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

[Herrington]

It is kind of interesting, whether the bond raters simply looked the other way or got hoodwinked, or both. Fooling the rating system would not be all that hard. It is kind of the breakfast cereal model. A percentage of rodent droppings and dead insects is allowed in boxes of cereal. If the ratios get too high, then measures must be taken. But if the samples provided to raters are carefully selected to contain a credible ratio that is always within the limits, then, you know.

Not every box of cereal can be examined. At some point the manufacturer must be trusted to self police. In the case of the securitized mortgages I suspect the manufacturers were not self policing and a higher rate of rodent droppings were included in the package. And the problem then becomes which of all the packages out there are ok and which are not. Result, all are assumed to be bad.

[kellygrrrl]

we're still asking that question about the run-up to the Iraq War

did they look the other way?
did they get hoodwinked?

[mommamia526]

Are you confusing Federal Agencies? The safety of our food has been discussed for a while as well, a.o. with some force by Lou Dobbs. We have had contaminated spinach and tomatoes, and ...did you HAVE to bring up the rodent droppings? ..well who cares, I do not eat cereal. And, of course, the Chinese are now having a problem with tainted milk powder. Plus it is not a good idea to use plastics to wrap food, but it is still allowed. The problem in the financial markets is, and has been, deregulation, and deregulation is also a problem elsewhere, so your food example was not too far off. Short selling is borrowing money to buy assets (stock) and then selling it right away at a profit, pocketing the margin. You can thus make money even if you do not have any, especially with easy credit. Mortgages went this way. You bought property, and got a mortgage at an usury rate, and then the realtor, not even the mortgage company turned around and sold that mortgage at an even higher rate to yet another mortgage broker, and pocketed the margin. It has all been like the notorious, but ever succeeding pyramid scheme. *Reaganomics* was that old yet new again idea that businesses would regulate themselves, just as human beings do not need any laws, because they are all naturally good and sound, and would never do anything naughty or bad. Of course not.

[Herrington]

"Short selling is borrowing money to buy assets (stock) and then selling it right away at a profit,"

What you describe is buying on margin. Selling it right away is called day trading. Short selling is when you borrow stock from a broker and sell it in anticipation of the stock price declining. If it does decline then you purchase the stock back and return it to the broker. This is the margin to which you refer, the difference between what you sold the stock for and what you paid to replace it.

Technically, you can't short sell real estate. Stocks can be short solf because they are what is called "covered" by a broker for short sale. To short sell a house you would first have to own it, sell it, then buy it back when the market goes down.

[DLSteinhardt]

I'm with Larisa Alexandrovna on this one, elsewhere on HuffPo:

http://www.huffingtonpost.com/larisa-alexandrovna/welcome-to-the-final-stag_b_127990.html

This isn't a bailout. This is fascism.

The merger of the state and corporations. Emptying the federal treasury into the hands of the oligarchs, the plutocrats.

All those things Lefties have been saying for 40 years? It mighta been crackpot then, but it sure seems true today.

!

[DLSteinhardt]

Paul Krugman says it's bogus too:

http://krugman.blogs.nytimes.com/2008/09/20/no-deal/

[kellygrrrl]

I agree!

just like the Forged Evidence and FEAR CARD that got US into Iraq War

we are being played again

[breakingpoint]

ok, I got one more.... Instead of letting this Do Nothing Congress tackle the Wall Street Crisis let's hand all the paper over to the guys in Vegas. Guaranteed better and faster results.

[breakingpoint]

The perposal Bush gave Henry Paulson (TS) to bail the crooks out is 3 pages long and written in caryon; Bush wrote it himself. We have now entered into the Salvador Dali phase of this crisis.

[breakingpoint]

Three card Monte anyone?
Forget Fiorina, she’s in quarantine, I say we conjure up Houdini or Charles Keating.

[Kindheart]

I am with you, Harry. I don't get it. Don't cities work very hard to acquire that rating? Why would any reasonably thinking person buy these bonds? There is no end in sight.