodling need inconvenient questions from people with prosecution authority. They need more such questions from more such people, those admitteddirected civil service "appointments" are part of what needs independent investigation.
I have no problem with electing good people to the Presidency. We failed, though my efforts were otherwise. Checks and balances within our system are supposed to allow such mistakes, or even prioritization choices to be charitable, with some pain, but still...my point is that the checks and balances have failed, not simply enforcement by the administration. Congress needs to restore checks and balances regardless of what happens in this particular instance.
"At the same time, regulators - despite numerous warnings - mostly ignored the problem, apparently for ideological reasons ("let the free market work").
Well! it worked didn't it?
Did it worked as intended? Not quite!
If you want the free market to work as intended, you need regulations.
It's like a cell. It lives in an ecosystem, is highly efficient, but regulated. When it becomes unregulated, you get....cancer!
What makes us believe we are so damn smart that we can do better than what Nature learned in billions of years?
NC Jim writes: The rating agencies did not just rate securities based on statistical models of past performance they charged big bucks to advise securitizers on how to design the products in order to get the AAA ratings.
BING! We have a prize winner. Moody's effectively published their model to their clients, who then "optimized" their data to fit the model... oh, INCOME is a parameter? Stated income solves that!
As long as there are enough degrees of freedom outside of the model, you can play with the data to fit any known model to have it "predict" any desired outcome... and all the parties are well-paid, and happy. Until the prediction fails.
Modelers use one method known as cross-validation scoring to test models... I once had an assistant that produced models that had AMAZING cross-validated scores. I asked how he did it... simple, he said. He optimized on the cross-validation score. Statistically illegal, of course. Same idea here.
Congress needs to restore checks and balances regardless of what happens in this particular instance.
Tom | 04.22.08 - 11:21 pm | #
Agreed.
My point was I do NOT see a larger & more 'independent' civil servant cadre as being the solution... I see that as a potential refuge where the problem can linger & get worse. Everyone thinks they will pick servants compatible to their world view - benevolent & wise - I don't believe that is likely at all. You get a group (the civil servants) enthroned to protect THEIR interests... if not immediately, then eventually. They too need good cops - the electorate.
There is no other workable alternative except good people enacting & executing good policy. There really are no social autopilots or bureaucratic deities gonna save us - THAT was my point.
The ultimate pitfall of a democracy where central planning is an important role. You can't always pick the "right" people to put in office and when you are wrong we all suffer the systemic risk.
Orrrr, orrrrrrrrrrrr, it's an argument for less powerful centralized government and stronger, more accountable local government. Same can, and should, be said for businesses. There's the old Chesterton chestnut:
"Big Business and Big Government are very much alike. Especially Big Business."
I think the assertion that they were just statisticians in bogus. Rating agencies are supposed to assign ratings based on credit quality and not just the output of some model. Afterall, the people who assign those ratings are called analysts and not just a statistician. If all they are going to do is put information into a model, then there is no value added by the people doing the ratings and they should be paid minimum wages. Credit analysts by nature are supposed to observe trends and determine what factors can impact credit qality. To publish a rating and not understand the collateral supporting that rating sounds like the ultimate in negligence. Such negligence should be sufficient for investors to bring legal action against the rating agency.
Steve " The RA models made no provision whatsoever for declines and wouldn't even accept negative pricing as a parameter."
I think that should have been the focus of this story. See if price declines were ever explored in the modeling and why not. If the answer is "we've never seen declines so we didn't condifer it", well, we had never seen 20% y/y increases for 3 years running, in the markets that represented the bulk of the lending either.
You get a group (the civil servants) enthroned to protect THEIR interests... if not immediately, then eventually. They too need good cops - the electorate.
At some level, I can also agree. I think one of the points of a system of checks and balances is to make "eventually" a higher barrier. At the end, if voters are firmly convinced of something then a democratic system is supposed to give it to them. The barriers test that conviction before simply turning around on a dime.
Civil Service independence is another of those things which Congress has already legislated. Asking that Congress build on what it's already done, and what's generally worked for over 100 years, strikes me as a fairly conservative step. Silly String [tm]...less so, though at this point the lending industry deserves no less.
Oh come on, CR. You had me right up until, "At the same time, regulators - despite numerous warnings - mostly ignored the problem, apparently for ideological reasons ("let the free market work")."
You should know better than that. Clearly there is no "free market" at work here. We have a distorted market created by government intervention. GSEs, the Federal Reserve, FHA, the governments who bought the loans, and now except them as collateral!... all of these entities are excplicitly involved in this mess. Don't blame the free market when we clearly do not have one here.
Everyone is discussing the failures of these analyst's models and decision making tools. People talk about the statistics and model development. As a student of economics and statistics I have the question the rigor and the honesty of these models.
Statistical literature has been challenging the methodology of statistical modeling, especially the data driven model building. The model building has become much more biased than previously thought which has given false sense of confidence in their predictions. My experience with mathematic statistical teaching compared to business statistic methodology and teaching shows the discrepancy in the depths of the analysis.
The RA models referred to HPA' - house price appreciation - which was forced to be positive, becauseon a national basis' house prices had risen for 50 years. Fitch admitted on their conference call last March that their model would start to break down if HPA remained flat for a period of time, and would break down completely' if HPA declined by just 1% or 2%for an extended period of time'. Their model required uninterrupted HPA of at least low single digits for the entire life of the loans.
Dr. Foland's comments above are the smartest commentary on this whole model-driven financing mess I've read so far.
Blame the stupid model, but don't blame the dolts who created the model or put blind faith in it.
I think Tanta hit the nail on the head a couple weeks ago when she was talking about the hidden default rate during the runup. Sure, people who couldn't ordinarily get better than a 75% LTV weren't "defaulting" at a high rate until 2005 or so. That's because by the time they made (or missed) the first few payments, even if they had a 100% NINJA exploding liar loan on Day 1, their LTV was in the 70's or 80's when they started feeling the heat a few months in. They just called their bestest friend in the world, Mr. or Ms. Broker, who helped them refi or find a bigger house with their newfound equity.
I'm sure that all along, like Tanta says, had anyone been paying attention to the level of delinquency in the prepays, it would have been clear what was going on. And the model would have been a whole lot more, uh, modellish.
Join us next time on CR for a very special episode of "Hoocoodanode?!??1!"
One broker that I was talking with told me of the 8 properties he had bought in Phoenix in 2004.
Oh, there were quite a few Californians doing that here.
My g/f worked in the title biz during that time and she said that in her humble opinion, the Phoenix bubble was driven in very large part by California and Arizona flippers buying several houses at a shot.
"I have not met a cavalier sociopath like that. Calmly working the system to steal. Wow."
I honestly don't think he was sociopath, looking to work the system. He thought he was an entrepreneur making effective use of leverage.
What horrifies me is that he was not alone. There were tens of thousands of "smart guys" making 'effective' use of leverage to capitalize on the latest bubble -- mortgage brokers, bankers, investment bankers, and hedge fund managers -- none of which could be described as 'sociopathic'.
A single sociopath we can deal with. An army of "smart guys", that's a different problem.
The real problem with the rating agencies is the same as the real problem with the accountants -- they're being paid by the same people they're supposed to be rating or auditing.
I seem to recall reading somewhere that in the case of the rating agencies it was not always so. That once upon a time their income came from the purchasers of bonds.
I've long argued that if accountants are going to be paid by the people the audit, then they should have to buy audit insurance. If there were an insurance company with skin in the game, they would demand that the auditors make serious and effective efforts to discover fraud, and would never allow the kinds of things that went on between Arthur Andersen and Enron.
The same should be done with rating agencies, if no way can be found to go back to paying them from the buy side. If the rating agencies were liable for the reliability of their ratings, and had to carry insurance against rating failure, then the insurance companies would demand more rigorous efforts (and it would all cost more).
I've long argued that if accountants are going to be paid by the people the audit, then they should have to buy audit insurance. If there were an insurance company with skin in the game, they would demand that the auditors make serious and effective efforts to discover fraud, and would never allow the kinds of things that went on between Arthur Andersen and Enron.
Okay - I'm a little slow - if the accountants & rating agencies have conflict of interest because they are paid by those they audit & rate... then why won't the insurers have similar conflicts since they too will get paid by those they insure?
And since it only goes bad when it goes bad... why will insurance enforce more discipline? Without insurance if the deal goes bad the auditors & rating agencies suffer directly... with insurance the insurer suffers. But none of that happens UNTIL the deal goes bad... a rare event. Until then it is just collect premiums from counterparties. Ka Ching.
Does somebody have to reinsure the insurers to keep them honest too? Or regulate them also? If regulation is the answer then why not skip the whole insurance thing and regulate closer to the original transaction (RAs & auditors) instead of layering more transactions on top of transactions.
And that doesn't even get into the counterparty risk issue of adding insurance... see derivatives & their insurers, like Ambac. Is that better?
My gut feel is the only ones who benefit from insurance in this instance are those collecting commissions from selling that insurance.
The end problem is the result of the investors. They were too willing to take the rating agencies AAA rating without looking at the underlying paper. If the investors weren't looking to get a free lunch there would have been no bubble.
Why? The market is finally about to throw Buffett his long-awaited pitch. He's got lots of cash, billions in free cash flow, no debt, and a nose for VERY good deals. The next 5 years will be Buffett's swan song and we all get to watch, and hopefully some of us learn for the next time. I suspect that Buffett has never been so optimistic for his (i.e. BRK's) prospects.
It is all just so pathetic and sad. The bottom line is that we got "had". No body on this site would even be here if you weren't looking for that "we got had" confirmation.
You can talk statistics and models until you are blue in the face. It's over for democracy in the US. And the concept of capitalism, which never really existed, is, sadly dead. Because it should have been, combined with democracy, a real winner. But you can not say we did not try, because we did try.
Some time down the road and some where else, it will emerge again and hopefully with more success. But you know, for a while, at least since I was born in 1952, I had the priveledge of being born in the greatest country on our planet for our time and I got to grow into late adulthood living the dream.
I just wish that my babies and their babies could have had as much joy. If I was not an avowed atheist I would become a true believer and swear we have seen "the end times".
I want to meet the SOBs that dreamed up a $1.00 a barrel ethonol subsidy paid by our government, the US taxpayer, to ethonol producing companies, as an example of the tragedies of the current time. As if killing people in the Middle East is not enough, we have to starve people all over as fast as we can.
"My g/f worked in the title biz during that time and she said that in her humble opinion, the Phoenix bubble was driven in very large part by California and Arizona flippers buying several houses at a shot."
And I would guess these 'investors' were all considered 'prime' borrowers by their lenders. This is one of the reasons that the problem goes well beyond 'subprime'.
My g/f worked in the title biz during that time and she said that in her humble opinion, the Phoenix bubble was driven in very large part by California and Arizona flippers buying several houses at a shot.
rnato, sprung | 04.22.08 - 11:59 pm
Sounds familiar. One acquaintance was very proud of his son that had purchased about 25(!) properties in Phoenix as investments a few years ago. His son was about 25 at the time...
We saw the writing on the wall and sold our home in '06. Even moved to New Zealand, although the move had a bit more to it than real estate cash-out.
Some are suggesting that a hands-off attitude by government was a big contributor to the housing bubble.
I'd like to suggest that the housing market is where it is today mostly because of over-involvement of government. (And I'm not a Republican.)
Imagine a world without the GSEs, the FHA, deductibility of home mortgage interest, tax-free gain on sale etc. In that world, I'd guess that house prices would be much lower and less volatile. You don't have to clean up a burst bubble if you deflate it before it bursts, but you don't have to deflate it if you never let it have too much air in the first place.
Government supplies a lot of the excessive air for housing. Take away the government price supports (because that is what these supports all end up being) and you'd have far fewer and far smaller problems.
Actually the problem described comes from a lack of brains. Lack of intelligence. The stupidity of it all was pretty obvious. If people can't admit something is stupid when it is, then what's to do?
Andrew Foland: I must say I wholly disagree that this was a "black swan" event.
I'd have to agree. Human over-confidence can lead to tragedy? That's not some low probability event. It is pretty well documented. Icarus learned it the hard way a long, long time ago. Bernanke's attempt to force the distortion in prices to stick might destabilize the world enough for the next great War. It's probably time for a correction in the population curve anyways. We are overburdening the carrying capacity of the land.
Imagine a world without the GSEs, the FHA, deductibility of home mortgage interest, tax-free gain on sale etc. In that world, I'd guess that house prices would be much lower and less volatile. You don't have to clean up a burst bubble if you deflate it before it bursts, but you don't have to deflate it if you never let it have too much air in the first place.
Government supplies a lot of the excessive air for housing. Take away the government price supports (because that is what these supports all end up being) and you'd have far fewer and far smaller problems.
We are all whipping the wrong horse(s). There are bubbles aided by gov't... this one for example. There were past bubbles without much gov't help (1800s mania's & busts, tulips, etc.)
I don't think the GSEs were 'the' problem, nor was the home income tax exemption... they were there, a factor, but not the cause. And I don't blame 'the market' per se. It was a convoluted mix of all those things coupled with greed's temporary triumph over fear - always an ingredient when bubbles form.
The area gov't failed was regulating market participants. Specifically - not insisting that each step in the transaction chain be fully transparent to all other participants.
That and making sure participants & their counter parties either have sufficient resources to back up commitments OR that their lack of resources is FULLY disclosed & agreed to. Wholesale 'brokered' lending coupled to multiple orders of securitization made a mockery market transparency. Gov't needed to make sure participants disclosed all information & were accountable for their part. Didn't happen.
I believe it is a fools errand to believe there ever was or ever will be a truly 'free market'. All transactions are subject to laws if none other than ownership & title transfer. And laws are products of political systems. So just like it is a fools errand to lament the loss of the gold standard (do it if you want but it ain't coming back) it is equally foolish to believe there will ever be a truly 'government free market economy'. We will have the option of more or less gov't and better or worse gov't... but no gov't is not an option as long as there are people.
The best we can expect - and we should demand it actually - is efficient & effective gov't. Minimal foot print, low cost and effective execution.
We didn't get any of that. In fact it appears we got the worst of all worlds: an expensive & ineffective gov't funded with debt that actually worked against our better interests. That almost takes talent to pull off.
dryfly, your points are well stated and convincing.
On some reflection, I think you are right, better enforcement would go a long way to preventing and fixing financial messes like this one. I read on tickerforum that the SEC was investigating Bear Stearns CDO marks late last year, then inexplicably just dropped it. Sen. Grassley is trying to get them to come clean on why the lax oversight, but they are stonewalling him, apparently.
One thing I would recommend to anyone who is angry about this whole thing ... find an outlet for your feelings. I've taken up writing letters to my Congressmen. It may not accomplish much, but at least it gets my feelings out on paper.
I liked the Drexel U statistician/engineering analogy from last night, but came to a different view than their expert did.
The RAs, for reasons known to themselves at least, indulged in design errors with now disastrous effects. The same can happen - has happened - in structural engineering, viz, the Citicorp building on Lexington in NYC.
The difference is that the engineer, William J. LeMessurier, realizing the problems post-construction, made the necessary calls. Not an easy thing but, considering the probable consequences, certainly the right thing.
The RAs did the equivalent of load testing, failed to appreciate the equivalent of shear, and also failed to make that call. That's a failure of ethics, and not of analysis only. Regulation wouldn't have - or didn't - stop either one from making an error. Personal integrity made a difference, though.
Jay writes:
Bill: Investors don't bear any responsibility? We should have blind faith in Moody's ratings like religious fundamentalists have blind faith in their symbolic leaders?
