Alchemy Lives!

I'm not an economic idiot -- I remember what "elasticity of demand" means -- but I may be an economic special-needs person. Even so, there's one fact about the current credit meltdown that seems to be escaping a lot of attention. I know President Bush wants to solve the problem, and leave the process of finding out how the problem came about for later (maybe four months down the road?), but my needs aren't that special.

So here goes: the key to the process of wrapping questionable mortgages together in fancy financial packages and selling them to financial institutions far away was making those packages attractive. What better way than to turn them into bonds rated AAA, the same rating given to bonds issued by our strongest corporations and best-managed cities? But how does that happen? It would seem to be like turning dross into gold, the old alchemists' trick.

Enter the bond-rating agencies, the folks whose job it is to signal to investors which bonds are golden and which are junk (even junk bonds had their day, although it was in the 1980s). So what possibly convinced these normally sober ladies and gentlemen that financial instruments that basically turned slices of questionable mortgages into "securities" deserved a triple-A rating? I'm all ears.

Maybe Carly Fiorina could explain it to me.

Comments

[professor]

Regulate! Nationalize! Tax the Rich!

[Bienville]

Where have we hear this before?

Danger is imminent. Action is required now. There is no time for debate. There is no reason for oversight.

We are still mired in a war without end in Iraq from the last time Bush and his stooges demanded immediate, unlimited authorization. What will it bring this time?

I vote NO. Bring us a better plan.

[Caddisfly]

Well it started like this....deregulation was the buzz word of the corporate machine. So we deregulated, and allowed these institutions to list certain assets at a value they ( the banking operators) would be allowed to estimate. Hard assets were in one category, the will-o-the-wisp assets were another. We all get to pay for the will-o-the-wisp now! Enjoy your portion.

[NicasioKid]

To all voters - be angry, be very, very angry. "Your" money is about to become "their" money. Call your representatives in Congress to demand this bailout package include industry accountability measures, government's (your) partial ownership of assets to be liquidated, and relief for homeowners. I know three hard-working families that could still be paying the banks their monthly mortgage fees if the banks had been willing to renegotiate the loan terms (to reflect the lower value of the homes). Instead, the banks now have foreclosed homes they are trying to sell to speculators.

[Pdubya]

This is a symptom of the root problem: our fiat monetary system.

No amount of regulation or deregulation can reign in creating money out of thin air.

"Allow me to control and issue a nation's money and I care not who writes its laws!". Amshell Rothschild.

we have a left wing and right wing socialist plutocracy. they're just fighting over which arm to thrust the needle into.

meanwhile we wear our red and blue capes and argue over who can save us. they answer to the same new world order bosses.

we're seeing it unfold.

peace

[lechatnoir]

Aho.

[Rumplestiltskin]

"Even so, there's one fact about the current credit meltdown that seems to be escaping a lot of attention. "

This"

http://www.villagevoice.com/2008-08-05/news/how-andrew-cuomo-gave-birth-to-the-crisis-at-fannie-mae-and-freddie-mac/2

[francoise]

If I buy some stuff wrapped in a nice box which says it's good quality stuff,

if I give my good real hard-earned bucks to pay for the stuff inside the box,

if the seller takes my money and hands me the box with the stuff inside,

And if when home I open the box and find sh*t in it,

I won't call the seller an alchimist, but a liar and a thief.

In civilized democracies, those who lie and steal for a living and on such a large scale are sent to jail.

[dogman44]

No matter how pretty it looks you should always smoke a sample of the sh*t before you hand
over the money.

[hopeless277]

Uh, bribes. Geeze Harry, didn't you cover that in civics class? It's the American way. Bribe the regulators and then grant them pardons on 1/19. I like the way Obama jokes about this 'meltdown' thingy. I'm sure he'll get serious soon.

[DaOne]

Many of the original MBS securities carried AAA rating because they were topped up by third party guarantees as insurance. This is done typically by monoline insurers. However when the rug fell out and the monoline companies started getting hit themselves, the AAA rating of many of the MBS were only as strong as their weakest link; hence the tumble in ratings.

One of the most shocking statements I recall from the ratings agencies was that irrespective of the rating assigned to any product rated by them, those ratings were not guaranteed for investment purposes (please insert my bugged out eyes here!)

Until there is sufficient reform of a) the ratings agency role and b) the regulatory oversight required of financial institutions, I would not drop a dime on any of these firms.

