Comments on: Prosecutors Ask If Congress Duped CBO To Obtain Favorable Score

By: Akston

Akston — Fri, 14 May 2010 05:09:00 +0000

“What really happened is that all the checks in the system (the rating agencies being a big one of those) failed.”

And possibly the biggest check in the system, bankruptcy (and the commensurate creative destruction) also failed, thanks to bailouts from those same folks in Congress.

On the HealthCare/CBO side of the analogy, Americans have a chance to avoid the same mistake in at least one way: Fire as many of the bankrupt Congresspeople as possible.

Sadly, we have precious few “green shoots” to follow that kind of political creative destruction. Just red shoots and blue shoots.

By: Brad Warbiany

Brad Warbiany — Fri, 14 May 2010 04:19:24 +0000

Well, Jeff, you do have me there. Whenever someone opposite the conventional wisdom, like Peter Schiff, explained exactly what was going on, they made him seem like a doom-saying quack. Or, for that matter, what I said here. I'm a layman when it comes to economics, but look at about 2/3 of what I predicted has already come to pass -- and with the current mess in the EU, nobody knows whether there are more shoes to drop to fulfill the rest of them. *Knowingly* inflate ratings? Not quite. They set the table, told the banks what would score well, and then the banks played as hard and fast with the rules as they possibly could to put together securities to get the highest ratings possible. And if they didn't get the right answer from Moody's, they went to S&P, or vice versa. Clear conflict of interest against the ratings agency that might "call the bluff", if you will. And Congress? What incentive did they have to blow the whistle when all this loose money was pushing up GDP and driving American homeownership to "historic" levels? There were a lot of issues. What really happened is that all the checks in the system (the rating agencies being a big one of those) failed. The rating agencies in particular failed because they basically gave the banks the roadmap to game the system (much like the CBO does for Congress, which was the point of the post).

By: Quincy

Quincy — Fri, 14 May 2010 01:11:04 +0000

Actually, I think Congress’s gambit with the CBO is a fair amount worse than banks gaming the rating agencies. As Jeff rightly points out, buyers could refuse to buy the shit-turned-shinola from the banks. Voters still haven’t gotten a say on health care…

By: jeff molby

jeff molby — Thu, 13 May 2010 23:46:03 +0000

The key is in your first paragraph. If they knowing inflated ratings, sure, hang ‘em high. If, otoh, they simply made the same mistaken assumption that a llllllllot of people made — that house prices wouldn’t plummet across the board — then they’re only partially to blame. If their criteria was made public and few, if any, analyst-type people said, “wait just a minute! Your criteria suck!” at the time, I can’t see how you can assume they were very far from conventional wisdom. Sure you can argue that they should be even better than conventional wisdom, but that’s closer to a nitpick

By: Brad Warbiany

Brad Warbiany — Thu, 13 May 2010 22:02:34 +0000

So Jeff, I take it that every time you buy a new piece of electronics, you carefully review the UL test reports to ensure that the product won’t burn down your house, right? Or do you just trust that UL is a respected institution and won’t certify a product that they, as experts in the field, know is bad?

While I’m sympathetic to your argument, as I am a believer in personal responsibility as the final determinant of the “justice” of a situation, I’m not willing to let the rating agencies off the hook. While ultimately the one who bears the brunt is the buyer, a UL certification, or a AAA rating should mean something. That it ceased to do so was a failure of the rating agencies.

Likewise the buyers of these MBS & CDO products, given that they’re shelling out a lot more money than I do for a stereo, should have known what they were getting into. Especially when these investment banks were packaging up crap to sell, and then on the other side of their houses were BUYING the same crap packaged by other morons. The strangest thing about this meltdown is that banks who should have known better about what these CDOs contained ended up holding on to the live grenade and getting blown to bits.

In one sense, you’re right. Ultimately, it’s caveat emptor. In another, though, you’re seeing what were once very trustworthy rating agencies who were part of and enabled a massive failure. The rating agencies failed to properly detect risk, because they used bad assumptions about housing values and economic trends (i.e. that foreclosures were uncorrelated — overestimating the “diversification” of the CDOs they rated) and at the same time fell victim to conflicts of interest. Frankly, they simply blew it.

By: Jeff Molby

Jeff Molby — Thu, 13 May 2010 20:36:55 +0000

I don’t understand the problem. If there was transparency across the board, then the fault lies with the buyers for not doing enough research to tell if the securities were worth the going rate. Likewise for voters and the bill.