Jay | 04.22.08 - 9:13 pm | #
Jay: Investors made their choices, many of which were dumb, and have paid the price for that stupidity. But look at the ratings agencies. They have a special charter and place GIVEN to them by the Federal government. In a free market they would have to pay for that charter. Or, and this is I think a better way to look at it, they have a duty to the public in exchange. This is the intention of the laws that use the ratings given by these agencies to derive capital standards used to protect our banking system, life insurance company system and pension system. We protect these things because they are an integral part of our free market. Since the laws of our country basically drive the demand for the ratings, not an organic demand by investors for analytical talent, the ratings agencies owe us all their fiduciary duty. If they fail in that, and they have, the laws need to be changed so that we don't have investors (indirectly) and issuers (directly) paying for something that is worthless. Worthless except that it is required by law. Agree? Or do you support the perverse profits the ratings agencies derive due to their special place in our regulatory regime?
Gari N. Corp writes:
Lowenstein neither asked why debt investors chose to rely exclusively on agencies nor how the agencies might be replaced. The agencies screwed up quite magnificently, but the idea that we'd premise the operations on debt markets on their say-so is nuts.
Gari N. Corp | Homepage | 04.22.08 - 9:12 pm | #
Gary: You are dead on. The Federal government outsourced regulation to our ratings agencies. The agencies failed us. We need to come up with a new model that doesn't include them. The ratings agencies should just go back to earning fees from investors that want to pay them for their analyses (which right now, might not be too many investors).
Still having a tough time divining why investors buying billions of mortgage paper effectively outsourced their credit analysis function to the rating agencies.
Shouldn't investors do that in-house given the sums involved?
"Hey man, I just drive 'em. I don't know what makes 'em run." is NOT an excuse that I'm willing to accept from Moody's. They CREATED the rating models. They sold the ratings as being an accurate measure of relative risks between various bonds. And then they told the creaters of the bonds "What lies to tell us."
However, in-house resources adequate to the job meant the replication of services available in the marketplace, and for a long time the RA's appeared to know their stuff. How would you have justified that duplication/parallel service in the environment of 2002 through 2005 or 6 or even 7?
Even if fund managers had some bad feelings, how successful would they have been in pursuing an alternative in-house?
So, who pays the ratings agencies? If the investors, then have the rating agencies paid much of a price in terms of lower prices/lost business? If they were paid by the creators of the securities, then why did anyone listen to the ratings agencies?
Craig wrote: why did anyone listen to the ratings agencies?
Craig, it's the law. Certain institutions can only buy securities with certain ratings. Other institutions have many of their capital charges based on the ratings of the securities they own. This is why the ratings agencies are especially culpable. They were not just selling research. They had a special role GIVEN to them by the laws of our country.
dryfly writes:
yeah we got Eliott Spitzer instead.
"Even good cops like to get laid. His chastity would have made sub-prime not happen?"
The problem with Spitzer was not hookers, though that's what helped to take him out, made easier by his hypocritical earlier pursuit of indictments against prostitution rings. The problem was his tyrannical spirit, which made him indistinguishable from the malefactors he was pursuing.
When the distinction between the cops and the malefactors vanishes, your system has descended into rule by tyrants - - a perpetual struggle between rival criminal gangs. As Obama's and Hillary's rival crews go to the mattresses, we will see this unfold on one side of the empire mega-party system. In the fall it will be "whoever" vs "Keating Five" McCain, who did so much to make elections safe for incumbents (McCain-Feingold).
Ron Paul has the right ideas, and is modest enough to realize that the imperial presidency and Rome-on-the-Potomac both need serious down-sizing, but his executive skills are lacking, even for a reduced executive role. Perhaps someone more qualified will run along similar lines in a future canvas (if the current system allows for that before breaking down in a more spectacular way).
Patientrenter has it right: as Jim Grant has pointed out, the role of government housing policy has been to bring together lenders who shouldn't lend with borrowers who shouldn't borrow, and make them both comfortable with the loans by subsidizing the whole process in a variety of ways.
Our expertise is as statisticians on an aggregate basis. We want to know, of 1,000 individuals, based on historical performance, what percent will pay their loans?
Wow. Based on the performance of these securities you've done a really horrible job. Does anyone accept responsibility anymore?
Okay - I'm a little slow - if the accountants & rating agencies have conflict of interest because they are paid by those they audit & rate... then why won't the insurers have similar conflicts since they too will get paid by those they insure?
There's a world of difference between an appraiser and an insurer. Insurers aren't getting paid by those they rate, they're rating those who pay them ... because those payments carry a substantial downstream risk. Appraisers, like Moody's, are getting paid without taking on any underlying risk.
The motive in the first case is to accurately quantify the frequency and severity of all potential loss scenarios so that the insurance can be priced accordingly.
The motive in the second case is to earn fees - preferably from large, regular customers.
Moody's wasn't insuring anything; they were appraisers and, knowing who was buttering their bread, acted accordingly. You can bet that Lloyd's of London, placed in a similar situation but asked to insure these MBS's instead of rate them, would not have as blindly followed St. Patrick out of the village of Rationality.
Wow. Based on the performance of these securities you've done a really horrible job. Does anyone accept responsibility anymore?
Let me put it this way.
I want to buy a house and don't have access to comparable sales data.
Along comes Joe from a local appraisal company, who will offer to do a detailed assessment of the value of the house I want to buy. Oh, and it won't cost me anything, either, because the seller is paying his fees.
Mightn't I, the buyer, be a wee bit ... umm ... skeptical of this arrangement? And perhaps arrange for my own independent appraisal or, failing that, want Joe to bear some contractual liability for an inflated assessment?
Sure, the appraiser bears some fiduciary responsbility to all parties but, in the end, he who pays the piper calls the tune.
The most interesting part of the article to me was that government did not care. After the collapse of Penn Central in 1970 and the SEC was faced with the question of how to measure the capital of broker-dealers... "in effect, the gov. outsourced its regulatory function to 3 for-profit companies."
Issuers were thus forced to seek credit ratings. Agencies started charging issuers and "it put the agencies in a conflicted position."
Also of interest to me was the discussion about Monte Carlo simulation. Because it seems to me if this had been done properly, and the variation in the outcomes of the Monte Carlo runs studied in depth, it should have indicated vulnerabilities in assumptions. In a Monte Carlo model, assumptions should have been entered as probability distributions of various kinds and run over and over. Then the output should have been sifted to identify what kind of initial conditions result in greater loss. This should have been written up by researchers. Was this done?
Back in the early 1800s, boiler explosions used to kill a lot of people. Then boiler owners were required to get insurance. Since the insurance companies were on the hook for the losses, they demanded rigorous inspections. Boiler explosions became rare events -- even though the insurance companies were being paid by the boiler owners.
Yes, the insurance companies, too, would be paid directly or indirectly by the firms being audited or rated, but their potential losses from any single "boiler explosion" would be far greater than what they would be paid by any one firm. And as insurance companies they would be forced by government regulators to maintain adequate reserves against claims. The key difference is that the insurer's potential losses from an audit or rating failure would be much greater than their revenue from any one customer. Being on the hook for large losses, they would demand rigorous audits and analyses.
you have obviously never lived or done business in SoCal. What Jack Staub descirbed is nothing. Fraud is rampant in everything there.
One of the worse thing I have ever seen was a shopping center owner burn down a 5000 sq.foot below-rate restaurant to cancel the proprietors lease, sub-divide the spot, re-rent at quadruple the existing rate to changethe CAP and existing value by some 400-500k.
That is when I decided that I had to leave LA before I ended up performing corporal injury upon someone.
"you simply cannot separate economics from politics in our system"
"Yes, and I would add 'ethics' as well."
America has a diversity of ethical standards - we must tolerate (if not embrace) them all - this has been preached
in corporate, government, academic, and journalistic venues in MANDATORY seminars for decades.
Q-, I live here in SoCal; I need to get out more often and interact with a broader range of folks, obviously!
J-S-: okay, maybe I misread the fellow's profile.
FT W-: IMO, the mess began in '81, when personal consumption/GDP began its unrelenting drive up. I say the cause was overconsumption by Baby Boomers and overindulgence by them of their progeny.
Today's problem is household debt/GDP, not government debt/GDP (although I abhor deficit spending).
Lots of good posts in this thread. I liked maybe 30% instead of the more typical half dozen interesting posts out of 150.
In terms of causes, don't forget that things worked pretty well for 20+ years. This relative success led to a weakening of controls at every link in the process.
Some parts of the system had worked very well over an even longer period of time. Success bred a laxity in controls at every stage in the process. By the same token, failure will significantly tighten controls at every stage in the process, to the extent that I don't think we need a lot of new rules, regs, or even enforcement to prevent a repeat of this.
Among other things, ratings agencies have done very well in conventional credit analysis. That is, traditional credit of traditional businesses. They had built up a great deal of credibility because of their success in accurately rating bonds. Stuff you can do using ratios, which is taught in elementary school. And if you have enough zeros, you don't want to rely on 5th graders, but it you don't need a decent first year physics grad student. As far as DD on the inputs, GAAP is more then good enough to compute coverage ratios. Its flaws have more to do with much smaller issues regarding timing and management of earnings.
Yea they messed up Penn Central bonds, but these are financial systems and an occasional failure every decade or two seems reasonable. By failure I mean a AAA defaulting in a year. Count them on the fingers of one hand.
No one with a brain will ever buy a multi billion CDO without some DD outside of a rating from an agency. Which is still maybe overdoing it, since the rating agencies will be using data from the mid 00's for the next 20 years. In a year, you could probably buy a AAA cdo without any DD, assuming they are still around.
Just plausible controls at each stage is more then enough to prevent a repeat of this excess.
In general, there are advantages in aggregating and pooling, at the cost of transparency. Once again, it worked really well at first but poor incentives led to excesses until we got to extreme examples like CDO^2. No one in the future will be willing to sacrifice that much transparency to pick up a few basis points of yield.
Also, on the buy side, I think that the amount of fees generated on this crap will look absurdly small, considering the damage. Maybe for some individuals it was a big number, but C lost $100 billion of market cap for a few hundred million in fees. By this I mean that they were making a few basis points on their SIV's. The bond insurers, who would have done fine if they had stuck to regular bonds, were charging a few basis points again -- picking up nickels in front of steamrollers. Being off by a couple of orders of magnitude is truly impressive, and it took enormous computing power to develop engineered products and rating/pricing models to fail this spectacularly.
Another poster touched on it, saying that "money corrupts".
The root of the problem, which few care to deal with, is right in the main post: "Mortgage brokers didn't care because they would sell the loans immediately and collect their fees. Wall Street didn't care because they could package the loans and sell them to investors. [and at every step along the way, people earned promotions and bonus check] Investors would have cared, except they trusted the rating agencies. [because no one wanted to be left out or lose bragging rights to his neighbor]...
The post also mentions the rating agencies, which apparently are paid by the organizations they rate. Expecting them to do anything other than act as a rubber stamp would be asking people to avoid making money. And the internal culture of the rating agencies brought huge pressure on everyone to get on the bandwagon, along with the potential to lose ones job if you don't.
Everyone got paid by ignoring the potential problems, directly or indirectly. That's why it happened. And they get to keep the money now. No downside, so why not? It's not like morality has any place in economics.
Wait! Stop me if you've heard this one before:
"Lies, damn lies and statistics!"
As someone who has taken all sorts of stats and investment courses, let me tell you something: statistics are meaningless. In fact, good investing exploits the misuse of statistics by the many. Case in point: Paulsen Capital.
The real problem here is that Moody's should have incorporated the changes in origination standards into their models. I've got another one here -- wait for it: "Garbage In, Garbage Out"! Hoowhee, I kill myself. This is easy to contain but when you have the shiny-haired, perfect-teethed sales people involved, Who's gonna say no? In an age where critical thinking has been utterly abandoned for an emotional need for irrational trust, well we're getting what we deserved.
What happened to housing was an outlier...statistically not supposed to have happened.
Oh, c'mon. The '87 stock market crash was a 12 standard deviation move and shouldn't happen more than once in 3 billion years, but it did and was nearly repeated 2 years later in the '89 mini-crash.
you simply cannot separate economics from politics in our system
Yes, and I would add "ethics" as well.
I'm as much for free markets as the next guy, but this whole debacle has to end in more regulation.
The current crop of stooges running our government either don't get it, or as Jas so consistently points out, are evil men in cahoots with a criminal cabal running our banking system.
The kind of abuse described here needs to be made illegal, as in "go to jail and smoke lucky strikes with bubba." Future generations must learn from our stupidity, and say "never again."
What do you think will happen when the general population gets as angry as the commenters on this blog?
Or will they just keep stoically driving their 1 hour commute, emptying their wallets to fill the gas tank, and escaping reality into iPod tunes and "reality TV"?
Personally, I think folks are gonna wake up, probably when their stock portfolio and their housing equity both head south another 15-20%...and they're going to be very grumpy.
I'm as much for free markets as the next guy, but this whole debacle has to end in more regulation.
My sis was a prosecutor - DOJ white collar & tax (now a history prof - she burned out)... she would often 'say good cops make good citizens'. Our cops went to the coffee shop & never came back. The citizenry figured that out pretty fast. Result is the mess we see in front of us all.
Could be fraud, too. I've read about some large, gutsy mortgage fraud rings around here.
Joy | Homepage | 04.22.08 - 8:24 pm | #
On the front page of our daily rag it told the story of a guy who bought 5 houses ($350k each) on the same street and got mortgages from five different lenders, no money down. He was supposed to get a kickback from the seller in the way of landscaping contracts, which never came through. He lied on the app and told each lender he would occupy the home. They're now appraised at $250k.
I'm still wondering why the lenders didn't check this guy out, you know, just a little due diligence.
Personally, I think folks are gonna wake up, probably when their stock portfolio and their housing equity both head south another 15-20%...and they're going to be very grumpy.
ShortCourage | 04.22.08 - 8:58 pm | #
They wake up if & when they lose their job. Paper losses are ephemeral... job losses are tangible right now whatyagonnadoaboutit in your face.
All we need is common sense enforcement of common sense laws, along with an environment where peer pressure works to prevent fraud, not support it. The latter will come naturally at some point, I'm not so hopeful about the former.
In other words, if you don't do your own due diligence or make sure if you are going to outsource the process that you understand the third parties incentives and methodology you deserve to have a large poll shoved up your ass.
They (Moody's) were worse statisticians than they were loan officers. As loan officers, they did nothing. As statisticians, their product was devastatingly bad. If they had done nothing, we all would have been better off. They're in denial because to admit that you're personally the cause of so much damage to the world must be hard to take. If you've taken one semester of undergraduate stats, the problems with the models were obvious.
I'm seeing Albert Finney in my head..He's asking me to open up my window and scream out "I'm mad as hell, and I'm not going to take it anymore!"
The 6-figure earning(at least) eggheads are blaming their models when plenty of us little people saw this wreck coming with plain old common sense. Shit, maybe common sense is more like ESP or something and we're all gifted savants.
Bullshit...I call bullshit!
You get the result that you incentivize. There is no politics here, and no amount of regulation (at the time) would have stopped what was going to happen, much as nothing could have stopped the dot com bubble either.
Moodys did what they were supposed to do: they took the historical data and they build models on it. Neither they, nor anyone else for that matter, was prepared for what happened to the chain. And frankly none of them were interested in the chain because, well, they had the models. And insurance companies use models all the time. They're excellent at it. There is no differnece here from figuring out when I'm going to die, and figuring out what tranch of loans are going to perform at.
