The April 19, 2014 Economist reports [Credit where credit’s due] that the ratings agencies are making a financial comeback after their near-death experience following the financial crisis, circa 2007-2009. For those readers who believed that Moody’s, S&P, and to a lesser degree, Fitch, were pure as the wind-driven snow, let me correct the record: During the years 2005 – 2008 the ratings agencies got paid big bucks to give inflated ratings to security offerings from large investment banks so that institutional investors would pay billions of dollars to purchase them. Many of these investments were filled to the brim with subprime mortgages. But they were pumped and packaged in such a way as to be rated as “investment grade.” Continue reading “Ratings Agencies: Still Shilling for Shillings”
As some of my readers know, S&P, the largest of the ratings agencies, that in tandem with their investment banking cohorts, made millions – nay, billions – during the securitization frenzy of 2005 – 2007. [For more details, see my rants posts, here and here.] The Big Banks needed a shill to convince investors to purchase their bundled mortgage backed securities, and so turned to S&P, Moody’s and to a lesser degree, Fitch, to rate them as “investment grade.” This meant that the large pension funds and municipalities could legitimately invest in the securities because they were perceived to be safe. Continue reading “Nuts and Dolts: S&P’s Defense to the DOJ Lawsuit”
Following a rough and tumble year in the banking industry, Belial Bank’s feckless fearless leader, B.L. Zebub, believes it is high time to bring some levity and loyalty to the lowly troops who have been tirelessly foreclosing all the Beleaguered Borrowers they may have missed the first and second time around. Mostly, however, B.L. is concerned about the reputational damage his bank has suffered this year. Once known as the largest bank in America as measured by hubris, it is at risk of losing this mantle of distinction. On the Chinese calendar, 2012 has been Belial Bank’s Year of the Rat.
B.L. is hoping against hope to instill a sense of pride among the rank and file; he knows that his company’s promise to the feds to install a “single point of contact” [or “SPOC”] for every borrower seeking help, has become a sham. Problem is, after a couple of weeks on the job, the SPOCs either quit, get fired, or leave to take more respectable jobs in the collection and repo industries. And then there was the public relations nightmare Belial Bank suffered after it was disclosed to the press that the top brass were giving prizes to supervisors who could run up the highest number of SPOCs for a single borrower in the shortest amount of time. Last week’s big winner, Art O. DeLay, won a hundred crisp dollar bills and the afternoon off to visit The Devil’s Den Gentlemen’s Club, conveniently located just down the street from Belial’s headquarters. [Cover charge waived.] Continue reading “Belial Bank’s 2012 Holiday Planning Meeting”
This is the second installment of my article looking back over the past five years at Portland housing statistics. Part One examined the real reason for the housing crisis which officially commenced in 3Q 2007, and looked at the historic numbers for average and median (i.e. “mean”) sale prices according to the RMLS™. The link to Part One is here.
The Rest of the Story. Besides pricing over the past five years, what about time on the market? Available inventory? Number of listings? Closed sales? Let’s look at each one:
1. Time on the Market. Until 3Q 2007, an overheated real estate market was still burning through inventory. In August 2007, the average time on the market was 56 days – less than two months from listing to “pending sale.” The following month, September, 2007, banks began realizing that the drumbeat of subprime defaults was not going away. They tightened their underwriting requirements almost immediately. Over time, they began to even restrict borrowers from tapping their HELOCs based upon ZIP code. As short sales and REOs began to fill the real estate marketplace, buyers and appraisers began viewing the sales figures as legitimate comps by which to gauge present value. All the while, many potential buyers remained on the sidelines, waiting for prices to hit bottom. Many sellers who were fortunate enough to have equity during the following five years had to decide whether to wait until the market turned, or sell their home and recover far less equity than they had earlier. Continue reading “Portland Metro Housing Prices – The Last Five Years [Part Two]”
In Parts One and Two I addressed the favored status of the ratings agencies in affecting all manner of financial instruments and investment decisions. But now, as an outgrowth of Dodd-Frank, the agencies’ impact appears to be on the wane. The new OCC regulations are figuratively airbrushing the ratings agencies out of the financial landscape. My third post on the agencies addresses the final insult, as the private sector snubs them.
