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?