But the behavior in the chain happened because everyone wanted to make the numbers, everyone wanted their bonuses (and I'm not talking CEOs I'm talking loan originators who were pulling in well into the 6 figures too) and the stockholders wanted the returns. The street DEMANDED the returns. Look at the posters on here who complain about things. They're the stockholders that would have cried had their bank no produced the results of Citi, WaMu and Countrywide.
The problem is everyone, and no one in particular. And everyone was doing whatever they could, at whatever level they operated to keep the flow going. That's the definition of a bubble.
Had I not happened to stumble onto some blogs that were publicizing the insanity of the California, Florida and Arizona real estate markets, I myself would probably not have been aware of the degree of deterioration in lending standards until the wheels started coming off.
Unless the Moody's statisticians are based in one of the super-hot bubble areas, there would be no particular reason for them to foresee the scale of the problem.
A statistician is going to have a very strong bias towards relying on hard statistical data. Until the early defaults started showing up, the statistics available to them indicated no problem.
Even had they had some clue through acquaintances/family experience, to have rated those securities properly, they'd have had to have ignored the statistics and issued a subjective opinion. On what hard data would they have justified that? Anecdotal comments on Ben Jones' blog or CR?
Even the auditors of corporations say it's difficult for them to detect outright fraud. For a rating agency statistician to detect it is even more difficult.
are the folk's at moody's aware that there is a difference between a loan officer and an underwriter? And that loans that were made to be securitized were underwritten to standards that were set by investors?
They're denials are BS. If they're going to rate MBS, then they need to understand the loans. How can they rate them if they don't understand what it is that they're rating? And it seems to me that they should have been doing some due diligence on these loans (like at least sampling a few to make sure the info they were being given was correct). Other people were, after all, going to rely on their ratings.
Everyone assumed the credit agencies knew what they were doing, says Joseph Mason, a credit expert at Drexel University. A structural engineer can predict what load a steel support will bear; in financial engineering we cant predict as well.
How candid! You mean those chicken entrails aren't as accurate as engineering math on steel girders?
"I think folks are gonna wake up, probably when their stock portfolio and their housing equity both head south another 15-20%...and they're going to be very grumpy."
So what are they going to do? The political system is rotten, bought and paid for, the Constitution was thrown out the window years ago, the banks are insolvent. Benankie is giving them the finger with spiking fuel prices and a falling dollar with every rate cut. These poor complacent bastards are going to get just what they deserve good and hard.
Lowenstein neither asked why debt investors chose to rely exclusively on agencies nor how the agencies might be replaced. The agencies screwed up quite magnificently, but the idea that we'd premise the operations on debt markets on their say-so is nuts.
The 6-figure earning(at least) eggheads are blaming their models when plenty of us little people saw this wreck coming with plain old common sense.
Oh please! The "little people" knew nothing and they could still care less. In fact, the "little people" who had 401k's would have been screaming bloody murder if their returns were down because the stocks they held DIDN'T participate in all this. Who are we kidding here?
We get the government we deserve and the markets we do too. If you were a stockholder and didn't ask these questions, you're no better. If you helped to elect this admisitration you're part of the problem. And even if you didn't you surely benefitted from the market if you bought and sold stocks at the right time, or you bought and sold property at the right time.
The righteous indignation is really a hoot sometimes.
Bill: Investors don't bear any responsibility? We should have blind faith in Moody's ratings like religious fundamentalists have blind faith in their symbolic leaders?
All we need is common sense enforcement of common sense laws, along with an environment where peer pressure works to prevent fraud, not support it. The latter will come naturally at some point, I'm not so hopeful about the former.
Again my sis (ex-prosecutor) would prefer simple & comprehensive laws & regs and better enforcement over more & increasingly complex laws & regs and poor enforcement.
And shes a liberal not a wing nut by any definition.
The failure was in enforcement not in the lack of weight of the federal register.
There might need to be some tweaking of the laws & regs to clarify how some of these 'financial innovations' fit into old regs & laws but not a lot.
Indeed. I have said this over the last 2 Bush elections to my partner, the avid Republican...who is in a perpetual bitch mode right now.... what a hoot. I mean, seriously, what were we expecting???
A decent, honest, intelligent, trustable government?
"If you helped to elect this administration you're part of the problem"
The problem is it wouldn't have mattered because the system is rotten. When you have 1000 lobbyist with fist full of money for every elected official the goverment will be corrupt.
If they're going to rate MBS, then they need to understand the loans.
They insure my health, do they follow me around and understand how I behave, what I eat etc? Do you think the actuaries that form the models know things about people's personal health?
How about property insurance. Do you think they're all weathermen in FL? That they understand seismic events?
I don't need to know any of that if I'm building a model. What happened to housing was an outlier...statistically not supposed to have happened. You know, a black swan event. That mean, something unanticipated. And humans don't like to think that there are things they can do nothing about. Sort of like when someone dies...it always has to be someone's fault. It can't just be the way it is or something crap just happens.
Maybe i'm missing something here, but where was the financial penalty to Moody's if their rating was wrong?
If Moody's had been required to put up even a token amount to back their rating, then you can bet that they would have put a little more due diligence into making sure that their rating was correct. I mean this is pretty basic to me, if you want a market based pricing information to work, then the incentives within the system have to point the right way for the effects you want.
As far as i can see from this article, this system functioned precisely in the opposite direction - Moody's incentive was to get the ratings wrong, in the bank's favour.
Well, the good news is that with all this new fangled technology we have now, the free market will work to sort things like this out much faster than it used to. That's the bad news too.
Tons of great stuff in the article. I like this one:
"On the plus side, Moodys noted, 94 percent of those borrowers with adjustable-rate loans said their mortgages were for primary residences. That was a comfort feeling, Robinson said. Historically, people have been slow to abandon their primary homes. When you get into a crunch, she added, Youll give up your ski chalet first.'
1) so no effort to verify this 94% figure?
2) and I guess she expected these subprime borrowers to give up their ski chalet first because, well, they all reported that their assets included ski chalets? Or is there a high prevelance of ski chalet rental among subprime borrowers?
These Moody's folks so obviously played ostrich and they look like bigger fools the more they try to justify themselves.
Maybe i'm missing something here, but where was the financial penalty to Moody's if their rating was wrong?
Simple in future business, stock value, enterprise value, and earnings. They should be treated like a leper now by the financial community, and their business curtailed. Frankly I think ratings should be done by the government. That would chap quite a few hides.
The ultimate pitfall of a democracy where central planning is an important role. You can't always pick the "right" people to put in office and when you are wrong we all suffer the systemic risk.
"They insure my health, do they follow me around and understand how I behave, what I eat etc? Do you think the actuaries that form the models know things about people's personal health?
How about property insurance. Do you think they're all weathermen in FL? That they understand seismic events?"
While it's gone off the tracks many times, yeah that is the idea. Insurance agencies attempt to pool data on exactly that information and set rates accordingly. So yeah, they look at weather patterns on the gulf coast and trends in personal health. What's your point?
ipodius: I'm one of the "little people" (relatively small 401(k), which is invested in a mutual fund) and I saw this coming years ago (maybe being in CA helped).
In 2004, my brother bought a condo, and advised me to also get into RE. I had looked at our market, and realized then that we were in a bubble and so I refused to buy. I'd like to buy (it will be my first house), but I've chosen to rent until prices return to sanity (i.e., in line with basic fundamentals, such as rent/price and price/income ratios).
I admit that I used to get mad because I felt that I was being forced to wait until the prices came back down. But, getting mad wasn't productive, and so I just go along with my life realizing that there are a lot of things which we have no control over - including the timing of RE bubbles. So, yes, some of us "little people" saw this coming, and used our common sense to avoid it. I wish that Moody's and others would have done the same.
With health insurance and homeowners insurance they are not handing you the money up front. They always have the opportunity to re-evaluate you when they pay out. If you smoked and claimed you were a non-smoker on the application and you die of enphysema they can just not pay.
I am certain that I could build a model that would predict, with great accuracy, the chances of an ateroid hitting the earth in a populated area if I had the dataset of all known bodies in our part of space. I know nothing about astronomy at all. But I do know a lot about math and stats.
I could follow those rocks around the sky for years and adjust my models. But you know what I won't see? I won't see that rock that no one knows is there, or I won't see that comet come close enough to one of those rocks to change its courae no matter how good my math is.
Use that analogy here and look for where the problem actually was...with the people who were causing those rocks orbits to get changed by writing bad loans in the first place.
The idea that free markets and regulation are mutually exclusive is wrong IMO. Sports are highly regulated as to what is allowed in competion (legal vs illegal block in football) and outside of competition (drug testing). Additionally officials are present to enforce the regulations and punish offenders but the games are freely competed. No one ever suggested that Jordan wear ankle weights because he could jump higher, he used his superior ability to be a winner. But a defender couldn't punch him in the gut when he took it to the rim either - against regulations.
Deregulation has been used to rationalize fraud in many cases (Enron) and one of the biggest supporters of this fraud is McCain's economic advisor - Phil Gramm.
There are several major issues with the agencies' performance as statisticians:
they were willing to extrapolate out 30 years on products that were only 2-3 years old and had never been tested through a complete economic cycle.
they chose to assume rather than demonstrate similarities between different classes of borrowers.
on structured products, they ran breach tests but never tested the magnitude of the breaches. So if a structure passed x times, they ignored the size of the losses when the structure failed.
they used variable (the most recent house price trends) as a parameter.
ipodius-
But when you can look out your own window and see that the rocks have moved, you need to put that new information in your analysis. These weren't in deep space. Look at housing prices and mortgage ads and you can see the universe of rocks has changed.
Moody's is 100% liable. Instead of relying on historical loan performance which didn't match this loan pool (prime vs subprime) they should have deffered making a rating until they had investated the pool. This means counting some trees; i.e. pull 50 loans out of the pool at random and evaulate each for potential problems. If there were too many problems in the random sample, they should not have rated the pool. There is no excuse for not doing any real work.
What amazes me is that no one dares to discuss what the macro advantages were for creating and propagating this scam. Yes individual groups made money on the scam but might it have been advantageous on a national level for some?
And frankly none of them were interested in the chain because, well, they had the models.
No one looked up the skirt to see if what they thought was there was really there. Now its 2 AM and they discover to their horror they should have looked.
That's always the trouble with models - its the assumptions you start with. Feed the system a different set of conditions than the assumptions you model with & you get a completely different result that that which the model would have predicted.
The regs that were violated weren't those that affect Moody's per se - it was where the loans were originated... originated under completely different conditions than the model assumptions were built upon. No shock that they failed as badly as they did.
The failure of reg enforcement was at the loan origination step... it then amplified through securitization & ratings.
But Moody's should have been monitoring incoming... testing the incoming versus previous sets of incoming and say 'Whooooa, this stuff is different - we can't predict based on what we are receiving now'. They didn't do that - didn't even suggest that.
In the food business there is a process called HACCP. Financial markets need something similar. Simple & enforceable & transparent.
What do you think will happen when the general population gets as angry as the commenters on this blog?
Every person, whos pension gets raped by this mess, should receive a nice clearly written writeup that describes all of this in language that even a 6th grader could understand. Walter Cronkite did something similar to this when he explained the Watergate scandal to the American people.
Steve, your trying to justify your point by using present circumstances to say what the models would have predicted in the past using them. That's just logically specious.
None of this was known in the past because no one was writing crappy loans in the past and no one modeled for it because banks didn't knowingly write loans to people they knew couldn't pay.
Some here are looking at Moody's and saying "yeah man they should have known". I'm saying no one in their right mind would have modeled for loans being written on false information...and it was false. If people really did have those incomes, DTI ratios, FICO scores (that you could adjust on the fly, btw because I watched someone do it), and sane approaisals, the models would have held. Is this wrong?
Oh boy, 4 more years of McBush, thanks Noble! First he's against the Bush graft to the rich, now he's for making them permanent, he's just fine with a $11B/month war lasting 100 years, he's got Phil and Wendy Gramm as his economic advisor's (Ennron anybody?). Here's hoping that Cheney invites him hunting REAL soon!
This mess belongs squarely at the feet of the drown the government in the bathtub crowd, which translates to Republican's Noble.
Even good cops like to get laid. His chastity would have made sub-prime not happen?
Maybe a few more of our cops need to see hookers if it gives them the strength to take on Wall Street at the same time. Heck I'd start a PAC to see it gets done if that were case.
SweetHomeKilla writes:
I'm so sick of calls for more regulation.
Totally agree. I know it's an unpopular opinion, but I see nothing wrong with what the rating companies did; they got paid to put ratings on stuff based on statistics, and they did so. As long as the people buying the paper in the end knew what they were buying, they should take the loss, and the market should be allowed to fix itself.
If there's a legal failing, it's in letting public-interest portfolio managers hide behind rating agency statistics to deflect personal liability for losses. If you bought RMBS's, you invested in a de-facto risky (in the qualified investor sense) investment. If you have losses chasing those high returns, you should be liable for making a bad fiduciary decision if you're a fiduciary. For everyone else buying these securities (who should all be qualified investors), they should suck up the losses and move on. To the extent that non-qualified investors could buy RMBS's or derivatives thereof, or any other de-facto risky investments, there might need to be additional regulation; but increasing regulation just cause lots of people lost money is just dumb.
I think it's fine. You didn't like the weather analogy but it holds. They don't know anything about the weather, they know data and stats about the weather that they use to predict patterns. They are geneerally not right either because of that.
My point is the anger is directed at the wrong place here. It had nothing to do with Moody's and everything to do with writing crappy loans and presenting them as done with due dilligence. They weren't.
The rating agencies did not just rate securities based on statistical models of past performance they charged big bucks to advise securitizers on how to design the products in order to get the AAA ratings. Rating agencies were also paid by the sellers rather than the investors. Both conditions established a conflict of interest which obviously biased their opinions.
In other words they knew what side of the bread the butter was on.
More joys of regulators looking the other way.
BTW: The best definition of an ideolog I have heard is someone who ,regardless of the starting assumptions, arrives at the same conclusion.
Right, but the ISO policies you referenced purposely standardize terms, and the insurance companies are very loathe to change them/alter the product, precisely because they want to know what kinds of risk they're exposing themselves to. They do what the ratings agencies failed to do.
BTW: The best definition of an ideolog I have heard is someone who ,regardless of the starting assumptions, arrives at the same conclusion.
Jim
NC Jim | 04.22.08 - 9:40 pm | #
As in, for example, "We have surpluses, so we need tax cuts to give people back their own money" which shifted to "The economy is softening and we no longer have surpluses so . . . we need tax cuts to give people back their own money!"
And then have Mr. Magoo give it all the "independent" stamp of approval. Ah, those fiscally conservative Republicans.
My point is the anger is directed at the wrong place here. It had nothing to do with Moody's and everything to do with writing crappy loans and presenting them as done with due dilligence. They weren't.
ipodius | 04.22.08 - 9:37 pm | #
I agree but Moody's isn't without blame - they really needed to audit the incoming to see if it fit prior incoming upon which their models were based. If they has done that alarms should have gone off.
But that would NOT have changed the quality of THAT BATCH of incoming - but it might have changed the quality of future batches if they couldn't get rated.
Moody's just kicked the can down & didn't ask the right questions either.
Tom Stone wrote: And that loans that were made to be securitized were underwritten to standards that were set by investors?
Here's one point where I, as a "civilian", have a problem.
X is writing a loan to be sold to Y. Y publishes a set of standards. If X is a professional and, taking CA as a pesky example is a fiduciary to the borrower, then Y's standards are not the standard, they're a minimum standard. Yet, repeatedly, I read that X simply "wrote to the standards published by" Y.