On another note, if anyone thinks 700 billion will be enough, think again. Our Treasury Department thought 85 billion would be enough last Tuesday to backstop AIG, by Friday it was talking 1 trillion. Cleary, those in charge are no better than feces slinging monkeys. Sorry for the visual.

[GoCards1978]

What was the point of AAA ratings in the first place, if not a guarantee for investment purposes. Talk about pigs in a poke....

[Biffmeister]

The Art Metrano school of economics. DAh, dAh-dah, dah. Presto, AAA rated bonds.

[lionqueen]

PART II
So, the smartypants whiz kids of Wall St. snuggled up into bed with Moody's and S&P and said, "Here's the underlying calculations." Fifty pages later, with their eyes rolling back in their heads, Moody's and S&P said, "Well, this looks good on the surface, but..." Then the smartypants whiz kids handed them lots of money to do the analysis, and it started to look better.
And, so it went, until Uncle Hanky came to the rescue after he saw that US housing prices can actually fall down all at once - especially when demand artifically pushed prices higher at an unsustainable trajectory.
So, nite nite, little Harry, and sleep well, won't you?

[lionqueen]

PART I
Well, Harry dear, you must dig just a shovel or so deeper to see that the premise for going into to the mortgage business in the first place, was that at no time (before now) had the value of US residential real estate gone down simulaneously. Using that premise, you see, investment bankers could go into the mortgage banking business, package loans, and slice them up into tranches and sell them as AAA-rated instruments based on the fact that they were comprised of geographically diverse pieces of US real estate - that, as we mentioned before, had never gone down all at once.
You see, when New England real estate goes down, surely Florida will go up, and all those little positive corollaries will certainly offset any regional difficulties.
And, hey, wait! You know what? We can outbid those stodgy bankers for mortgages - with their 20% down, no more than 30% of gross income, blah blah blah underwriting standards - and get THEIR business, too. Here's how it will work. Since the underlying value will always be rising (on a national level), even 100% financing is not risky, because the asset value is going up. Hey, we don't even need to check borrowers' income. And we'll design low initial payments that will adjust upward, too. Heck, their incomes will rise; and even if they don't, the real estate value will rise, and they can sell at a profit.

[raw016]

OK, I'm not a finance guy either, but don't the credit rating agencies essentially work for the banks? Clearly a conflict of interest, but I believe that's how it works. If a credit rating agency didn't give a bank the rating they wanted, I think they could just go to another one that would.

Anyway, the best explanation of this whole fiasco that I've heard yet was on This American Life - the show is called "The Giant Pool of Money" (don't know the show number, but you can find it in the archives). They covered this issue in the show.

[miles120]

Harry, the bond rating agencies are paid by the investment banks that bundled the mortgages into bonds. They had incentive to inflate the ratings, so they could maintain the business and create an environment that would lead to their own revenue growth.

The conflict seems pretty obvious. You have to wonder why the idea of simple regulation is so unpalatable to people.

[Martee]

You don't have to wonder too long. Without regulations they can steal as much as they want -- and then when it all goes to hell -- they get bailed out by their friends in White House. Not a lot to think about.

[Biffmeister]

Regarding your original question, I am reminded of a song: "Don't send a monkey to the store to bring home bananas", or "Don't send a rabbit to the store to bring home carrots". I can picture some Cigar Smoking Wall Street Good Old Boys in the back room with a can of gold spray paint, and a stack of bricks.
CSWSGOB #1: "You sure this will work B.S.?
CSWSGOB #2: "Hell yes. Dubbya says he's on board. Besides, Karl says give him a couple weeks and we won't even need the paint to convince people this is BULLion.

No bail out without reinstatement of all previous oversight laws plus some extras. Severe limits to CEO salaries. No golden parachutes. You fail, you get less money--not more. This is our money--return any monies recovered to the taxpayers. Break up these big money corporations much in the way Ma Bell was taken apart, but even more so. Too many eggs in too few baskets.

BTW any comparison between some poor average Joe over extending himself on his house payment, and this Wall Street debacle of greed and ineptitude is ludicrous.

EXTRA IDEA #1: We'll need considerable extra monies for our returning veterans. Ask the war profiteers such as Halliburton to ante up private funds to help veterans programs. Shouldn't those who profited so greatly be glad to help those who gave so much? The private sector could show their patriotism here. Dick? Dick Cheney, are you there?