Something Krugman said recently made me think this "Goldman Email Gate", was a bit of a Mis-Direction. Afterall it is their Job to Make Money in both Up and Down Markets.
So I decided to follow up on that hunch; I took to the Internet, to research the topic ...
Berating the Raters
By Paul Krugman, NYTimes -- April 25, 2010
No, the e-mail messages you should be focusing on are the ones from employees at the credit rating agencies, which bestowed AAA ratings on hundreds of billions of dollars’ worth of dubious assets, nearly all of which have since turned out to be toxic waste. And no, that’s not hyperbole: of AAA-rated subprime-mortgage-backed securities issued in 2006, 93 percent — 93 percent! — have now been downgraded to junk status.
What those e-mails reveal is a deeply corrupt system. And it’s a system that financial reform, as currently proposed, wouldn’t fix.
Paul Krugman continues his spotlight of the Rating Agencies role the the Wall Street Mortgage crisis. It's usually the Teachers who get fired when this happens right? And the Students paying for A's -- usually DON'T wind up Billionares either!
The Senate subcommittee has focused its investigations on the two biggest credit rating agencies, Moody’s and Standard & Poor’s; what it has found confirms our worst suspicions. In one e-mail message, an S.& P. employee explains that a meeting is necessary to "discuss adjusting criteria" for assessing housing-backed securities "because of the ongoing threat of losing deals." Another message complains of having to use resources "to massage the sub-prime and alt-A numbers to preserve market share." Clearly, the rating agencies skewed their assessments to please their clients.
Berating the Raters
Interesting.
Sounds like these "Pay to Play" Financial Analysts Salesman, knew they were dealing with something "dodgy" -- when it came to these Sub-Prime backed securities.
So why did they give them their AAA "Stamp of Approval", anyways?
Well that's what the Investment Bankers wanted, and THEY definitely were willing to "Pay to Play", for some AAA tinsel. In a nutshell, it looks like "Payola" ... $$$$$ for $$$,$$$,$$$
Well that initial article, was pointing me in one direction -- it was telling me, it's time to "Go to the Source", as I am often motivated to do, being a Student myself, who had to worked very hard for every A.
So here are a few AAA-Nuggets I dug up on that next latest archival excursion:
Committee Statement
April 23, 2010
Opening Statement of Senator Carl Levin, U. S. Senate Permanent Subcommittee on Investigations Hearing, Wall Street and the Financial Crisis: The Role of Credit Rating Agencies
In exchange for large fees, Wall Street firms helped design the [Residential mortgage backed securities] RMBS and CDO securities, worked with the credit rating agencies to obtain favorable ratings, and then sold the securities. Without credit ratings, Wall Street would have had a much harder time selling these products, because each investor would have had to rely on themselves to figure them out. Credit ratings helped make the sales possible by labeling certain investments as safe, using their trademark AAA ratings.
[...]
But those AAA ratings created a false sense of security. High risk [Residential mortgage backed securities] RMBS and CDOs turned out not to be safe investments. We heard in our first hearing how many of the high risk mortgages backing those securities were riddled with poor quality loans, contained fraudulent borrower information, or depended upon borrowers being able to refinance their loans before higher loan payments kicked in. When housing prices stopped climbing, and many borrowers could no longer refinance their loans, delinquency rates skyrocketed. RMBS and CDO securities rated as investment grade began incurring losses and were sharply downgraded.
Take, for example, a CDO known as Vertical ABS CDO 2007-1. In early 2007, UBS, which is a major bank, asked S&P and Moody’s to rate this CDO. The UBS banker, however, failed to cooperate with the analysts. One S&P analyst wrote in an email to colleagues: "Don’t see why we have to tolerate lack of cooperation. Deals likely not to perform." That’s Exhibit 94b.
Despite the analyst’s judgment that the CDO was unlikely to perform, S&P rated it. So did Moody’s. In April 2007, both agencies gave AAA ratings to the CDO’s top 4 tranches. Six months later, both agencies downgraded the CDO which later collapsed.
[...]
Conclusion
In the fall of 2007, Moody’s CEO Ray McDaniel called a town hall meeting to talk to his employees after the mass downgrades that shut down the subprime market. "What happened in ‘04 and ’05," he said, "is that our competition, Fitch & S&P, went nuts. Everything was investment grade. It really didn’t matter[.] ... No one cared because the machine just kept going."
A Moody’s managing director later responded our "errors make us look either incompetent at credit analysis, or like we sold our soul to the devil for revenue, or a little bit of both.
Permanent Subcommittee on Investigations (Home Page)
Senator Carl Levin is the chairman of the Permanent Subcommittee on Investigations.
Footnotes on: RMBS (a sidekick alias for CDO's)
Committee Statement
April 23, 2010
Residential mortgage backed securities, or RMBS, are one of the oldest types of structured finance. To create these securities, issuers bundle up large numbers of home mortgages into a pool, figure out the total revenue coming into the pool from all the mortgages, and then design a "waterfall" that assigns portions of the total incoming revenue to what are called "tranches." Tranches are not collections of mortgages, they are simply recipients of income from the waterfall of mortgage payments coming into the pool.
Each tranche is used to issue a mortgaged backed security that receives a credit rating and is then sold to investors. The tranches that are first in line to receive revenues represent the safest investments in the pool, and are designed to get AAA ratings. Tranches lower down the line get their revenues only after the more senior tranches are paid, and their securities get lower credit ratings.
Animation of the Tranche Waterfall
Brochure Graphics of the Income Streams from CDO's
We are taught to Work hard and Play by the Rules, in Life, growing up.
We are taught to Pull our own Weight, and to Add something of Real Value to Life, before we're done.
But it seems like Investment Banks Play by an entirely different set of Rules -- using a different kind of Money! ... with Investments Stamped AAA at the fire sale, and then quickly down-graded to "Junk" once they been sold.
You could build a LOT of Pyramids, with THAT kind of System! ... a system built on Paying for those most Excellent Grades.
The Top 5 Banks as March 2008
I guess it was fun, while it lasted
Wait? ... What! It's still going on?
Only in America!
Where ANYONE can grow up to be a Millionaire ... just Work Hard and Play by the Rules ...