The objection holds on an "inclusive or" basis...if X is a professional, or if X is a fiduciary, then I should expect X to apply X's standards on top of whatever dreck Y publishes. So I should be free to blame X, and if X points the finger at Y then I should blame both X and Y.
the "little people" who had 401k's
would have been screaming bloody
murder if their returns were down
because the stocks they held DIDN'T
participate in all this.
Not all. I was emailing Schwab last fall asking how to tell which fund in my 401k had no exposure to home mortgages. And I got blather and baloney in response about one time out of three and ignored the rest of the time. I'm too little.
The attitude seems to be "if we don't steal it, somebody else will" -- musical chair kleptocracy.
I should say, a better analogy would be insurance companies that don't set the underlying terms--like those insuring mortgage backed securities, for instance. Here, the ratings agencies were just one more level that failed their duty to ask questions and were deeply conflicted in the process. They're in good company in that respect.
What do you think will happen when the general population gets as angry as the commenters on this blog?
I've said it before, and I'll say it again. When you extrapolate the big picture all the way out, I think the US is heading towards a Soviet-style collapse.
What we're already seeing, really in somewhere like California is essentially the collapse under way--society itself is breaking down when people don't find contracts (i.e. their mortgage) compelling to abide by.
No one's going to come shoot you if you don't pay your mortgage. No one is going to come get you if you don't pay your taxes. No one is coming for you. Once people figure that out, which i think they are, you have a recipe for the whole thing to come down quickly.
Like the Soviet Union, we really are an artificial country, essentially a multinational, transcontinental empire. What happened in the USSR was really a financial/economic meltdown coupled with an erosion of the ideology the regime was based upon.
Everything the politicians and leaders say became empty words, just like today. And when that's the case, when the official ideology no longer holds up to the light for most people, those holding the guns will not be willing to pull the triggers (actual or metaphorical).
I think that's what we are seeing today. Everyone thought the Soviet system was way more resilient than it actually was. And we've seen just how fragile global capitalism is thus far this year.
I don't need to know any of that if I'm building a model. What happened to housing was an outlier...statistically not supposed to have happened. You know, a black swan event.
Really???
No one knew the impact of DTI's on ability to pay?
No one knew that, since 16__ whatever, real estate goes up by 1% or so above the rate of inflation?
No one knew that option ARMS/neg am loans were over 40% of total loan volume in some areas?
C'mon. How stupid do you think the model builders are? Black swan my ___.
The ratings agencies got paid to slap ratings on products, not to think.
The problem with models and pro formas are assumptions. They are based on assumptions that prove to be wrong 95% of the time. That is why a common sense approach is much better (although not accepted by people who want numbers). Example: Common sense approach: We are in a recession. Models approach: No recession yet.
I am reading an interesting book called "Nudge" by Richard Thaler and Cass Sunstein. Its about how we get "nudged" towards decision by what the authors term as "choice architects"
Moody's = Choice Architects and they are f&(&& guilty. Models, black swans, my a*&
Take em out and shoot em like they did with Anderson Consulting and Enro
Little known fact - Moody's not only provided the ratings, but they provided the banks with the software to assess risks of CDOs based on those ratings...
I agree. We need more enforcers of the current laws, not more laws.
Zarley | 04.22.08 - 9:52 pm | #
I'm not sure we even need MORE enforcers... we need BETTER enforcers & enforcers motivated to enforce not ignore.
Start with that THEN see if we need more and different laws... my guess is we don't need to change a lot of the laws just a lot of the people enforcing the laws. And soon!!!
Start with that THEN see if we need more and different laws... my guess is we don't need to change a lot of the laws just a lot of the people enforcing the laws. And soon!!!
I thought an advantage, and sometimes a frustration, of a bureaucracy was that rule enforcement wasn't supposed to depend upon the individuals doing the enforcement...
I think we need either a better firewall between political appointees and civil servants (so civil servants can more effectively do what we agree is their jobs), or we need to festoon the financial industry with so much red tape that I'll be long gone (I'm in my early 40s) before it's removed. Or both.
ipodius, you missed a few things. for a fire insurance policy the insurer insists on sprinkler systems hurricane straps, and other safety devices. The building inspector, a disinterested party, and sometimes and insurance rep are charged with ensuring that safety conditions are met. there were no disinterested parties with the loan debacle.
furthermore, if a catastrophe occurs, it is often investigated, and, if fraud, the company DOES NOT PAY the claim. pretty decent safeguard eh.
I've spent my entire adult life staring at pages full of numbers and building numerical models of what I'm seeing. I spent 20 years doing that as an experimental physicist, and over the past 5 years in a variety of other amusing pursuits.
These people are not performing statistical analyses. What they are doing is applying statistical methods to non-statistical processes. That's not invalid--I do it myself a lot. But if you don't know that you're doing that, or even worse aren't a tiny bit terrified by it, then you aren't any good at numerical analysis.
This may seem like a tiny nit pick but it's not. The underlying assumption in every true statistical problem is that the samples which are drawn are from a static distribution of known functional form--if possibly unknown parameters. Analyses of stock markets, voting patterns, or mortgage securities violate the underlying assumption--they are neither static, nor are the functional forms known. This leads inevitably to error. The only question is: how big is that error?
I must say I wholly disagree that this was a "black swan" event. It's only a black swan event if you build "low-dimensional models" (the main kind Wall Street quants build) and then insist on believing that nothing important happens in the other dimensions. Then sure, it's surprising when the circle expands as the sphere passes through your plane.
Honestly, anytime I've heard someone remotely "technical" talk about what they are doing, it strikes me that they have the statistical and modeling skills of a very good first year physics graduate student. That's great compared to the general public, but no faculty member who wants to keep publishing lets first year grad students--even very good ones--loose on the data unsupervised.
Tom - every human system relies on people doing what they are supposed to do. There is no system so robust that it runs on bureaucratic autopilot.
This is especially true in a society trying, at least nominally, to remain 'free' - then the ultimate check-n-balance is us voting in or out those who would be motivated (or unmotivated) to enforce those laws.
I don't think more bureaucracy or a larger or more 'independent' civil service class is the answer. I think we all have to insist via ballot box and petition and maybe even protest that we get better representation. Until we make that insistence - it won't change much.
I wouldn't be surprised to see alot of major banks having to restate years of financial statements before this mess is done (and we have another TBD). The SEC is not going to continue to buy into the whocoodanode theme forever. If the SEC does not cause restatements on many of the banks we discuss here, I'll make a tin foil sombrero and move south.
Every person, whos pension gets raped by this mess, should receive a nice clearly written writeup that describes all of this in language that even a 6th grader could understand.
The Pension was sold as a means to retire wealthy. It's dependent on ever increasing exponential growth.
Clearly not possible. The rape occured early, when the employee traded higher wages for back end promises.
As far as loan brokers knowing what they were doing,look at the number of newbies,and where they got their information.Want to learn how an option ARM works? world has a class! and they feed you lunch too!Go to your boss,they say come along to the next MLS Lunch,the eminent Dr Robert Eyler,a Phd economist at SSU gives a speech,with graphs PROVING that while prices "might flatten in some inland areas like the inland empire,there is NO POSSIBILITY of price declines within 50 miles of the California Coast" He gave that speech in May 2006 in Santa Rosa at the MLS lunch,and at other county MLS lunches up and down the state.Tv and Radio ads and shows all day,full page ads in the paper every day,all your neighbors at every gathering saying "real Estate only goes up!" and you are paid on commission...It takes someone with a genuinely skeptical attitude and a fair amount of guts to go against that tide.
I don't think more bureaucracy or a larger or more 'independent' civil service class is the answer. I think we all have to insist via ballot box and petition and maybe even protest that we get better representation. Until we make that insistence - it won't change much.
If I've voted for a Congress that's enacted a set of laws, which have been either signed by some President or had the President's veto overridden, then my expectation is that those are the laws which are to be enforced until, or unless, they're changed.
If we're talking about laws changed in a Constitutional manner then I'll join you in your insistence upon the ballot box as the only solution.
But if we are, then we shouldn't be talking about the need to change the enforcers of the law.
Yet we are.
So either Bush needs to be impeached and convicted for violating his oath of office, or civil service laws need to provide a better firewall against political appointees interfering with enforcement of laws that have already been enacted, or we need to cover the financial industry with so much red tape that it looks like Silly String[tm]. The 'or's are not exclusive.
Realistically, I'm not holding my breath on the impeachment part.
The investment banks and hedge funds should should all be nationalized, their books should be assessed, and what remains of their assets should be sold off. If you want to start a ratings agency, from now on it has to be a non-profit. Violate the rules and there need to be minimum sentences in place: you loose ALL the money you made illicitly, you go to jail for a while, and you NEVER are allowed to work in finance OR in financial consulting AGAIN. End of story. This stuff doesn't happen I'm moving to another country; I'm sick of it.
As far as loan brokers knowing what they were doing,look at the number of newbies,and where they got their information.
If this is in response to what I wrote...I mentioned being a "civilian". Where loan brokers got their information is someone else's problem (covered by an SEP field, per Hitchhikers Guide to the Galaxy). I thought CA brokers were licensed by the state...if so then since CA is one of the poster children for the meltdown I assume this licensing, along with the fiduciary requirement, are insufficient steps for those brokers not already inclined to be ethical. Since these steps are being proposed by Congress, I'll assume even the better Congressmembers don't have a handle on the situation.
"No price declines within 50 miles of the CA coast" contradicts what happened in the first half of the '90s (I doubt we disagree, I'm simply stunned that people had that little sense of history, though I know that's so).
I've read, somewhere, of Sacred Tomato brokers being told that being away from the coast was good because Us Coastals have Earthquakes. I'm not surprised that people in Sonoma were told the opposite by, apparently, the same people, though I think Sonoma's nicer than Sacto. Better wine, and prettier.
A busy day CR. As I've long said, you simply cannot separate economics from politics in our system. It all comes down to ideology.
Thanks for a great site.
It all comes down to hand greasing.
--
Free market is working. If there is more money to be made by dishonesty then dishonesty will rise. Also, during certain periods the honest loose out big to the dishonest in getting the business. In a secular society morality gravitates towards the lowest common denominator -- TRASH. America is going down the toilet because of moral corruption. Evildoers Greenspan, Bush and Bernanke have led the way. There is no going back until prolonged misery brings the old-time religion back in America.
It is the Morality, Stupid!
Jas
Wow. No one could have seen this coming. I mean, if the models didn't see it, then it shouldn't have happened.
Um, I don't accept the `garbage in, garbage out' defense of the rating agencies. They helped to develop the pricing models and were de facto co-underwriters. The models blew up when house prices declined, not when delinquencies started to rise (if price appreciation had continued, the collateral would be appreciating). The RA models made no provision whatsoever for declines and wouldn't even accept negative pricing as a parameter.
I have no problem with letting the free market work as long as we let it work on the way down too.
Moodys monitors began to make inquiries with the lender and were shocked by what they heard. Some properties lacked sod or landscaping, and keys remained in the mailbox; the buyers had never moved in. The implication was that people had bought homes on spec: as the housing market turned, the buyers walked.
Could be fraud, too. I've read about some large, gutsy mortgage fraud rings around here.
What a mess is right. It was no secret to anybody in the industry that recent vintage loan quality was poor. Moodys should have known, and in fact I think they probably did. I know people who work there and have dealt with them professionally. I just don't buy this ignorance they're feigning.
how could Moody's not recognize that credit conditions and terms that these loans were granted under had changed SO DRASTICALLY over the past several years that their historical statistics were almost useless because they were based on a totally different subset of borrowers, terms, and credit conditions. It was using statistics about apples in order to draw conclusions about oranges.
she quipped "we're not loan officers, we're statisticians". well maybe you should have taken a look at the ridiculous terms, credit scores, etc. of the underlying paper and borrowers and compared them to the terms of 5, 10, 25 years ago.
what a lame after-the-fact excuse to deflect blame for missing this bomb as it ticked right next to their HP calculator.
everyone stopped paying attention and doing what they were suppossed to cause they could make mint by cheating since everyone else was as well.
Everyone got caught polishing the turd.
I think Jas deserves some credit for being so vocal about that a long time ago
I think a lot of people give JJ credit for his calls on some of this stuff . . . he is just such a dick about it, no one wants to give him any credit.
As for the ratings agencies, they were pulling in huge fees for rating these stinkbombs. Without their complicity this mess could never have happened.
The ratings agencies will pay the fiddler through state AG investigations and plaintiff's suits, you can rest assured of that.
Must have a bunch of stupid pigeons at Moody's. i saw this disaster building over 5 years ago. Where's my multi-million dollar pay package?
Ive seen similar types of things happen before, first hand. It doesnt matter if some of the analysts say, look, here is how this model will work, because in the end, they dont decide how the model gets built. Their "teams" will not be picked by them, but they will have important players who rule out brining in information that would give a result that doesnt maximize the firm's profits. The question is, over what time frame. Short term, profits boom, but long term, kaboom. Analysts might look at the longer picture of reality, but the business decisions will be made on the short term, and denial of important but uncomfortable truths will be part and partial to the end result.
I can tell you that in my first hand experience, no one wanted to believe house prices could go down, and showing them information that proved that they HAD gone down historically was not enough to convince anyone that it had ever happened. Because, if you argument is that house prices always go up, you have to deny those facts. And so it was...
Someone may have already mentioned this but, Pension Funds have to mark to market and these down grades are going to hurt. This paper was widely held and governments with defined benefit plans are going to be scrambling for money at a time when there is no money. Good luck to all!
I think Piter is exactly right. I wonder how this system is going to survive.
The US has been operating on 20 year credit expansion odyssey that is now ending. I have multiple friends with mutliple homes and we are in our mid twenties. How is this sustaiable? There is WAY too much leverage going on. The US goverment, consumers, corporations cannto support this amount of leverage and credit growth period.
ipodius writes:
Moodys did what they were supposed to do: they took the historical data and they build models on it. Neither they, nor anyone else for that matter, was prepared for what happened to the chain. And frankly none of them were interested in the chain because, well, they had the models.
I agree that they weren't interested, but they certainly could have been more prepared for what happened. Ill venture that most readers here were. Even a mediocre modeler goes beyond simply fitting (historical) data to consider underlying principals and fundamental logic. This wasn't done because the conclusions were incompatible with maintaining the short-term profits. After all, if you can make enough in a few years to throw in the towel, why worry about the future?
ipodius: "Frankly I think ratings should be done by the government"...
I am sure I missed the sarcasm intended.
So either Bush needs to be impeached and convicted for violating his oath of office, or civil service laws need to provide a better firewall against political appointees interfering with enforcement of laws that have already been enacted, or we need to cover the financial industry with so much red tape that it looks like Silly String[tm]. The 'or's are not exclusive.
So what if Bush-like politicos appoint the civil servants and make it so they are 'independent' of future elected officials? Then you have just institutionalized non-enforcement.
The people are the only check-n-balance that works. If you want good government you have to elect good governors. No if and or buts. Fail to do that and you get what we got.
In California there are 2 types of Loan brokers,those who hold a real estate sales or brokers license,or a finance lenders license through the dept of corporations.both have to pass a criminal background check.A real estate sales licensing test is a basic vocabulary and math skills test with a bit of real estate and agency law tossed in with a taste of appraisal technique.Hopefully you have an honest and competent Broker who will take the time to teach you the way the business works,but if you are not out hustling for the biz the lenders want you will not last long enough to exercise your curiousity.And if you question the conventional wisdom,you are demonstrating the kind of negative attitude that is Anathema to a culture based on selling blue skies and sizzle.There was a good deal of negative selection in Real Estate the last few years,and it is not the only field where that took place.As far as "Fiduciary Duty" The agency relationships in Real Estate are murky,to sale the least,if you select a Broker to find you a house,and they do,they are usually a sub agent of the listing Broker,they owe you full disclosure of material facts,and fair dealing,but there is no enforcement.
