Monday, July 28, 2008

The Giant Pool of Money

Thoughts on The Giant Pool Of Money - a "This American Life" special on the 2008 Credit/Mortgage meltdown.

I heard the show today while working. I'm not sure that I can place the blame squarely on banks.

I think rating agencies should be the ones to 'take the blame'.

- lenders borrowed as much as they thought they could get away with. the dude says "i was hoping to turn my financial situation around in 6-9 months and was able to secure that loan. If I hadn't been able to get that loan, i probably would've made some tougher choices and figured out other ways to help my situation" (paraphrase)

- mortgage brokers loaned as much as they could get away with - since they were driven by commission. they talk about some guy getting an 18K commission on a loan

- CDO's engineered their securities up so that the rating agencies would rate the bonds AAA.

- the 'global pool of money' somewhat blindly relied on the AAA ratings, and assumed that they were getting stellar returns with low-risk investments.

So everyone was inspired to keep this wheel turning. Some questions I'm left with (tell me if these were answered here or elsewhere and I just haven't been paying close enough attention to the news):

- Why did credit rating agencies give these bonds a AAA rating? What was their motivation? Was there a conflict of interest?
- Has the reputation of the credit rating companies suffered? What are the ramifications for them?
- What is the existing regulation surrounding credit ratings? Should this be a government function (I don't think so)? How transparent are they? How transparent are they required to be?


1 comment:

Anonymous said...

I believe because of a consolidation of banks the conflict of interest was just that the investment banks brought moody's and s&P and fitch tons of business. They essentially just felt that if they didn't give the AAA ratings than the other firm would. They haven't been tainted though, they did the same thing with Enron. Arthur Anderson was a finance consultant firm that was over a hundred years old that was ruined over signing off for Enron.
Glass & Steagall previously separated finance banks from investment banks. Now we have the sarbanes oxley act. The problem with regulating finance is that if you're smart enough to figure out derivative and cdo instruments than you're probably going to go get rich working for the private sector. Regulation takes time to come into law and these guys are inventing new finance tricks quickly. There absolutely needs to be more regulation. The SEC actually allowed Enron to use Mark to market accounting. That means they were putting 20 year contracts on the book the minute they were inked, before they actually made any money. Then they had no incentive to actually make money since their share value already went up for the quarter. Look it the 70 trillion dollar pool of money that wall street is in control of that bankrupted numerous countries 'economies. A CDS is essentially an insurance policy against a CDO (debt securitization). A CDO could be a thousand sub prime mortgages packaged together. Only capitalism is so fucked up that the SEC allowed anyone to take a out credit default swaps (CDS). Essentially, I could take out an insurance policy out on something I don't own. This in itself is insane. What bankrupted our economy is when Goldman sach had CDO securities in the form of sub prime loans and they took CDS's out against those CDO's. So Goldman sach was taking on home owners mortgages, re packaging them and selling them to foreign investors, then taking out bets against the homeowners (their own damn clients) that they knew would default. Therefore, when 9 million people lost their homes in america, Goldman sach got super rich. But investment firms like AIG left holding the insurance policy. They went belly up and Bush gave the same banks that created the financial crisis a 700 billion dollar bail out. Warren Buffet created holding companies and people in finance before that created ways around anti trust laws. Finance and accounting need heavy regulation. The incentive is inherently evil.