The federal reserve is going to pull another ONE TRILLION DOLLARS OUT OF THEIR ASS!

[Paulie]

The ratings of these securities was a lucrative business for the rating agencies, accounting for just under half of Moody's total ratings revenue in 2007. Through 2007, ratings companies enjoyed record revenue, profits and share prices. The rating companies earned as much as three times more for grading these complex products than corporate bonds, their traditional business. Rating agencies also competed with each other to rate particular MBS and CDO securities issued by investment banks, which critics argued contributed to lower rating standards. Interviews with rating agency senior managers indicate the competitive pressure to rate the CDO's favorably was strong within the firms. This rating business was their "golden goose" (which laid the proverbial golden egg or wealth) in the words of one manager.[4]

Critics claim that conflicts of interest were involved, as rating agencies are paid by the firms that organize and sell the debt to investors, such as investment banks.[8] John C. Bogle wrote in 2005 that there is an inherent conflict of interest when a professional firm is also publicly-traded, as the pressure to grow and increase profits is relatively stronger, which may detract from the quality of work performed.[9] Moody's became a public firm in 2001, while Standard & Poor's is part of the publicly-traded McGraw-Hill Companies.

Credit rating agencies and the subprime crisis - Wikipedia, the free encyclopedia

There you have it bud. Capitalism, unfettered capitalism, at work.

Right.

Because I would definitely consider only allowing 3 big companies to rate securities "unfettered capitalism"

And then when you consider how corruptible these companies can be, I have a lot of trouble making sense out of incentivizing banks to steer the majority of their risk towards securities that are forced to be rated by these said companies via REGULATORY RULES.

When you can show me where the "unfettered capitalism" lies in there, you'll get a gold star.

Even your boy Barney Frank agrees that the ratings company oligopoly needs to go.

 

[LiberalNut]

only allowing 3 big companies to rate securities "unfettered capitalism"

Umm, no. There are 10 agencies regarded by the feds as "nationally recognized". they are...

Moody's Investor Service
Standard & Poor's
Fitch Ratings
A. M. Best Company
Dominion Bond Rating Service, Ltd
Japan Credit Rating Agency, Ltd
R&I, Inc.
Egan-Jones Rating Company
LACE Financial
Realpoint LLC

steer the majority of their risk towards securities

Nothing in the rule does this of course. Indeed, the rule was supposed to encourage banks NOT to take tons of risk by making the best rated securities the best treated in terms of reserve requirements. What the investment banks did was pay off the ratings agencies to come up with the ratings they wanted on "toxic assets".

And, of course, none of this has anything really to do with the formation of CDOs and CDSs directly. That was all unfettered.

Reality: Unfettered Capitalism lead to disaster, as it aways does.

But, reality doesn't matter to wingnuts. They will blame everything but the bankers that actually made the thing happen. That's what they are trained to do.

 

[Paulie]

only allowing 3 big companies to rate securities "unfettered capitalism"

Umm, no. There are 10 agencies regarded by the feds as "nationally recognized". they are...

Moody's Investor Service
Standard & Poor's
Fitch Ratings
A. M. Best Company
Dominion Bond Rating Service, Ltd
Japan Credit Rating Agency, Ltd
R&I, Inc.
Egan-Jones Rating Company
LACE Financial
Realpoint LLC

steer the majority of their risk towards securities

Nothing in the rule does this of course. Indeed, the rule was supposed to encourage banks NOT to take tons of risk by making the best rated securities the best treated in terms of reserve requirements. What the investment banks did was pay off the ratings agencies to come up with the ratings they wanted on "toxic assets".

And, of course, none of this has anything really to do with the formation of CDOs and CDSs directly. That was all unfettered.

Reality: Unfettered Capitalism lead to disaster, as it aways does.

But, reality doesn't matter to wingnuts. They will blame everything but the bankers that actually made the thing happen. That's what they are trained to do.

The SEC has guidelines which push institutions, perhaps unintentionally and perhaps not, towards Moody's, S&P, and Fitch. Those 3 companies account for 95% of securities ratings, and the Federal Reserve only accepts assets as collateral that are rated by those 3 companies.

Now, finding certain points in the process of capitalism that may not have a regulation on the books that you believe to be adequate, does not change the fact the as a whole, the market is anything but unfettered.

Perhaps there should be more regulation in the creation of CDO's. I don't work in that industry and admittedly don't know enough about them to opine about that. But there were regulations in place throughout the market that FAILED. That much I DO know.

Coercing banks to take on certain risk, coercing them to use certain ratings agencies...Sorry my man, but that's not unfettered capitalism.

Sarbox didn't stop Lehman from pulling off Repo 105. That was failed regulatory procedure.

I realize you only want to focus on CDO's, for whatever reason, but the whole housing collapse issue is replete with regulatory failures.

 

[LiberalNut]

the market is anything but unfettered.

Perfectly competitive, totally unfettered markets are a utopian pipedream. They never have existed, they never will. Indeed, they can't.

Perhaps there should be more regulation in the creation of CDO's.

Well, duh. But, by advocating more regulation, you'll be branded a Bolshevic.