Sometime early in 2005, I was at a neighbor's party, in Newport Beach, CA. My new neighbor was a successful mortgage broker who had just bought a house on the harbor with a dock, he paid about $4M at the time, which was a lot of money back then.
As I came to find, there were a number of successful mortgage brokers at the party. But at the time I had no idea what 'subprime' was.
One broker that I was talking with told me of the 8 properties he had bought in Phoenix in 2004. He mentioned they were "income properties" and and I mistakenly assumed they were rental apartments and so I asked some sort of question regarding the rental market in AZ. He laughed and said, "No, I don't rent them. They are high-end houses and renting them only depreciates their value. I refinance them."
Soon after that conversation I started shorting home builders.
So what if Bush-like politicos appoint the civil servants and make it so they are 'independent' of future elected officials? Then you have just institutionalized non-enforcement.
That's why people like Monica Goodling need inconvenient questions from people with prosecution authority. They need more such questions from more such people, those admitted directed civil service "appointments" are part of what needs independent investigation.
I have no problem with electing good people to the Presidency. We failed, though my efforts were otherwise. Checks and balances within our system are supposed to allow such mistakes, or even prioritization choices to be charitable, with some pain, but still...my point is that the checks and balances have failed, not simply enforcement by the administration. Congress needs to restore checks and balances regardless of what happens in this particular instance.
"At the same time, regulators - despite numerous warnings - mostly ignored the problem, apparently for ideological reasons ("let the free market work").
Well! it worked didn't it?
Did it worked as intended? Not quite!
If you want the free market to work as intended, you need regulations.
It's like a cell. It lives in an ecosystem, is highly efficient, but regulated. When it becomes unregulated, you get....cancer!
What makes us believe we are so damn smart that we can do better than what Nature learned in billions of years?
Hubris.
NC Jim writes: The rating agencies did not just rate securities based on statistical models of past performance they charged big bucks to advise securitizers on how to design the products in order to get the AAA ratings.
BING! We have a prize winner. Moody's effectively published their model to their clients, who then "optimized" their data to fit the model... oh, INCOME is a parameter? Stated income solves that!
As long as there are enough degrees of freedom outside of the model, you can play with the data to fit any known model to have it "predict" any desired outcome... and all the parties are well-paid, and happy. Until the prediction fails.
Modelers use one method known as cross-validation scoring to test models... I once had an assistant that produced models that had AMAZING cross-validated scores. I asked how he did it... simple, he said. He optimized on the cross-validation score. Statistically illegal, of course. Same idea here.
First...someone signed a credit app.
Then.....
I've not yet heard testimony where a weapon was used to secure that signature.
Gary, you seem to be in a particularly bad mood this evening.
Did Os- lose or something?
Congress needs to restore checks and balances regardless of what happens in this particular instance.
Tom | 04.22.08 - 11:21 pm | #
Agreed.
My point was I do NOT see a larger & more 'independent' civil servant cadre as being the solution... I see that as a potential refuge where the problem can linger & get worse. Everyone thinks they will pick servants compatible to their world view - benevolent & wise - I don't believe that is likely at all. You get a group (the civil servants) enthroned to protect THEIR interests... if not immediately, then eventually. They too need good cops - the electorate.
There is no other workable alternative except good people enacting & executing good policy. There really are no social autopilots or bureaucratic deities gonna save us - THAT was my point.
The ultimate pitfall of a democracy where central planning is an important role. You can't always pick the "right" people to put in office and when you are wrong we all suffer the systemic risk.
Orrrr, orrrrrrrrrrrr, it's an argument for less powerful centralized government and stronger, more accountable local government. Same can, and should, be said for businesses. There's the old Chesterton chestnut:
"Big Business and Big Government are very much alike. Especially Big Business."
Cheers,
prat
Jack S-, hearing that would give me the shivers.
I have not met a cavalier sociopath like that. Calmly working the system to steal. Wow.
I need butter!
I think the assertion that they were just statisticians in bogus. Rating agencies are supposed to assign ratings based on credit quality and not just the output of some model. Afterall, the people who assign those ratings are called analysts and not just a statistician. If all they are going to do is put information into a model, then there is no value added by the people doing the ratings and they should be paid minimum wages. Credit analysts by nature are supposed to observe trends and determine what factors can impact credit qality. To publish a rating and not understand the collateral supporting that rating sounds like the ultimate in negligence. Such negligence should be sufficient for investors to bring legal action against the rating agency.
Which rating agency does Warren Buffett have an investment position?
Steve " The RA models made no provision whatsoever for declines and wouldn't even accept negative pricing as a parameter."
I think that should have been the focus of this story. See if price declines were ever explored in the modeling and why not. If the answer is "we've never seen declines so we didn't condifer it", well, we had never seen 20% y/y increases for 3 years running, in the markets that represented the bulk of the lending either.
You get a group (the civil servants) enthroned to protect THEIR interests... if not immediately, then eventually. They too need good cops - the electorate.
At some level, I can also agree. I think one of the points of a system of checks and balances is to make "eventually" a higher barrier. At the end, if voters are firmly convinced of something then a democratic system is supposed to give it to them. The barriers test that conviction before simply turning around on a dime.
Civil Service independence is another of those things which Congress has already legislated. Asking that Congress build on what it's already done, and what's generally worked for over 100 years, strikes me as a fairly conservative step. Silly String [tm]...less so, though at this point the lending industry deserves no less.
Oh come on, CR. You had me right up until, "At the same time, regulators - despite numerous warnings - mostly ignored the problem, apparently for ideological reasons ("let the free market work")."
You should know better than that. Clearly there is no "free market" at work here. We have a distorted market created by government intervention. GSEs, the Federal Reserve, FHA, the governments who bought the loans, and now except them as collateral!... all of these entities are excplicitly involved in this mess. Don't blame the free market when we clearly do not have one here.
This is a terribly wonkish comment.
Everyone is discussing the failures of these analyst's models and decision making tools. People talk about the statistics and model development. As a student of economics and statistics I have the question the rigor and the honesty of these models.
Statistical literature has been challenging the methodology of statistical modeling, especially the data driven model building. The model building has become much more biased than previously thought which has given false sense of confidence in their predictions. My experience with mathematic statistical teaching compared to business statistic methodology and teaching shows the discrepancy in the depths of the analysis.
barely:
The RA models referred to HPA' - house price appreciation - which was forced to be positive, becauseon a national basis' house prices had risen for 50 years. Fitch admitted on their conference call last March that their model would start to break down if HPA remained flat for a period of time, and would break down completely' if HPA declined by just 1% or 2%for an extended period of time'. Their model required uninterrupted HPA of at least low single digits for the entire life of the loans.
Dr. Foland's comments above are the smartest commentary on this whole model-driven financing mess I've read so far.
Blame the stupid model, but don't blame the dolts who created the model or put blind faith in it.
I think Tanta hit the nail on the head a couple weeks ago when she was talking about the hidden default rate during the runup. Sure, people who couldn't ordinarily get better than a 75% LTV weren't "defaulting" at a high rate until 2005 or so. That's because by the time they made (or missed) the first few payments, even if they had a 100% NINJA exploding liar loan on Day 1, their LTV was in the 70's or 80's when they started feeling the heat a few months in. They just called their bestest friend in the world, Mr. or Ms. Broker, who helped them refi or find a bigger house with their newfound equity.
I'm sure that all along, like Tanta says, had anyone been paying attention to the level of delinquency in the prepays, it would have been clear what was going on. And the model would have been a whole lot more, uh, modellish.
Join us next time on CR for a very special episode of "Hoocoodanode?!??1!"
One broker that I was talking with told me of the 8 properties he had bought in Phoenix in 2004.
Oh, there were quite a few Californians doing that here.
My g/f worked in the title biz during that time and she said that in her humble opinion, the Phoenix bubble was driven in very large part by California and Arizona flippers buying several houses at a shot.
"I have not met a cavalier sociopath like that. Calmly working the system to steal. Wow."
I honestly don't think he was sociopath, looking to work the system. He thought he was an entrepreneur making effective use of leverage.
What horrifies me is that he was not alone. There were tens of thousands of "smart guys" making 'effective' use of leverage to capitalize on the latest bubble -- mortgage brokers, bankers, investment bankers, and hedge fund managers -- none of which could be described as 'sociopathic'.
A single sociopath we can deal with. An army of "smart guys", that's a different problem.
The real problem with the rating agencies is the same as the real problem with the accountants -- they're being paid by the same people they're supposed to be rating or auditing.
I seem to recall reading somewhere that in the case of the rating agencies it was not always so. That once upon a time their income came from the purchasers of bonds.
I've long argued that if accountants are going to be paid by the people the audit, then they should have to buy audit insurance. If there were an insurance company with skin in the game, they would demand that the auditors make serious and effective efforts to discover fraud, and would never allow the kinds of things that went on between Arthur Andersen and Enron.
The same should be done with rating agencies, if no way can be found to go back to paying them from the buy side. If the rating agencies were liable for the reliability of their ratings, and had to carry insurance against rating failure, then the insurance companies would demand more rigorous efforts (and it would all cost more).
Warren Buffett must be pissed.
I've long argued that if accountants are going to be paid by the people the audit, then they should have to buy audit insurance. If there were an insurance company with skin in the game, they would demand that the auditors make serious and effective efforts to discover fraud, and would never allow the kinds of things that went on between Arthur Andersen and Enron.
Okay - I'm a little slow - if the accountants & rating agencies have conflict of interest because they are paid by those they audit & rate... then why won't the insurers have similar conflicts since they too will get paid by those they insure?
And since it only goes bad when it goes bad... why will insurance enforce more discipline? Without insurance if the deal goes bad the auditors & rating agencies suffer directly... with insurance the insurer suffers. But none of that happens UNTIL the deal goes bad... a rare event. Until then it is just collect premiums from counterparties. Ka Ching.
Does somebody have to reinsure the insurers to keep them honest too? Or regulate them also? If regulation is the answer then why not skip the whole insurance thing and regulate closer to the original transaction (RAs & auditors) instead of layering more transactions on top of transactions.
And that doesn't even get into the counterparty risk issue of adding insurance... see derivatives & their insurers, like Ambac. Is that better?
My gut feel is the only ones who benefit from insurance in this instance are those collecting commissions from selling that insurance.
The end problem is the result of the investors. They were too willing to take the rating agencies AAA rating without looking at the underlying paper. If the investors weren't looking to get a free lunch there would have been no bubble.
"Warren Buffett must be pissed."
Why? The market is finally about to throw Buffett his long-awaited pitch. He's got lots of cash, billions in free cash flow, no debt, and a nose for VERY good deals. The next 5 years will be Buffett's swan song and we all get to watch, and hopefully some of us learn for the next time. I suspect that Buffett has never been so optimistic for his (i.e. BRK's) prospects.
HAHAHAHAHAHahahahahaHAHAHAHA
HAHAHhahahahahaha....ahahah...whew.
Good one.
The fees and bonuses are made.
Or were you planning to put the corporate shell in jail?
It is all just so pathetic and sad. The bottom line is that we got "had". No body on this site would even be here if you weren't looking for that "we got had" confirmation.
You can talk statistics and models until you are blue in the face. It's over for democracy in the US. And the concept of capitalism, which never really existed, is, sadly dead. Because it should have been, combined with democracy, a real winner. But you can not say we did not try, because we did try.
Some time down the road and some where else, it will emerge again and hopefully with more success. But you know, for a while, at least since I was born in 1952, I had the priveledge of being born in the greatest country on our planet for our time and I got to grow into late adulthood living the dream.
I just wish that my babies and their babies could have had as much joy. If I was not an avowed atheist I would become a true believer and swear we have seen "the end times".
I want to meet the SOBs that dreamed up a $1.00 a barrel ethonol subsidy paid by our government, the US taxpayer, to ethonol producing companies, as an example of the tragedies of the current time. As if killing people in the Middle East is not enough, we have to starve people all over as fast as we can.
"My g/f worked in the title biz during that time and she said that in her humble opinion, the Phoenix bubble was driven in very large part by California and Arizona flippers buying several houses at a shot."
And I would guess these 'investors' were all considered 'prime' borrowers by their lenders. This is one of the reasons that the problem goes well beyond 'subprime'.
ipodius,
Any good stats person could've graphed income against prices and figured out when they went into uncharted waters that made the model void.
Money corrupts.
Incentives drive behavior.
Excuses are worthless.
My g/f worked in the title biz during that time and she said that in her humble opinion, the Phoenix bubble was driven in very large part by California and Arizona flippers buying several houses at a shot.
rnato, sprung | 04.22.08 - 11:59 pm
Sounds familiar. One acquaintance was very proud of his son that had purchased about 25(!) properties in Phoenix as investments a few years ago. His son was about 25 at the time...
We saw the writing on the wall and sold our home in '06. Even moved to New Zealand, although the move had a bit more to it than real estate cash-out.
Am I the only one here who sees the origin of this mess beginning in the voodoo economic policies of Ronald Reagan?
Some are suggesting that a hands-off attitude by government was a big contributor to the housing bubble.
I'd like to suggest that the housing market is where it is today mostly because of over-involvement of government. (And I'm not a Republican.)
Imagine a world without the GSEs, the FHA, deductibility of home mortgage interest, tax-free gain on sale etc. In that world, I'd guess that house prices would be much lower and less volatile. You don't have to clean up a burst bubble if you deflate it before it bursts, but you don't have to deflate it if you never let it have too much air in the first place.
Government supplies a lot of the excessive air for housing. Take away the government price supports (because that is what these supports all end up being) and you'd have far fewer and far smaller problems.
Actually the problem described comes from a lack of brains. Lack of intelligence. The stupidity of it all was pretty obvious. If people can't admit something is stupid when it is, then what's to do?
We are all ratings agencies now!
Andrew Foland: I must say I wholly disagree that this was a "black swan" event.
I'd have to agree. Human over-confidence can lead to tragedy? That's not some low probability event. It is pretty well documented. Icarus learned it the hard way a long, long time ago. Bernanke's attempt to force the distortion in prices to stick might destabilize the world enough for the next great War. It's probably time for a correction in the population curve anyways. We are overburdening the carrying capacity of the land.
Imagine a world without the GSEs, the FHA, deductibility of home mortgage interest, tax-free gain on sale etc. In that world, I'd guess that house prices would be much lower and less volatile. You don't have to clean up a burst bubble if you deflate it before it bursts, but you don't have to deflate it if you never let it have too much air in the first place.
Government supplies a lot of the excessive air for housing. Take away the government price supports (because that is what these supports all end up being) and you'd have far fewer and far smaller problems.
We are all whipping the wrong horse(s). There are bubbles aided by gov't... this one for example. There were past bubbles without much gov't help (1800s mania's & busts, tulips, etc.)
I don't think the GSEs were 'the' problem, nor was the home income tax exemption... they were there, a factor, but not the cause. And I don't blame 'the market' per se. It was a convoluted mix of all those things coupled with greed's temporary triumph over fear - always an ingredient when bubbles form.
The area gov't failed was regulating market participants. Specifically - not insisting that each step in the transaction chain be fully transparent to all other participants.
