Via Jim Henley, this charming story about one of my favorite issues:
As the bottom fell out of the housing market and complex mortgage-backed securities began tanking in 2007, a strange thing happened at Moody’s Investors Service, one of the largest firms that rate bonds for the risks they pose to investors.
Moody’s blue-ribbon board of directors stopped receiving key information from an internal committee that was supposed to keep the board informed of risks to the company, a McClatchy investigation has found.
Instead, the ad hoc risk-management committee suddenly disappeared, precisely at the time when the board and management should have been shifting to higher alert as the financial world began quaking.***
The findings of the new McClatchy investigation not only call into question the value of the new regulatory approach lawmakers are drafting; they also help underscore the widespread criticism that many corporate boards practice crony capitalism rather than independence.
I’m doing breathing exercises right now. Until the way the ratings agencies work and are funded fundamentally changes, this shit will keep on going on. And if you read the article, none of the proposed financial reform changes address this problem.
It still amazes me how little scrutiny the ratings agencies have gotten in all this.
The whorish, in-breeding nature of the whole relationship slays me. Moody’s gets a fee for the bond valuation, and if they continue to give high ratings, they get more biz. If they give low (read: honest) ratings to some things, they lose biz.
It’s like me and the wife — if I tell her she looks great, I get laid. If not, computer porn. At this point, my wife probably thinks every single day she’s Megan Fox.
I couldn’t agree more. It’s difficult to understate how dependent the rest of the financial community is (or was) on the ratings firms, and how the ratings issued by them were taken for granted as being accurate. The ratings firms were enormously complicit in the meltdown.
@Punchy: Megan Fox is a skank and needs to eat a sandwich.
Well, once again it’s the woman who raises the red flags. Everyone else is “a nice guy”. Mistakes were made. No comment.
The courts aren’t going to be so kind. Their First Amendment defense isn’t going to work this time.
And, good for McClatchy, the last bastion of journalism.
Punchy, I so need to find a way to put that into my signature.
“Conflict of interest” is clearly a fancy, elitist term that hippies use before they come in to regulate your business.
Creating and enforcing laws to ensure that the interests of shareholders and executives are aligned will be the first step in the soci1ist, nazi takeover by stupid liberals who don’t know how to run the government like a business.
@John Cole: Did you….just imply….that my wife is a……nah, you couldn’t have.
Somehow, it’s always someone else’s responsibility. I know the ratings agencies are there to keep the banksters honest, but if banksters have no integrity, how can someone else always catch them?
It seems to me that the regulations need to require that the banks own a percent of every single one of these assets. If they go down, the banksters lose their money first.
Nothing other than having skin in the game is going to make banksters start playing by the same rules everyone else has to use.
@Punchy: I think your point was lost: this praise of the wife, strictly accurate or not, is good for the relationship.
Financials… not so much.
Cole: It still amazes me how little scrutiny the ratings agencies have gotten in all this.
We have been kept amazingly well informed about the comedy stylings of Sarah Palin, however … that takes a lot of time, you know.
Wake me up when real trials start.
But … but … it’s not capitalism if the regulators aren’t paid off and the loan obligations aren’t sold to a third part.
Where do I sign up?
Too bad you hate populism. Because pitchforks and torches are probably the only remedy at this point.
The fucking ratings agencies are and always have been a giant practical joke on the rest of us. The markets are nothing more than a giant pyramid scheme built on incestuous relationships among the various players. Consumers and investors be damned. The Masters of the Universe rule us all and we better just get damned used to it.
FYWP, I’m in moderation because I used that word that can mean sexual relations among close relatives. I fucking hate WP.
@Ash Can: Gah. I meant to say “overstate,” of course. Coffee, stat!
Nothing to stop them from buying a default swap on that 1% position. Then they could care less if they go down.
We actually saw this with a major construction company last year – rather than work with the company to avoid bankruptcy (and a viable plan was on the table), the bank refused to work with them and forced them to file. The bank had a CDS against the company and collected 100%.
Until we outlaw certain kinds of credit derivatives, responsible credit practices will be neglected due to these kinds of perverted incentives.
Many, many years ago when I set up my first retirement account, the HR representative at my employer was aghast that I was not taking “aggressive” advantage of the market and instead invested in blue chip, Asian, and green stocks. The Asians made me a good chunk until I suddenly pulled out and put it all in bonds. The rep had a fit.
Fast forward. That account now holds a tidy nest egg. It won’t make me a millionaire, but the last time I looked, I lost a grand total of $4500 during the stock market debacle. A friend who followed the rep’s advice lost a quarter of a million.
The secret? knowing that these people lie, cheat, and steal. And those who don’t are cows that follow the herd anyway. Wall Street is a game for people who can take the time to pay attention each day every day or for con men. I’m neither.
@John Cole: You say that like being a skank is a bad thing.