Coercing banks

And back you go to wingnuttery. The banks did this thing, not the government. Regardless of what the right wing noise machine tells you, it was not CRA and it was not the Recourse Rule. It was corrupt Capitalists doing what corrupt capitalists do, making as much money as they can no matter who else gets screwed.

Deal with it.

 

[LordBrownTrout]

What's transpiring is absolutely horrid but I simply can't help myself but to buy more bags of silver. Thanks fed, for the American dream.

 

[Toro]

the market is anything but unfettered.

Perfectly competitive, totally unfettered markets are a utopian pipedream. They never have existed, they never will. Indeed, they can't.

Perhaps there should be more regulation in the creation of CDO's.

Well, duh. But, by advocating more regulation, you'll be branded a Bolshevic.

Coercing banks

And back you go to wingnuttery. The banks did this thing, not the government. Regardless of what the right wing noise machine tells you, it was not CRA and it was not the Recourse Rule. It was corrupt Capitalists doing what corrupt capitalists do, making as much money as they can no matter who else gets screwed.

Deal with it.

I completely agree that the CRA is a red herring. I also think deregulation and Wall Street were a big part of it. However, bubbles simply cannot form without easy money. And the propagator of easy money was the Federal Reserve, which is a government agency that sets interest rates by dictat. Interest rates at 1% and gunning the money supply did more to create the Housing Bubble than anything else, just like it did the Tech Bubble and the gold/silver, emerging markets or whatever bubble is being created right now.

BTW, silver is up 15% since the Fed announced QE2 on Wednesday.

 

[LordBrownTrout]

the market is anything but unfettered.

Perfectly competitive, totally unfettered markets are a utopian pipedream. They never have existed, they never will. Indeed, they can't.

Perhaps there should be more regulation in the creation of CDO's.

Well, duh. But, by advocating more regulation, you'll be branded a Bolshevic.

Coercing banks

And back you go to wingnuttery. The banks did this thing, not the government. Regardless of what the right wing noise machine tells you, it was not CRA and it was not the Recourse Rule. It was corrupt Capitalists doing what corrupt capitalists do, making as much money as they can no matter who else gets screwed.

Deal with it.

I completely agree that the CRA is a red herring. I also think deregulation and Wall Street were a big part of it. However, bubbles simply cannot form without easy money. And the propagator of easy money was the Federal Reserve, which is a government agency that sets interest rates by dictat. Interest rates at 1% and gunning the money supply did more to create the Housing Bubble than anything else, just like it did the Tech Bubble and the gold/silver, emerging markets or whatever bubble is being created right now.

BTW, silver is up 15% since the Fed announced QE2 on Wednesday.

Yes! It! Is!

 

[LiberalNut]

Interest rates at 1% and gunning the money supply did more to create the Housing Bubble than anything else

Nobody forced any bank to write a liars loan. Nobody forced a bank to ditch underwriting standards. Nobody forced a bank to create CDOs and hide the bad mortgages in them, then pay off the credit ratings agencies to stamp the toxic assets "AAA". Nobody forced a bank to by CDSs, in essense betting against the laons they underwrote.

Gimme a break toro, the bankers did this thing, not the government.

 

[LordBrownTrout]

Why in the hell would a bank give out a prime loan to someone who had a bad history of credit? And why would the fed bail the banking system and financial institutions out after this had happened?

 

[Paulie]

Interest rates at 1% and gunning the money supply did more to create the Housing Bubble than anything else

Nobody forced any bank to write a liars loan. Nobody forced a bank to ditch underwriting standards. Nobody forced a bank to create CDOs and hide the bad mortgages in them, then pay off the credit ratings agencies to stamp the toxic assets "AAA". Nobody forced a bank to by CDSs, in essense betting against the laons they underwrote.

Gimme a break toro, the bankers did this thing, not the government.

Just like you can argue that more regulation would have prevented this, so too can it be argued that had interest rates not been that artificially low for that long, there wouldn't have been anywhere near the amount of mortgages written in the first place.

You're really going to overlook that carrot dangling in front of the faces of millions of potential debtors?

 

[Valerie]

Interest rates at 1% and gunning the money supply did more to create the Housing Bubble than anything else

Nobody forced any bank to write a liars loan. Nobody forced a bank to ditch underwriting standards. Nobody forced a bank to create CDOs and hide the bad mortgages in them, then pay off the credit ratings agencies to stamp the toxic assets "AAA". Nobody forced a bank to by CDSs, in essense betting against the laons they underwrote.

Gimme a break toro, the bankers did this thing, not the government.

Nobody forced them but the rules and regulations allowed it to happen, so greed naturally filled that void...Proper regulation would have protected consumers from such predatory practices. Yes, no one forced banks to be predatory but they were anyway...The system failed to keep the feeding frenzy from happening.

 

[Toro]

Interest rates at 1% and gunning the money supply did more to create the Housing Bubble than anything else

Nobody forced any bank to write a liars loan. Nobody forced a bank to ditch underwriting standards. Nobody forced a bank to create CDOs and hide the bad mortgages in them, then pay off the credit ratings agencies to stamp the toxic assets "AAA". Nobody forced a bank to by CDSs, in essense betting against the laons they underwrote.