That and making sure participants & their counter parties either have sufficient resources to back up commitments OR that their lack of resources is FULLY disclosed & agreed to. Wholesale 'brokered' lending coupled to multiple orders of securitization made a mockery market transparency. Gov't needed to make sure participants disclosed all information & were accountable for their part. Didn't happen.
I believe it is a fools errand to believe there ever was or ever will be a truly 'free market'. All transactions are subject to laws if none other than ownership & title transfer. And laws are products of political systems. So just like it is a fools errand to lament the loss of the gold standard (do it if you want but it ain't coming back) it is equally foolish to believe there will ever be a truly 'government free market economy'. We will have the option of more or less gov't and better or worse gov't... but no gov't is not an option as long as there are people.
The best we can expect - and we should demand it actually - is efficient & effective gov't. Minimal foot print, low cost and effective execution.
We didn't get any of that. In fact it appears we got the worst of all worlds: an expensive & ineffective gov't funded with debt that actually worked against our better interests. That almost takes talent to pull off.
dryfly, your points are well stated and convincing.
On some reflection, I think you are right, better enforcement would go a long way to preventing and fixing financial messes like this one. I read on tickerforum that the SEC was investigating Bear Stearns CDO marks late last year, then inexplicably just dropped it. Sen. Grassley is trying to get them to come clean on why the lax oversight, but they are stonewalling him, apparently.
One thing I would recommend to anyone who is angry about this whole thing ... find an outlet for your feelings. I've taken up writing letters to my Congressmen. It may not accomplish much, but at least it gets my feelings out on paper.
I liked the Drexel U statistician/engineering analogy from last night, but came to a different view than their expert did.
The RAs, for reasons known to themselves at least, indulged in design errors with now disastrous effects. The same can happen - has happened - in structural engineering, viz, the Citicorp building on Lexington in NYC.
The difference is that the engineer, William J. LeMessurier, realizing the problems post-construction, made the necessary calls. Not an easy thing but, considering the probable consequences, certainly the right thing.
The RAs did the equivalent of load testing, failed to appreciate the equivalent of shear, and also failed to make that call. That's a failure of ethics, and not of analysis only. Regulation wouldn't have - or didn't - stop either one from making an error. Personal integrity made a difference, though.
Jay writes:
Bill: Investors don't bear any responsibility? We should have blind faith in Moody's ratings like religious fundamentalists have blind faith in their symbolic leaders?
Jay | 04.22.08 - 9:13 pm | #
Jay: Investors made their choices, many of which were dumb, and have paid the price for that stupidity. But look at the ratings agencies. They have a special charter and place GIVEN to them by the Federal government. In a free market they would have to pay for that charter. Or, and this is I think a better way to look at it, they have a duty to the public in exchange. This is the intention of the laws that use the ratings given by these agencies to derive capital standards used to protect our banking system, life insurance company system and pension system. We protect these things because they are an integral part of our free market. Since the laws of our country basically drive the demand for the ratings, not an organic demand by investors for analytical talent, the ratings agencies owe us all their fiduciary duty. If they fail in that, and they have, the laws need to be changed so that we don't have investors (indirectly) and issuers (directly) paying for something that is worthless. Worthless except that it is required by law. Agree? Or do you support the perverse profits the ratings agencies derive due to their special place in our regulatory regime?
Gari N. Corp writes:
Lowenstein neither asked why debt investors chose to rely exclusively on agencies nor how the agencies might be replaced. The agencies screwed up quite magnificently, but the idea that we'd premise the operations on debt markets on their say-so is nuts.
Gari N. Corp | Homepage | 04.22.08 - 9:12 pm | #
Gary: You are dead on. The Federal government outsourced regulation to our ratings agencies. The agencies failed us. We need to come up with a new model that doesn't include them. The ratings agencies should just go back to earning fees from investors that want to pay them for their analyses (which right now, might not be too many investors).
Still having a tough time divining why investors buying billions of mortgage paper effectively outsourced their credit analysis function to the rating agencies.
Shouldn't investors do that in-house given the sums involved?
"Hey man, I just drive 'em. I don't know what makes 'em run." is NOT an excuse that I'm willing to accept from Moody's. They CREATED the rating models. They sold the ratings as being an accurate measure of relative risks between various bonds. And then they told the creaters of the bonds "What lies to tell us."
Clyde, I'm susceptible to your view in theory.
However, in-house resources adequate to the job meant the replication of services available in the marketplace, and for a long time the RA's appeared to know their stuff. How would you have justified that duplication/parallel service in the environment of 2002 through 2005 or 6 or even 7?
Even if fund managers had some bad feelings, how successful would they have been in pursuing an alternative in-house?
So, who pays the ratings agencies? If the investors, then have the rating agencies paid much of a price in terms of lower prices/lost business? If they were paid by the creators of the securities, then why did anyone listen to the ratings agencies?
Craig wrote: why did anyone listen to the ratings agencies?
Craig, it's the law. Certain institutions can only buy securities with certain ratings. Other institutions have many of their capital charges based on the ratings of the securities they own. This is why the ratings agencies are especially culpable. They were not just selling research. They had a special role GIVEN to them by the laws of our country.
Craig,
Lordy.
That's like saying 'who paid for the survey?'
If people generally had even a modest share of the critical instincts, we'd be living in a very different world.
dryfly writes:
yeah we got Eliott Spitzer instead.
"Even good cops like to get laid. His chastity would have made sub-prime not happen?"
The problem with Spitzer was not hookers, though that's what helped to take him out, made easier by his hypocritical earlier pursuit of indictments against prostitution rings. The problem was his tyrannical spirit, which made him indistinguishable from the malefactors he was pursuing.
When the distinction between the cops and the malefactors vanishes, your system has descended into rule by tyrants - - a perpetual struggle between rival criminal gangs. As Obama's and Hillary's rival crews go to the mattresses, we will see this unfold on one side of the empire mega-party system. In the fall it will be "whoever" vs "Keating Five" McCain, who did so much to make elections safe for incumbents (McCain-Feingold).
Ron Paul has the right ideas, and is modest enough to realize that the imperial presidency and Rome-on-the-Potomac both need serious down-sizing, but his executive skills are lacking, even for a reduced executive role. Perhaps someone more qualified will run along similar lines in a future canvas (if the current system allows for that before breaking down in a more spectacular way).
Patientrenter has it right: as Jim Grant has pointed out, the role of government housing policy has been to bring together lenders who shouldn't lend with borrowers who shouldn't borrow, and make them both comfortable with the loans by subsidizing the whole process in a variety of ways.
"Under-regulation"? What a laugh!
Our expertise is as statisticians on an aggregate basis. We want to know, of 1,000 individuals, based on historical performance, what percent will pay their loans?
Wow. Based on the performance of these securities you've done a really horrible job. Does anyone accept responsibility anymore?
Hey CR & Tanta-
I guess this does not qualify as 'walking away' in your book does it?
New flash: This is 'walking away'
During the boom 35% - 40% of home purchases from were 2nd homes. Historically, less then half would have been 2nd homes.
You are on the wrong side of history.
Cheers!
Okay - I'm a little slow - if the accountants & rating agencies have conflict of interest because they are paid by those they audit & rate... then why won't the insurers have similar conflicts since they too will get paid by those they insure?
There's a world of difference between an appraiser and an insurer. Insurers aren't getting paid by those they rate, they're rating those who pay them ... because those payments carry a substantial downstream risk. Appraisers, like Moody's, are getting paid without taking on any underlying risk.
The motive in the first case is to accurately quantify the frequency and severity of all potential loss scenarios so that the insurance can be priced accordingly.
The motive in the second case is to earn fees - preferably from large, regular customers.
Moody's wasn't insuring anything; they were appraisers and, knowing who was buttering their bread, acted accordingly. You can bet that Lloyd's of London, placed in a similar situation but asked to insure these MBS's instead of rate them, would not have as blindly followed St. Patrick out of the village of Rationality.
Wow. Based on the performance of these securities you've done a really horrible job. Does anyone accept responsibility anymore?
Let me put it this way.
I want to buy a house and don't have access to comparable sales data.
Along comes Joe from a local appraisal company, who will offer to do a detailed assessment of the value of the house I want to buy. Oh, and it won't cost me anything, either, because the seller is paying his fees.
Mightn't I, the buyer, be a wee bit ... umm ... skeptical of this arrangement? And perhaps arrange for my own independent appraisal or, failing that, want Joe to bear some contractual liability for an inflated assessment?
Sure, the appraiser bears some fiduciary responsbility to all parties but, in the end, he who pays the piper calls the tune.
The most interesting part of the article to me was that government did not care. After the collapse of Penn Central in 1970 and the SEC was faced with the question of how to measure the capital of broker-dealers... "in effect, the gov. outsourced its regulatory function to 3 for-profit companies."
Issuers were thus forced to seek credit ratings. Agencies started charging issuers and "it put the agencies in a conflicted position."
Also of interest to me was the discussion about Monte Carlo simulation. Because it seems to me if this had been done properly, and the variation in the outcomes of the Monte Carlo runs studied in depth, it should have indicated vulnerabilities in assumptions. In a Monte Carlo model, assumptions should have been entered as probability distributions of various kinds and run over and over. Then the output should have been sifted to identify what kind of initial conditions result in greater loss. This should have been written up by researchers. Was this done?
I hate ignorant articles such as this one. To sum it up simply for the author:
THE RATINGS AGENCIES DIDN'T FAIL
GOOD RATINGS ARE FOR SALE IDIOT!!!!
Yeah, right Noble...we also got Sen. Vitter too, remember? Elect McCain is you want four more years of these clowns.
dryfly,
Back in the early 1800s, boiler explosions used to kill a lot of people. Then boiler owners were required to get insurance. Since the insurance companies were on the hook for the losses, they demanded rigorous inspections. Boiler explosions became rare events -- even though the insurance companies were being paid by the boiler owners.
Yes, the insurance companies, too, would be paid directly or indirectly by the firms being audited or rated, but their potential losses from any single "boiler explosion" would be far greater than what they would be paid by any one firm. And as insurance companies they would be forced by government regulators to maintain adequate reserves against claims. The key difference is that the insurer's potential losses from an audit or rating failure would be much greater than their revenue from any one customer. Being on the hook for large losses, they would demand rigorous audits and analyses.
jg-
you have obviously never lived or done business in SoCal. What Jack Staub descirbed is nothing. Fraud is rampant in everything there.
One of the worse thing I have ever seen was a shopping center owner burn down a 5000 sq.foot below-rate restaurant to cancel the proprietors lease, sub-divide the spot, re-rent at quadruple the existing rate to changethe CAP and existing value by some 400-500k.
That is when I decided that I had to leave LA before I ended up performing corporal injury upon someone.
You people are so intolerant!
"you simply cannot separate economics from politics in our system"
"Yes, and I would add 'ethics' as well."
America has a diversity of ethical standards - we must tolerate (if not embrace) them all - this has been preached
in corporate, government, academic, and journalistic venues in MANDATORY seminars for decades.
The chickens are returning to Capistrano.
I like the idea of the ratings agencies providing insurance for their ratings. Trouble is, how will we know how much capital they should carry?
Q-, I live here in SoCal; I need to get out more often and interact with a broader range of folks, obviously!
J-S-: okay, maybe I misread the fellow's profile.
FT W-: IMO, the mess began in '81, when personal consumption/GDP began its unrelenting drive up. I say the cause was overconsumption by Baby Boomers and overindulgence by them of their progeny.
Today's problem is household debt/GDP, not government debt/GDP (although I abhor deficit spending).
Lots of good posts in this thread. I liked maybe 30% instead of the more typical half dozen interesting posts out of 150.
In terms of causes, don't forget that things worked pretty well for 20+ years. This relative success led to a weakening of controls at every link in the process.
Some parts of the system had worked very well over an even longer period of time. Success bred a laxity in controls at every stage in the process. By the same token, failure will significantly tighten controls at every stage in the process, to the extent that I don't think we need a lot of new rules, regs, or even enforcement to prevent a repeat of this.
Among other things, ratings agencies have done very well in conventional credit analysis. That is, traditional credit of traditional businesses. They had built up a great deal of credibility because of their success in accurately rating bonds. Stuff you can do using ratios, which is taught in elementary school. And if you have enough zeros, you don't want to rely on 5th graders, but it you don't need a decent first year physics grad student. As far as DD on the inputs, GAAP is more then good enough to compute coverage ratios. Its flaws have more to do with much smaller issues regarding timing and management of earnings.
Yea they messed up Penn Central bonds, but these are financial systems and an occasional failure every decade or two seems reasonable. By failure I mean a AAA defaulting in a year. Count them on the fingers of one hand.
No one with a brain will ever buy a multi billion CDO without some DD outside of a rating from an agency. Which is still maybe overdoing it, since the rating agencies will be using data from the mid 00's for the next 20 years. In a year, you could probably buy a AAA cdo without any DD, assuming they are still around.
Just plausible controls at each stage is more then enough to prevent a repeat of this excess.
In general, there are advantages in aggregating and pooling, at the cost of transparency. Once again, it worked really well at first but poor incentives led to excesses until we got to extreme examples like CDO^2. No one in the future will be willing to sacrifice that much transparency to pick up a few basis points of yield.
Also, on the buy side, I think that the amount of fees generated on this crap will look absurdly small, considering the damage. Maybe for some individuals it was a big number, but C lost $100 billion of market cap for a few hundred million in fees. By this I mean that they were making a few basis points on their SIV's. The bond insurers, who would have done fine if they had stuck to regular bonds, were charging a few basis points again -- picking up nickels in front of steamrollers. Being off by a couple of orders of magnitude is truly impressive, and it took enormous computing power to develop engineered products and rating/pricing models to fail this spectacularly.
Another poster touched on it, saying that "money corrupts".
The root of the problem, which few care to deal with, is right in the main post: "Mortgage brokers didn't care because they would sell the loans immediately and collect their fees. Wall Street didn't care because they could package the loans and sell them to investors. [and at every step along the way, people earned promotions and bonus check] Investors would have cared, except they trusted the rating agencies. [because no one wanted to be left out or lose bragging rights to his neighbor]...
The post also mentions the rating agencies, which apparently are paid by the organizations they rate. Expecting them to do anything other than act as a rubber stamp would be asking people to avoid making money. And the internal culture of the rating agencies brought huge pressure on everyone to get on the bandwagon, along with the potential to lose ones job if you don't.
Everyone got paid by ignoring the potential problems, directly or indirectly. That's why it happened. And they get to keep the money now. No downside, so why not? It's not like morality has any place in economics.
Wait! Stop me if you've heard this one before:
"Lies, damn lies and statistics!"
As someone who has taken all sorts of stats and investment courses, let me tell you something: statistics are meaningless. In fact, good investing exploits the misuse of statistics by the many. Case in point: Paulsen Capital.
The real problem here is that Moody's should have incorporated the changes in origination standards into their models. I've got another one here -- wait for it: "Garbage In, Garbage Out"! Hoowhee, I kill myself. This is easy to contain but when you have the shiny-haired, perfect-teethed sales people involved, Who's gonna say no? In an age where critical thinking has been utterly abandoned for an emotional need for irrational trust, well we're getting what we deserved.
Excellent articlo, thank you for the post.
What happened to housing was an outlier...statistically not supposed to have happened.
Oh, c'mon. The '87 stock market crash was a 12 standard deviation move and shouldn't happen more than once in 3 billion years, but it did and was nearly repeated 2 years later in the '89 mini-crash.
you simply cannot separate economics from politics in our system
Yes, and I would add "ethics" as well.
