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Tuesday, April 15, 2008

Stuff You Have To Read

The picture for corporate debt - Bloomberg.

On mortgages, this article by Linda Lowell hosted at the rightly esteemed Housing Wire. Lowell discusses the changes in modelling that produced the wildly irrational valuations of the recent brand of mortgage securitizations, and the role of the ratings firms. Just one word before you begin. She is correct that they are for-profit entities, but the truth is that the federal regulators ceded regulatory authority to them by making NRSROs (nationally recognized statistical rating organizations) their official benchmarks of risk. The banking regulators used them just like the SEC did, so in essence these organizations became a major part of the regulatory apparatus.

Regarding Egan-Jones (see the NRSRO link above), it was just recognized last December. The ratings game has been a closely-held franchise in which the profit all stemmed from payments from the organizations seeking ratings on their instruments. The conflict of interest is obvious. Egan-Jones was started as an investor-paid ratings firm, and is therefore a different animal; its conclusions have sometimes been notably different than those of other such firms and it has been controversial in certain quarters. More background on the certification, which had been long denied.

However it is stupid to say that the ratings firms misled the banks who were originating funny-money mortgages. If you are writing no/low doc ARMs with funky affordability features for astronomically disproportionate amounts, you either know the risk you are taking or you are exerting great effort not to know it.

However it is stupid to say that the ratings firms misled the banks who were originating funny-money mortgages.

It's not the originators that got screwed - they knew what sludge they were selling - it was the investors who believed the silly AAA ratings that took gas.
Well,ummm.Happy april 15th.
Why thank you! Like everyone else I enjoy mailing those checks. It makes me feel all warm and cozy, somehow.
Anyone who thought a pool of BBB could be split into tranches such that 90% of it could be classed as AAA was not exactly doing their due diligence either. Financial alchemy doesn't work any better than the physical kind did.

There's a lot of blame, greed, and foolishness to point to.
Ohhhh. Backloading business failures due to extending unwise credit and front loading business failures due to unreasonable credit contraction.

Well, Rob, it's not necessarily an "unreasonable" credit contraction. Usually credit contractions overshoot when previous lending standards got so loose that a great deal of risk was created, and now in effect money has to be withdrawn from lending to bolster reserves. An institution which doesn't lend money it doesn't have isn't being unreasonable - it's just surviving as best it can.

The entire point of establishing a system of banking regulation was to break this boom-and-bust cycle. While regulation will take off the tops of the booms, it also prevents the crashes.

Obviously we let that concept get away from us for a while....
MoM,I hope you will comment on Mccain's economic speech today.I do miss the Republican party sometimes...
Some posts are self-explanatory.
Facts tell whatever story.

More of greed, liars, & crooks and their effects.

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