The shenanigans that Moody’s and Standard and Poor’s pulled in the two years leading up to their massive ratings downgrades of 3Q 2007, have come home to roost. At the same time that Dodd-Frank has smacked them down, it appears Wall Street is also now beginning to ignore them. [In fact, one might wonder if legislative comeuppance was even necessary, inasmuch as the agencies are now receiving less and less attention from the very industry upon which their existence relies. In short, it appears that we are witnessing a sort of Darwinian result, akin to what happened to the dinosaurs, who simply got too big for their own good. – PCQ] Continue reading “Ratings Agencies Get Their Comeuppance – They’ve Been Downgraded! [Part Three]”
Even the most heinous of financial crimes are usually – if not always – the bi-product of willing participants. Admittedly, there may be only one “evil genius” in the mold of Bernie Madoff, but invariably there are many willing enablers. These are the peripheral players to whom we might contribute some degree of culpability or at least benign neglect: Never asking the tough questions; uncritically following the crowd; accepting rewards for silence and moral passivity; and, putting introspection on auto-pilot. ~PCQ
Background. Before we get to “The Comeuppance,” we need to address what might be moralistically described as “The Pride before the Fall.”
Certainly, the boom and bust of the credit and housing markets of 2005-2007, can be attributed to many factors; there were multiple players and participants. For example:
- There was pressure by the federal government to extend the dream of homeownership to persons who deserved it, but could not afford it;
- There was Wall Street’s securitization machine that encouraged the mass marketing of mortgages;
- Fannie and Freddie, heretofore wildly successful quasi-public corporations that seemingly served the secondary mortgage market well, both played a role in their own demise;
- There was the big investment banks’ creation of a Private Label secondary market, thus enabling home loans to be given to borrowers that Fannie and Freddie wouldn’t touch;
- Added to this were the financial and real estate industries, which convinced themselves that property appreciation was like a perpetual motion machine, and would continue forever;
- And then there was the American Public, whose insatiable appetite for homeownership turned them into lemmings, following one another over a financial cliff. Continue reading “Ratings Agencies Get Their Comeuppance – They’ve Been Downgraded! [Part One]”
Shill – “…a person who helps a person or organization without disclosing that he or she has a close relationship with that person or organization. “Shill” typically refers to someone who purposely gives onlookers the impression that he or she is an enthusiastic independent customer of a seller (or marketer of ideas) that he or she is secretly working for.” Wikipedia
Introduction. The Fall of 2007 seems like a long time ago. While most people do not mark the season with anything other than falling leaves and back-to-school activities, the third quarter of 2007 was a watershed moment. It represented a period of massive investment downgrades by the credit rating agencies, and marks the tipping point for the financial crisis that was to follow.
Until Q3, 2007, the credit ratings companies had been issuing high grade ratings to investments that, we now know, did not deserve them. Without these ratings, investment banks could not have bought and packaged millions of home loans to sell as securities to large investors. Without investment banks buying their loans, lending banks would not have tossed their underwriting standards out the window. Without banks originating millions of bad loans to purchase homes, real estate values would not have ballooned to stratospheric levels. In short, the rating agencies were enablers of the entire securitization process that set in motion the rise and fall of the American real estate industry.
What are the “rating agencies” anyway, and how did they get so much power? How is it that they had the ability to make and break markets, when their entire business model was based upon a huge conflict of interest? And why is anyone giving them any credence today, when they were, together with the big investment banks, the shills in the crowd, giving inflated ratings to junk, so investors would buy them? Lastly, how have they escaped liability for their misdeeds? Or have they? Continue reading “Credit Rating Agencies – The Shills in the Crowd”