I'm as much for free markets as the next guy, but this whole debacle has to end in more regulation.
The current crop of stooges running our government either don't get it, or as Jas so consistently points out, are evil men in cahoots with a criminal cabal running our banking system.
The kind of abuse described here needs to be made illegal, as in "go to jail and smoke lucky strikes with bubba." Future generations must learn from our stupidity, and say "never again."
Elvis writes:
It all comes down to hand greasing.
That would be ideology then.
What do you think will happen when the general population gets as angry as the commenters on this blog?
Or will they just keep stoically driving their 1 hour commute, emptying their wallets to fill the gas tank, and escaping reality into iPod tunes and "reality TV"?
Personally, I think folks are gonna wake up, probably when their stock portfolio and their housing equity both head south another 15-20%...and they're going to be very grumpy.
I'm as much for free markets as the next guy, but this whole debacle has to end in more regulation.
My sis was a prosecutor - DOJ white collar & tax (now a history prof - she burned out)... she would often 'say good cops make good citizens'. Our cops went to the coffee shop & never came back. The citizenry figured that out pretty fast. Result is the mess we see in front of us all.
woe be to incumbents
Could be fraud, too. I've read about some large, gutsy mortgage fraud rings around here.
Joy | Homepage | 04.22.08 - 8:24 pm | #
On the front page of our daily rag it told the story of a guy who bought 5 houses ($350k each) on the same street and got mortgages from five different lenders, no money down. He was supposed to get a kickback from the seller in the way of landscaping contracts, which never came through. He lied on the app and told each lender he would occupy the home. They're now appraised at $250k.
I'm still wondering why the lenders didn't check this guy out, you know, just a little due diligence.
Personally, I think folks are gonna wake up, probably when their stock portfolio and their housing equity both head south another 15-20%...and they're going to be very grumpy.
ShortCourage | 04.22.08 - 8:58 pm | #
They wake up if & when they lose their job. Paper losses are ephemeral... job losses are tangible right now whatyagonnadoaboutit in your face.
I'm so sick of calls for more regulation.
All we need is common sense enforcement of common sense laws, along with an environment where peer pressure works to prevent fraud, not support it. The latter will come naturally at some point, I'm not so hopeful about the former.
"let the free market work"
In other words, if you don't do your own due diligence or make sure if you are going to outsource the process that you understand the third parties incentives and methodology you deserve to have a large poll shoved up your ass.
They (Moody's) were worse statisticians than they were loan officers. As loan officers, they did nothing. As statisticians, their product was devastatingly bad. If they had done nothing, we all would have been better off. They're in denial because to admit that you're personally the cause of so much damage to the world must be hard to take. If you've taken one semester of undergraduate stats, the problems with the models were obvious.
I'm seeing Albert Finney in my head..He's asking me to open up my window and scream out "I'm mad as hell, and I'm not going to take it anymore!"
The 6-figure earning(at least) eggheads are blaming their models when plenty of us little people saw this wreck coming with plain old common sense. Shit, maybe common sense is more like ESP or something and we're all gifted savants.
Bullshit...I call bullshit!
You get the result that you incentivize. There is no politics here, and no amount of regulation (at the time) would have stopped what was going to happen, much as nothing could have stopped the dot com bubble either.
Moodys did what they were supposed to do: they took the historical data and they build models on it. Neither they, nor anyone else for that matter, was prepared for what happened to the chain. And frankly none of them were interested in the chain because, well, they had the models. And insurance companies use models all the time. They're excellent at it. There is no differnece here from figuring out when I'm going to die, and figuring out what tranch of loans are going to perform at.
But the behavior in the chain happened because everyone wanted to make the numbers, everyone wanted their bonuses (and I'm not talking CEOs I'm talking loan originators who were pulling in well into the 6 figures too) and the stockholders wanted the returns. The street DEMANDED the returns. Look at the posters on here who complain about things. They're the stockholders that would have cried had their bank no produced the results of Citi, WaMu and Countrywide.
The problem is everyone, and no one in particular. And everyone was doing whatever they could, at whatever level they operated to keep the flow going. That's the definition of a bubble.
Had I not happened to stumble onto some blogs that were publicizing the insanity of the California, Florida and Arizona real estate markets, I myself would probably not have been aware of the degree of deterioration in lending standards until the wheels started coming off.
Unless the Moody's statisticians are based in one of the super-hot bubble areas, there would be no particular reason for them to foresee the scale of the problem.
A statistician is going to have a very strong bias towards relying on hard statistical data. Until the early defaults started showing up, the statistics available to them indicated no problem.
Even had they had some clue through acquaintances/family experience, to have rated those securities properly, they'd have had to have ignored the statistics and issued a subjective opinion. On what hard data would they have justified that? Anecdotal comments on Ben Jones' blog or CR?
Even the auditors of corporations say it's difficult for them to detect outright fraud. For a rating agency statistician to detect it is even more difficult.
are the folk's at moody's aware that there is a difference between a loan officer and an underwriter? And that loans that were made to be securitized were underwritten to standards that were set by investors?
They're denials are BS. If they're going to rate MBS, then they need to understand the loans. How can they rate them if they don't understand what it is that they're rating? And it seems to me that they should have been doing some due diligence on these loans (like at least sampling a few to make sure the info they were being given was correct). Other people were, after all, going to rely on their ratings.
Everyone assumed the credit agencies knew what they were doing, says Joseph Mason, a credit expert at Drexel University. A structural engineer can predict what load a steel support will bear; in financial engineering we cant predict as well.
How candid! You mean those chicken entrails aren't as accurate as engineering math on steel girders?
Models and statisticians....same folks who are guaranteeing us that global warming is our fault.
"I think folks are gonna wake up, probably when their stock portfolio and their housing equity both head south another 15-20%...and they're going to be very grumpy."
So what are they going to do? The political system is rotten, bought and paid for, the Constitution was thrown out the window years ago, the banks are insolvent. Benankie is giving them the finger with spiking fuel prices and a falling dollar with every rate cut. These poor complacent bastards are going to get just what they deserve good and hard.
Lowenstein neither asked why debt investors chose to rely exclusively on agencies nor how the agencies might be replaced. The agencies screwed up quite magnificently, but the idea that we'd premise the operations on debt markets on their say-so is nuts.
The 6-figure earning(at least) eggheads are blaming their models when plenty of us little people saw this wreck coming with plain old common sense.
Oh please! The "little people" knew nothing and they could still care less. In fact, the "little people" who had 401k's would have been screaming bloody murder if their returns were down because the stocks they held DIDN'T participate in all this. Who are we kidding here?
We get the government we deserve and the markets we do too. If you were a stockholder and didn't ask these questions, you're no better. If you helped to elect this admisitration you're part of the problem. And even if you didn't you surely benefitted from the market if you bought and sold stocks at the right time, or you bought and sold property at the right time.
The righteous indignation is really a hoot sometimes.
Bill: Investors don't bear any responsibility? We should have blind faith in Moody's ratings like religious fundamentalists have blind faith in their symbolic leaders?
All we need is common sense enforcement of common sense laws, along with an environment where peer pressure works to prevent fraud, not support it. The latter will come naturally at some point, I'm not so hopeful about the former.
Again my sis (ex-prosecutor) would prefer simple & comprehensive laws & regs and better enforcement over more & increasingly complex laws & regs and poor enforcement.
And shes a liberal not a wing nut by any definition.
The failure was in enforcement not in the lack of weight of the federal register.
There might need to be some tweaking of the laws & regs to clarify how some of these 'financial innovations' fit into old regs & laws but not a lot.
We needed good cops & didn't get them.
ipodius
"We get the governments we deserve..."
Indeed. I have said this over the last 2 Bush elections to my partner, the avid Republican...who is in a perpetual bitch mode right now.... what a hoot. I mean, seriously, what were we expecting???
A decent, honest, intelligent, trustable government?
"If you helped to elect this administration you're part of the problem"
The problem is it wouldn't have mattered because the system is rotten. When you have 1000 lobbyist with fist full of money for every elected official the goverment will be corrupt.
If they're going to rate MBS, then they need to understand the loans.
They insure my health, do they follow me around and understand how I behave, what I eat etc? Do you think the actuaries that form the models know things about people's personal health?
How about property insurance. Do you think they're all weathermen in FL? That they understand seismic events?
I don't need to know any of that if I'm building a model. What happened to housing was an outlier...statistically not supposed to have happened. You know, a black swan event. That mean, something unanticipated. And humans don't like to think that there are things they can do nothing about. Sort of like when someone dies...it always has to be someone's fault. It can't just be the way it is or something crap just happens.
Maybe i'm missing something here, but where was the financial penalty to Moody's if their rating was wrong?
If Moody's had been required to put up even a token amount to back their rating, then you can bet that they would have put a little more due diligence into making sure that their rating was correct. I mean this is pretty basic to me, if you want a market based pricing information to work, then the incentives within the system have to point the right way for the effects you want.
As far as i can see from this article, this system functioned precisely in the opposite direction - Moody's incentive was to get the ratings wrong, in the bank's favour.
Well, the good news is that with all this new fangled technology we have now, the free market will work to sort things like this out much faster than it used to. That's the bad news too.
Tons of great stuff in the article. I like this one:
"On the plus side, Moodys noted, 94 percent of those borrowers with adjustable-rate loans said their mortgages were for primary residences. That was a comfort feeling, Robinson said. Historically, people have been slow to abandon their primary homes. When you get into a crunch, she added, Youll give up your ski chalet first.'
1) so no effort to verify this 94% figure?
2) and I guess she expected these subprime borrowers to give up their ski chalet first because, well, they all reported that their assets included ski chalets? Or is there a high prevelance of ski chalet rental among subprime borrowers?
These Moody's folks so obviously played ostrich and they look like bigger fools the more they try to justify themselves.
"We needed good cops and didnt get them...."
yeah we got Eliott Spitzer instead.
bwahhhahahhahahahahahahhahahaaaa...
Dont cry for me, America... elect McCai
Maybe i'm missing something here, but where was the financial penalty to Moody's if their rating was wrong?
Simple in future business, stock value, enterprise value, and earnings. They should be treated like a leper now by the financial community, and their business curtailed. Frankly I think ratings should be done by the government. That would chap quite a few hides.
"We get the governments we deserve..."
The ultimate pitfall of a democracy where central planning is an important role. You can't always pick the "right" people to put in office and when you are wrong we all suffer the systemic risk.
Shareholders not happy...... unfortunately they are the 30% that aren't institutional
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"They insure my health, do they follow me around and understand how I behave, what I eat etc? Do you think the actuaries that form the models know things about people's personal health?
How about property insurance. Do you think they're all weathermen in FL? That they understand seismic events?"
While it's gone off the tracks many times, yeah that is the idea. Insurance agencies attempt to pool data on exactly that information and set rates accordingly. So yeah, they look at weather patterns on the gulf coast and trends in personal health. What's your point?
ipodius: I'm one of the "little people" (relatively small 401(k), which is invested in a mutual fund) and I saw this coming years ago (maybe being in CA helped).
In 2004, my brother bought a condo, and advised me to also get into RE. I had looked at our market, and realized then that we were in a bubble and so I refused to buy. I'd like to buy (it will be my first house), but I've chosen to rent until prices return to sanity (i.e., in line with basic fundamentals, such as rent/price and price/income ratios).
I admit that I used to get mad because I felt that I was being forced to wait until the prices came back down. But, getting mad wasn't productive, and so I just go along with my life realizing that there are a lot of things which we have no control over - including the timing of RE bubbles. So, yes, some of us "little people" saw this coming, and used our common sense to avoid it. I wish that Moody's and others would have done the same.
With health insurance and homeowners insurance they are not handing you the money up front. They always have the opportunity to re-evaluate you when they pay out. If you smoked and claimed you were a non-smoker on the application and you die of enphysema they can just not pay.
These Moody's folks so obviously played ostrich
I am certain that I could build a model that would predict, with great accuracy, the chances of an ateroid hitting the earth in a populated area if I had the dataset of all known bodies in our part of space. I know nothing about astronomy at all. But I do know a lot about math and stats.
I could follow those rocks around the sky for years and adjust my models. But you know what I won't see? I won't see that rock that no one knows is there, or I won't see that comet come close enough to one of those rocks to change its courae no matter how good my math is.
Use that analogy here and look for where the problem actually was...with the people who were causing those rocks orbits to get changed by writing bad loans in the first place.
The idea that free markets and regulation are mutually exclusive is wrong IMO. Sports are highly regulated as to what is allowed in competion (legal vs illegal block in football) and outside of competition (drug testing). Additionally officials are present to enforce the regulations and punish offenders but the games are freely competed. No one ever suggested that Jordan wear ankle weights because he could jump higher, he used his superior ability to be a winner. But a defender couldn't punch him in the gut when he took it to the rim either - against regulations.
Deregulation has been used to rationalize fraud in many cases (Enron) and one of the biggest supporters of this fraud is McCain's economic advisor - Phil Gramm.
Jim
What's your point?
What's your point baruza?
There are several major issues with the agencies' performance as statisticians:
Jay
"You cant always pick the right people to put in office...."
I dont know whether to laugh or cry at my countrymen....
Psst NC Jim they are all bought and paid for, both parties, all of them. Got it?
Steve: No one forced anyone to purchase derivatives based on Moody's ratings. One is always free to create their own synthetic ratings.
ipodius-
But when you can look out your own window and see that the rocks have moved, you need to put that new information in your analysis. These weren't in deep space. Look at housing prices and mortgage ads and you can see the universe of rocks has changed.
Moody's is 100% liable. Instead of relying on historical loan performance which didn't match this loan pool (prime vs subprime) they should have deffered making a rating until they had investated the pool. This means counting some trees; i.e. pull 50 loans out of the pool at random and evaulate each for potential problems. If there were too many problems in the random sample, they should not have rated the pool. There is no excuse for not doing any real work.
What amazes me is that no one dares to discuss what the macro advantages were for creating and propagating this scam. Yes individual groups made money on the scam but might it have been advantageous on a national level for some?
And frankly none of them were interested in the chain because, well, they had the models.
No one looked up the skirt to see if what they thought was there was really there. Now its 2 AM and they discover to their horror they should have looked.
That's always the trouble with models - its the assumptions you start with. Feed the system a different set of conditions than the assumptions you model with & you get a completely different result that that which the model would have predicted.
The regs that were violated weren't those that affect Moody's per se - it was where the loans were originated... originated under completely different conditions than the model assumptions were built upon. No shock that they failed as badly as they did.
The failure of reg enforcement was at the loan origination step... it then amplified through securitization & ratings.
But Moody's should have been monitoring incoming... testing the incoming versus previous sets of incoming and say 'Whooooa, this stuff is different - we can't predict based on what we are receiving now'. They didn't do that - didn't even suggest that.
In the food business there is a process called HACCP. Financial markets need something similar. Simple & enforceable & transparent.
What do you think will happen when the general population gets as angry as the commenters on this blog?
Every person, whos pension gets raped by this mess, should receive a nice clearly written writeup that describes all of this in language that even a 6th grader could understand. Walter Cronkite did something similar to this when he explained the Watergate scandal to the American people.
That you should pick another analogy.
Steve, your trying to justify your point by using present circumstances to say what the models would have predicted in the past using them. That's just logically specious.
None of this was known in the past because no one was writing crappy loans in the past and no one modeled for it because banks didn't knowingly write loans to people they knew couldn't pay.
Some here are looking at Moody's and saying "yeah man they should have known". I'm saying no one in their right mind would have modeled for loans being written on false information...and it was false. If people really did have those incomes, DTI ratios, FICO scores (that you could adjust on the fly, btw because I watched someone do it), and sane approaisals, the models would have held. Is this wrong?