Gimme a break toro, the bankers did this thing, not the government.

You are absolutely right. This would never have gotten this big had Wall Street not created all sorts of derivative products. And various deregulatory actions, such as allowing Wall Street firms to increase leverage and making it more difficult for states to prosecute for predatory lending certainly contributed to it. There was market failure.

But if you study economic history, you find that at the root of all bubbles is easy credit. And the Federal Reserve - the central bank of the United States - kept interest rates far too low for too long, accelerating the creation of excess credit, creating the Housing Bubble. It is the Fed and its irresponsible monetary policy that is at the heart of this crisis.

 

[Toro]

You also have to understand why structured products were popular in the first place. Because the FOMC kept interest rates so low, investors reached for yield. AAA CDOs often yielded 20-30 bps over Treasuries. If you are earning 4.2% on 10 year paper, 4.5% is a significant difference. Because the Fed forced the curve down, market participants reacted by reaching for yield, given that knee-scraping yields for govies made it more difficult for plans to meet their actuarial liabilities.

 

[Valerie]

The price of real estate has been inflated by the historically low interest rates because banks told people they could afford to borrow significantly more dinero based on the lower monthly payment, so people were deluded into thinking they could afford to borrow crazy amounts of money just because the bank told them they were "qualified" and "approved". Housing prices sky rocketed. Yes, foolish people never considered what would happen if one of them lost their job and half the cash flow was suddenly not there five years into a 30 year mortgage and ultimately that is their responsibility, but banks are also responsible for packaging "no money no problem" loans. Now the feds are trying to hold up the market by keeping rates low while tightening lending practices. It's actually a great time to buy a home as the prices are down and the interest rates are even lower!

 

[LiberalNut]

Because the FOMC kept interest rates so low, investors reached for yield.

A very fanciful way of saying that greed won the day.

 

[LiberalNut]

Just like you can argue that more regulation would have prevented this, so too can it be argued that had interest rates not been that artificially low for that long, there wouldn't have been anywhere near the amount of mortgages written in the first place.

Low interest rates were not the problem. Banks lending to people who could not afford the loans, hiding those bad mortgages in exotic derivatives and then betting aginst their own scheme was the problem. No matter how much you try to blame the government, the private sector actually did this thing. The only thing that you could possibly blame the government for, if you are honest and sane, is not stepping in sooner and putting a stop to what the private sector was doing.

 

[Toro]

Because the FOMC kept interest rates so low, investors reached for yield.

A very fanciful way of saying that greed won the day.

For sure, there was some of that. Lots of leverage too. But if you run a pension plan, and your actuarial target is to earn 7% a year, whether you earn 7.2% in a 10 year Tbond or 7.5% in a AAA CDO is basically irrelevant. But if your choice is to earn 5% in a Tbond and 5.4% in a CDO, the demand for CDOs will be higher. So the Fed is complicit in that. And what is scary is that they are doing it in an even bigger way today. I wouldn't be surprised if we saw $250 oil one day. I'm not making that prediction and I don't think it will happen, but it wouldn't surprise me.

 

[LiberalNut]

Look, fund managers reaching for yeild without knowing what the fuck is actually in the derivative they're buying is just another failing of the private sector, not the government.

There is no doubt that devaluing the currency will lead to higher oil prices. None. Indeed, the last time we saw 4 dollar a gallon gas, this is what did it.

But, in the final analysis, 4 dollar a gallon gas is a good thing.

 

[Toro]

But, in the final analysis, 4 dollar a gallon gas is a good thing.

Why?

And whose analysis?

 

[Toro]

Just like you can argue that more regulation would have prevented this, so too can it be argued that had interest rates not been that artificially low for that long, there wouldn't have been anywhere near the amount of mortgages written in the first place.

Low interest rates were not the problem. Banks lending to people who could not afford the loans, hiding those bad mortgages in exotic derivatives and then betting aginst their own scheme was the problem. No matter how much you try to blame the government, the private sector actually did this thing. The only thing that you could possibly blame the government for, if you are honest and sane, is not stepping in sooner and putting a stop to what the private sector was doing.

Of course low interest rates that are too low are a problem. It encourages misallocation of resources. The average real Fed funds rate over this decade has been exactly 0.05%. Given that the economy grows at about 2% per year after inflation, real interest rates should be 2% because, as Alfred Marshall correctly pointed out, the rate of interest represents the opportunity cost of financing the growth of an economy's capital stock. When the rate of interest is significantly below that for an extended period of time, it skews capital allocation towards unproductive purposes, such as building excess capacity and speculation. That's exactly what has happened over the past decade. We have had rolling asset bubbles. We still have them.

There is no doubt that market failure contributed to this financial crisis. I'm not a dogmatic conservative. I've spent most of my time here dispelling conservative economic myths. But this crisis is little different than other asset-induced credit collapses. And since the Fed is the primary institution that affects the pricing of credit, it bears the most responsibility for this mess.