Friday, December 12, 2008

Quis custodiet ipsos custodes?

Or, Who watches the watchmen?

(Note how I am cleverly getting you to read a financial article by making you think it's about the upcoming Watchmen film.)

A few weeks ago I recommended an article by Michael Lewis about the meltdown, and who knew it was coming, and who profited by knowing.

One of the heroes of that article was an investor named Eisman, "who couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds."

Today's New York Times has an article on exactly that topic.

"Moody’s, which judges the quality of debt that corporations and banks issue to raise money, had just graded a pool of securities underwritten by Countrywide Financial, the nation’s largest mortgage lender. But Countrywide complained that the assessment was too tough.

"The next day, Moody’s changed its rating, even though no new and significant information had come to light . . .

"That the credit-rating agencies missed immense problems in the mortgage-related securities they blessed is undeniable. Moody’s declined to say how many classes of the securities it has downgraded. But the number is in the thousands and the original value in the hundreds of billions of dollars.

"When Moody’s began lowering the ratings of a wave of debt in July 2007, many investors were incredulous.

“If you can’t figure out the loss ahead of the fact, what’s the use of using your ratings?” asked an executive with Fortis Investments, a money management firm, in a July 2007 e-mail message to Moody’s. “You have legitimized these things, leading people into dangerous risk . . .

"Moody’s current woes, former executives say, were set in motion a decade or so ago when top management started pushing the company to be more profit-oriented and friendly to issuers of debt. Along the way, the firm, whose objectivity once derived from the fact that its revenue came from investors who bought Moody’s research and analysis, ended up working closely with the companies it rated, and being paid by them."

They were being paid by the same people they were expected to rate. Why should we be surprised that they tried to make them happy?

Revolution by guillotine doesn't seem so bad now, does it?



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4 Comments:

Blogger Lance Larka said...

Revolution by guillotine still leaves someone to wipe up the mess.

I support revolution by claw back and jail time. A long time.

If these jokers are in jail for 40+ years maybe it will be a learning lesson for those in their junior careers.

Putting a lien on their estates would simply be just deserts.

8:41 PM  
Anonymous S.M. Stirling said...

Since apparently the entire world made pretty much the same mistakes, it's a bit futile to waste energy on figuring out who to shoot.

Odd as it seems, we're actually in better shape than most countries.

10:00 PM  
Blogger dubjay said...

The entire world made the same mistakes because they trusted rating agencies like Moody's and Standard & Poor's.

On mature consideration, I find the guillotine unsuitable. I'd like them hacked to bits by hatchets weilded by elderly people whose pensions have gone bust, and their bodies left on the stones for the dogs to eat.

11:29 PM  
Blogger SpeakerToManagers said...

Now this sounds really familiar ... oh, wait, isn't this just what the industry analysts did during the dotcom bubble? And we didn't draw and quarter them, now did we? I still want to know why not. Those bastards ruined the best job I ever had, and I want payback.

Of course this latest band of corporate pirates has done a real number on my investments, and prevented me from retiring when I planned. So we need something a little more, oh, draconian, for them. I vote for long prison sentences, but not in Club Fed. I think Supermax is about right for these guys; isn't that where the scum of the earth is supposed to go? After all, once you kill them, no matter how painfully, they're beyond any more punishment.

A little more seriously, though, nothing has been done to prevent these critters from doing it again. In fact, many of them continue to have their jobs because the Secretary of the Treasury insists they're the only people who can fix the problems they made. So, yes, there is a point in going after them; unless you're resigned to the idea that we're going to go through this every few years.

3:21 PM  

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