Oh boy, 4 more years of McBush, thanks Noble! First he's against the Bush graft to the rich, now he's for making them permanent, he's just fine with a $11B/month war lasting 100 years, he's got Phil and Wendy Gramm as his economic advisor's (Ennron anybody?). Here's hoping that Cheney invites him hunting REAL soon!
This mess belongs squarely at the feet of the drown the government in the bathtub crowd, which translates to Republican's Noble.
Let them Eat Debt
Now you're asking the right question...
Who bought HAL leap calls in 2003?
bwahhhhahahahahahahahhahaha
yeah we got Eliott Spitzer instead.
Even good cops like to get laid. His chastity would have made sub-prime not happen?
Maybe a few more of our cops need to see hookers if it gives them the strength to take on Wall Street at the same time. Heck I'd start a PAC to see it gets done if that were case.
Just sayin'...
Dickeyelee.
If you think I am for McCain then adjust your sarcasm meter please...
SweetHomeKilla writes:
I'm so sick of calls for more regulation.
Totally agree. I know it's an unpopular opinion, but I see nothing wrong with what the rating companies did; they got paid to put ratings on stuff based on statistics, and they did so. As long as the people buying the paper in the end knew what they were buying, they should take the loss, and the market should be allowed to fix itself.
If there's a legal failing, it's in letting public-interest portfolio managers hide behind rating agency statistics to deflect personal liability for losses. If you bought RMBS's, you invested in a de-facto risky (in the qualified investor sense) investment. If you have losses chasing those high returns, you should be liable for making a bad fiduciary decision if you're a fiduciary. For everyone else buying these securities (who should all be qualified investors), they should suck up the losses and move on. To the extent that non-qualified investors could buy RMBS's or derivatives thereof, or any other de-facto risky investments, there might need to be additional regulation; but increasing regulation just cause lots of people lost money is just dumb.
That you should pick another analogy.
I think it's fine. You didn't like the weather analogy but it holds. They don't know anything about the weather, they know data and stats about the weather that they use to predict patterns. They are geneerally not right either because of that.
My point is the anger is directed at the wrong place here. It had nothing to do with Moody's and everything to do with writing crappy loans and presenting them as done with due dilligence. They weren't.
"Even good cops like to get laid...."
I'll contribute to the PAC myself... if I thought that the good cops could avoid being taken out and shot....
The rating agencies did not just rate securities based on statistical models of past performance they charged big bucks to advise securitizers on how to design the products in order to get the AAA ratings. Rating agencies were also paid by the sellers rather than the investors. Both conditions established a conflict of interest which obviously biased their opinions.
In other words they knew what side of the bread the butter was on.
More joys of regulators looking the other way.
BTW: The best definition of an ideolog I have heard is someone who ,regardless of the starting assumptions, arrives at the same conclusion.
Jim
Right, but the ISO policies you referenced purposely standardize terms, and the insurance companies are very loathe to change them/alter the product, precisely because they want to know what kinds of risk they're exposing themselves to. They do what the ratings agencies failed to do.
BTW: The best definition of an ideolog I have heard is someone who ,regardless of the starting assumptions, arrives at the same conclusion.
Jim
NC Jim | 04.22.08 - 9:40 pm | #
As in, for example, "We have surpluses, so we need tax cuts to give people back their own money" which shifted to "The economy is softening and we no longer have surpluses so . . . we need tax cuts to give people back their own money!"
And then have Mr. Magoo give it all the "independent" stamp of approval. Ah, those fiscally conservative Republicans.
My point is the anger is directed at the wrong place here. It had nothing to do with Moody's and everything to do with writing crappy loans and presenting them as done with due dilligence. They weren't.
ipodius | 04.22.08 - 9:37 pm | #
I agree but Moody's isn't without blame - they really needed to audit the incoming to see if it fit prior incoming upon which their models were based. If they has done that alarms should have gone off.
But that would NOT have changed the quality of THAT BATCH of incoming - but it might have changed the quality of future batches if they couldn't get rated.
Moody's just kicked the can down & didn't ask the right questions either.
Tom Stone wrote: And that loans that were made to be securitized were underwritten to standards that were set by investors?
Here's one point where I, as a "civilian", have a problem.
X is writing a loan to be sold to Y. Y publishes a set of standards. If X is a professional and, taking CA as a pesky example is a fiduciary to the borrower, then Y's standards are not the standard, they're a minimum standard. Yet, repeatedly, I read that X simply "wrote to the standards published by" Y.
The objection holds on an "inclusive or" basis...if X is a professional, or if X is a fiduciary, then I should expect X to apply X's standards on top of whatever dreck Y publishes. So I should be free to blame X, and if X points the finger at Y then I should blame both X and Y.
Here's a question for you to ponder (as one who once received projection models from clients to tweak and make my own)
Who built the models? The Ratings agencies? Or the bankers?
If you don't know the answer, don't assume you do.
Not all. I was emailing Schwab last fall asking how to tell which fund in my 401k had no exposure to home mortgages. And I got blather and baloney in response about one time out of three and ignored the rest of the time. I'm too little.
The attitude seems to be "if we don't steal it, somebody else will" -- musical chair kleptocracy.
Yeah dryfly,
I agree. We need more enforcers of the current laws, not more laws.
I should say, a better analogy would be insurance companies that don't set the underlying terms--like those insuring mortgage backed securities, for instance. Here, the ratings agencies were just one more level that failed their duty to ask questions and were deeply conflicted in the process. They're in good company in that respect.
What do you think will happen when the general population gets as angry as the commenters on this blog?
I've said it before, and I'll say it again. When you extrapolate the big picture all the way out, I think the US is heading towards a Soviet-style collapse.
What we're already seeing, really in somewhere like California is essentially the collapse under way--society itself is breaking down when people don't find contracts (i.e. their mortgage) compelling to abide by.
No one's going to come shoot you if you don't pay your mortgage. No one is going to come get you if you don't pay your taxes. No one is coming for you. Once people figure that out, which i think they are, you have a recipe for the whole thing to come down quickly.
Like the Soviet Union, we really are an artificial country, essentially a multinational, transcontinental empire. What happened in the USSR was really a financial/economic meltdown coupled with an erosion of the ideology the regime was based upon.
Everything the politicians and leaders say became empty words, just like today. And when that's the case, when the official ideology no longer holds up to the light for most people, those holding the guns will not be willing to pull the triggers (actual or metaphorical).
I think that's what we are seeing today. Everyone thought the Soviet system was way more resilient than it actually was. And we've seen just how fragile global capitalism is thus far this year.
I don't need to know any of that if I'm building a model. What happened to housing was an outlier...statistically not supposed to have happened. You know, a black swan event.
Really???
No one knew the impact of DTI's on ability to pay?
No one knew that, since 16__ whatever, real estate goes up by 1% or so above the rate of inflation?
No one knew that option ARMS/neg am loans were over 40% of total loan volume in some areas?
C'mon. How stupid do you think the model builders are? Black swan my ___.
The ratings agencies got paid to slap ratings on products, not to think.
The problem with models and pro formas are assumptions. They are based on assumptions that prove to be wrong 95% of the time. That is why a common sense approach is much better (although not accepted by people who want numbers). Example: Common sense approach: We are in a recession. Models approach: No recession yet.
I am reading an interesting book called "Nudge" by Richard Thaler and Cass Sunstein. Its about how we get "nudged" towards decision by what the authors term as "choice architects"
Moody's = Choice Architects and they are f&(&& guilty. Models, black swans, my a*&
Take em out and shoot em like they did with Anderson Consulting and Enro
Little known fact - Moody's not only provided the ratings, but they provided the banks with the software to assess risks of CDOs based on those ratings...
Moody's KMV - The Leading Provider of Credit Risk Management Solutions
I agree. We need more enforcers of the current laws, not more laws.
Zarley | 04.22.08 - 9:52 pm | #
I'm not sure we even need MORE enforcers... we need BETTER enforcers & enforcers motivated to enforce not ignore.
Start with that THEN see if we need more and different laws... my guess is we don't need to change a lot of the laws just a lot of the people enforcing the laws. And soon!!!
Seeking Alpha - The Worst Is Behind Us (unless massive bank failure is considered a bad thing)
The Worst Is Behind Us (unless massive bank failure is considered a bad thing) -- Seeking Alpha
Some capital requirements to limit leverage wouldn't be the end of the world.
Start with that THEN see if we need more and different laws... my guess is we don't need to change a lot of the laws just a lot of the people enforcing the laws. And soon!!!
I thought an advantage, and sometimes a frustration, of a bureaucracy was that rule enforcement wasn't supposed to depend upon the individuals doing the enforcement...
I think we need either a better firewall between political appointees and civil servants (so civil servants can more effectively do what we agree is their jobs), or we need to festoon the financial industry with so much red tape that I'll be long gone (I'm in my early 40s) before it's removed. Or both.
ipodius, you missed a few things. for a fire insurance policy the insurer insists on sprinkler systems hurricane straps, and other safety devices. The building inspector, a disinterested party, and sometimes and insurance rep are charged with ensuring that safety conditions are met. there were no disinterested parties with the loan debacle.
furthermore, if a catastrophe occurs, it is often investigated, and, if fraud, the company DOES NOT PAY the claim. pretty decent safeguard eh.
no equivelent safeguard in loans.
I've spent my entire adult life staring at pages full of numbers and building numerical models of what I'm seeing. I spent 20 years doing that as an experimental physicist, and over the past 5 years in a variety of other amusing pursuits.
These people are not performing statistical analyses. What they are doing is applying statistical methods to non-statistical processes. That's not invalid--I do it myself a lot. But if you don't know that you're doing that, or even worse aren't a tiny bit terrified by it, then you aren't any good at numerical analysis.
This may seem like a tiny nit pick but it's not. The underlying assumption in every true statistical problem is that the samples which are drawn are from a static distribution of known functional form--if possibly unknown parameters. Analyses of stock markets, voting patterns, or mortgage securities violate the underlying assumption--they are neither static, nor are the functional forms known. This leads inevitably to error. The only question is: how big is that error?
I must say I wholly disagree that this was a "black swan" event. It's only a black swan event if you build "low-dimensional models" (the main kind Wall Street quants build) and then insist on believing that nothing important happens in the other dimensions. Then sure, it's surprising when the circle expands as the sphere passes through your plane.
Honestly, anytime I've heard someone remotely "technical" talk about what they are doing, it strikes me that they have the statistical and modeling skills of a very good first year physics graduate student. That's great compared to the general public, but no faculty member who wants to keep publishing lets first year grad students--even very good ones--loose on the data unsupervised.
Tom - every human system relies on people doing what they are supposed to do. There is no system so robust that it runs on bureaucratic autopilot.
This is especially true in a society trying, at least nominally, to remain 'free' - then the ultimate check-n-balance is us voting in or out those who would be motivated (or unmotivated) to enforce those laws.
I don't think more bureaucracy or a larger or more 'independent' civil service class is the answer. I think we all have to insist via ballot box and petition and maybe even protest that we get better representation. Until we make that insistence - it won't change much.
I wouldn't be surprised to see alot of major banks having to restate years of financial statements before this mess is done (and we have another TBD). The SEC is not going to continue to buy into the whocoodanode theme forever. If the SEC does not cause restatements on many of the banks we discuss here, I'll make a tin foil sombrero and move south.
Every person, whos pension gets raped by this mess, should receive a nice clearly written writeup that describes all of this in language that even a 6th grader could understand.
The Pension was sold as a means to retire wealthy. It's dependent on ever increasing exponential growth.
Clearly not possible. The rape occured early, when the employee traded higher wages for back end promises.
And in that case, statutory limits may apply.
As far as loan brokers knowing what they were doing,look at the number of newbies,and where they got their information.Want to learn how an option ARM works? world has a class! and they feed you lunch too!Go to your boss,they say come along to the next MLS Lunch,the eminent Dr Robert Eyler,a Phd economist at SSU gives a speech,with graphs PROVING that while prices "might flatten in some inland areas like the inland empire,there is NO POSSIBILITY of price declines within 50 miles of the California Coast" He gave that speech in May 2006 in Santa Rosa at the MLS lunch,and at other county MLS lunches up and down the state.Tv and Radio ads and shows all day,full page ads in the paper every day,all your neighbors at every gathering saying "real Estate only goes up!" and you are paid on commission...It takes someone with a genuinely skeptical attitude and a fair amount of guts to go against that tide.
I don't think more bureaucracy or a larger or more 'independent' civil service class is the answer. I think we all have to insist via ballot box and petition and maybe even protest that we get better representation. Until we make that insistence - it won't change much.
If I've voted for a Congress that's enacted a set of laws, which have been either signed by some President or had the President's veto overridden, then my expectation is that those are the laws which are to be enforced until, or unless, they're changed.
If we're talking about laws changed in a Constitutional manner then I'll join you in your insistence upon the ballot box as the only solution.
But if we are, then we shouldn't be talking about the need to change the enforcers of the law.
Yet we are.
So either Bush needs to be impeached and convicted for violating his oath of office, or civil service laws need to provide a better firewall against political appointees interfering with enforcement of laws that have already been enacted, or we need to cover the financial industry with so much red tape that it looks like Silly String[tm]. The 'or's are not exclusive.
Realistically, I'm not holding my breath on the impeachment part.
The investment banks and hedge funds should should all be nationalized, their books should be assessed, and what remains of their assets should be sold off. If you want to start a ratings agency, from now on it has to be a non-profit. Violate the rules and there need to be minimum sentences in place: you loose ALL the money you made illicitly, you go to jail for a while, and you NEVER are allowed to work in finance OR in financial consulting AGAIN. End of story. This stuff doesn't happen I'm moving to another country; I'm sick of it.
late to this thread but CR makes great comments and Lowenstein is lucid as usual.
that about summed up the whole mess.
wonder if ratings agency regulation is what we need more than anything.
I'll add to what Tom Stone says, that I watched a bit of CNBC at the gym today, and I wanted to vomit over the side of the elliptical trainer.
What a disgusting pack of over-paid shills and apologists.
Anyone who takes that station's non-stop editorializing as "news" is a fool.
Would Moody's be in this mess if we hadn't made huge loans to people who had a history of not paying their bills?
So whose stupid idea was that?
Isolate that person and bring him/her before this blog for a good verbal lashing.
Then maybe we can get on with life.
One more addition to my CNBC rant: who is the wide-mouthed blonde on at lunchtime? A glib GOP shill, she makes me shudder with disgust.
As far as loan brokers knowing what they were doing,look at the number of newbies,and where they got their information.
If this is in response to what I wrote...I mentioned being a "civilian". Where loan brokers got their information is someone else's problem (covered by an SEP field, per Hitchhikers Guide to the Galaxy). I thought CA brokers were licensed by the state...if so then since CA is one of the poster children for the meltdown I assume this licensing, along with the fiduciary requirement, are insufficient steps for those brokers not already inclined to be ethical. Since these steps are being proposed by Congress, I'll assume even the better Congressmembers don't have a handle on the situation.
"No price declines within 50 miles of the CA coast" contradicts what happened in the first half of the '90s (I doubt we disagree, I'm simply stunned that people had that little sense of history, though I know that's so).
I've read, somewhere, of Sacred Tomato brokers being told that being away from the coast was good because Us Coastals have Earthquakes. I'm not surprised that people in Sonoma were told the opposite by, apparently, the same people, though I think Sonoma's nicer than Sacto. Better wine, and prettier.