@Ash Can: Coffee is good. Still, incoherent and/or inchoate rage is entirely an appropriate response to the situation.
“@Punchy: Megan Fox is a skank and needs to eat a sandwich.”
‘Sandwich’? So that’s what you call your –
Why is fraud legal in America?
To me, the Kardashian sisters are the epitome of unattractive skanks.
Them and everyone on VH1.
I have a pitchfork ready for the ratings agencies though. It is shocking they haven’t all been driven out of business.
If I performed like them, I’d be fired for sure, and probably jailed.
Was it a mutual fund? If so, the brokerage was probably taking some of the fees and giving it to the HR rep as a kickback. I think they even get to write it off as an advertising expense.
Same reason why car dealers insist that buyers let them set up financing plans in-house. They almost always get a kickback from the bank for steering business their way. So they’ll give you a deal on a car that will only last till the end of the month and promise you a low interest rate if you go with them. All the sudden WHOOPS that rate wasn’t as low as you thought and you now have one day to take their loan, get a loan on your own (which is impossible), or else the price goes back up.
Godfathers are supposed to advise their godchildren on religious matters, or so I’m told. I tell my Godson, “Never trust someone in a suit who says they have a great deal for you.” I figure it’ll help him out more than a lot of superstitious mumbo-jumbo my sister thinks I should be giving him.
John, if you have not picked up Michael Lewis’ “The Big Short” yet, I highly recommend it.
Among other things, he took the rating agencies out to the woodshed and slapped them all senseless.
@Egilsson: To me, the Kardashian sisters are the epitome of unattractive skanks.
These people must have the greatest publicists in Christendom. As far as I can gather from actively avoiding them, they’re rich spoiled dumb brats who party and shop. Who the fuck gives a shit about any of this? Doesn’t this get really boring to watch after, maybe, ten minutes?
As far as Moody’s goes, I enjoyed the creativity in using a free speech defense for pumping out pile of crap AAA ratings to anybody who wags a twenty in their faces. Like they’re the little socialist newspaper stickin’ it to the man, bro. I assume they’re buried under a pile of fraud suits, because if I lost a nickel directly based on their dumb ratings I’d sue their asses.
Sly: No, it was the University’s HR person. She was so convinced people could make a million dollars in the stock market in seven years that she recommended really aggressive investments for everyone. Which would have been fine if I had the time to monitor the thing as closely as I would need to but I didn’t.
Funny enough, when I pulled out of the Asian fund the fit was because they were making a bundle. But I had just seen an article in FT talking about the Singapore economy getting the shakes, so I pulled out. Six months later there was a complete debacle.
Because bribery is also legal.
Yes, you are right about the apparent effectiveness of their publicists. I watched an episode once where the kardashian sister who is the porn star got emotional when she shopped for a Bentley on her birthday. It was a very important day for her; the pinnacle of her aspirations.
Her sisters, suitably jealous of her shopping prowess, were vicious and awful, and the whole episode devolved into an ugly, name-calling spat.
I felt unclean after watching it. There are lots of awful and shallow people out there, and apparently they are really good at being awful and shallow. I guess the talent of their publicists was in recognizing that.
Somebody please explain to me how the ratings agencies came to be depended on in the first place when they were not providing information on a fee-for-service basis? I thought that free advice is worth what you paid for it was one of the oldest proverbs around, and applies with especial force to investing. How did the raters ever develop a reputation higher than street corner stock touts?
It’s unfortunate that financial reform won’t get as much attention as healthcare reform, because we are about to get f’ed. Again.
In my amateur opinion, this will never get better until all three of these things happen. 2 out of 3 won’t cut it:
1. Much tougher regulations that lead to criminal liability.
2. A fully funded and aggressive SEC
3. Jail time.
Regulation with underfunded regulators won’t cut it.
Mere fines won’t cut it.
Things won’t change until the people involved have a credible fear of being put in “pound you in the ass” prison (Cf. Office Space)
@BombIranForChrist: And if I may reply to myself, it shouldn’t just be the SEC that is very well funded but other regulatory agencies as well. Oh, and the financial companies themselves should pay for this fundage.
Having accurate ratings on commodities would stop certain people’s abilities to make sh*tloads of money gaming the system and less connected investors, so I fully expect it to continue.
Of course, I honestly start to wonder at what point are investors going to realize that a Moody’s AAA carries as much value as the Super-star AAA+++ Infinity rating coming from a homeless man who enjoys talking about investment strategies with the voices in his head.
Kevin Phillips Bong
@Egilsson: After spending a few years in LA around the entertainment business, I can say that publicists are in general some of the worst human beings in the world. What must go on in your head when it becomes your highest goal to obtain positive media coverage for a-holes and douchebags?
Wha…? She needs to eat a sandwich? Because she doesn’t have a beer gut?