Greenspan: Blame the Rating Agencies
Perhaps I am biased, but Greenie and I finally agree on something:
Mr. Greenspan also lays the blame on the ratings agencies and the people that trusted their judgment for the proliferation of the mortgage derivatives that were a major part of the current financial crisis.
“What we have created in this world is an aura around the credit rating agencies about certification from them is the Good Housekeeping seal of approval, ” Mr. Greenspan said. “I will tell you the record of a lot of the forecasters of ratings have not been distinguished. They never were.”
Easy Al’s interview is part of a two-hour documentary on CNBC tonite, “House of Cards” at 8 p.m. and 12 a.m. Eastern time.
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Source:
Greenspan Says He Was Mystified by Subprime Market
Cyrus Sanati
Dealbook, February 12, 2009, 7:50 am
http://dealbook.blogs.nytimes.com/2009/02/12/greenspan-says-he-was-mystified-by-subprime-market/
February 12th, 2009 at 4:07 pm
Their corporate rating are generally OK after decades developments. However, other fields are…
Reason: they are facing a “dark matter” in fields like CMBS and CMBS. When there are no historical observations, no one can figure out the correct credit risk. Call it “DARK MATTER”. The problem is how heavy the dark matter is. Unfortunately, the answer is also dark.
Investors knew this, that’s why they asked IBs to share the risk. This left the credit agencies to be blamed…
February 12th, 2009 at 4:12 pm
And silly me…all along I was thinking the “but-for” blame goes to Greenie.
Without his expansive money/credit policies, would the rating agencies have had any of the ibank’s shite to rate?
February 12th, 2009 at 4:20 pm
Barry you old poot, you do read what your bloggers write…
Hey, Barry, look what I learned today!
I learned how to be an investment advisor! Just trust your investments with me, and I will be sure you are doing ok for your retirement!
Barry, watch me now! Are you watching? …er, oops…
http://www.marketwatch.com/news/story/Seven-years-wealth-gains-gone/story.aspx?guid=%7B25FECF6C%2DD974%2D4A45%2DA166%2D0E8D02684A80%7D
Seven years of wealth gains gone
February 12th, 2009 at 4:22 pm
So we can all just sit back and blame it on the ratings agencies. The ones that got paid by the people who they were rating. How shocking it is that they were biased. Who could have seen that coming?
And what about the credit default swaps? I suppose “Greenie” would argue that no one could have imagined that CDS’s would turn out to be a giant Ponzi scheme.
February 12th, 2009 at 4:32 pm
I’m not nearly as upset with the rating agencies as some. I take all the arguments about their conflicts of interest not as indictments of them, but of people who trusted them. I didn’t and don’t trust Lereah and his successor at NAR very much on housing issues, but I don’t blame them for the housing problems. Almost anyone who actually researches the rating on a bond should take the next step and research the research.
This isn’t letting them off the hook as far as sucking, they suck. However, the roots of there suckiness were discoverable. Who paid them and the basis for their models things that weren’t hidden. They may not have been advertised, but they weren’t hidden. People who trusted them given this have themselves to blame. There may have been a time when there was plausible deniablity with regard to ratings, but that time was long ago.
The intriguing thing to me is that there were no buy side funded rating agencies. These weren’t prohibited by law, why weren’t members of the giant pool of money clamoring for such agencies? A government mandate shouldn’t be required for people to look out for their own interests. Why did the market fail to produce buy side rating agencies? Why did the market fail to determine the worthlessness of sell side rating agencies? While their were laws around what sell side rated investments certain vehicles could invest in those laws didn’t prohibit an additional buy side rating. They also didn’t mandate investing in any and every sell side rated investment. Why did the market fail here? Why did AAA rated products that were junk get purchased?
February 12th, 2009 at 4:37 pm
I used to be an expert witness on equity costs, and bond rates. I’d hear the drum beats for “rating agencies.” Doesn’t Greenspan remember the NYC ratings before it crashed? AAA! The raters were reputed to be the lowest paid analyst on Wall St. They’d down rate somebody alright, but only after it was flat on it’s back for anyone to see. They could count knockouts, but TKO’s they’d miss. For the twenty-five years Mr. Greenspan was around, from the Council of Economic Advisors, under Ford right through 2001, there was plenty of evidence rating agencies only had 20/500 foresight, and 20/250 hindsight. Sounds like he was just passing the buck for not wanting to take the heat again, after the 1987 program trading debacle.
February 12th, 2009 at 4:37 pm
Bruce, you are almost as bearish as Mish lately, which is saying something.
@ crack: Why did AAA rated products that were junk get purchased?
Fees baby, the commissions. Everyone got paid, then everyone went for a drink.
Johnny Bottles and the crew. No yachts for the customers, though.
February 12th, 2009 at 4:44 pm
…and while he’s right
it’s still the pot calling the kettle black
shameless turd he is
February 12th, 2009 at 4:50 pm
Lefty:
Not bearish…realistic..I’ve already shared with you how aggressive I am during bull markets…and how wonderfully bull markets have been to me..
The article above…the average American nest egg is below what it was 7 years ago…My nest egg is 23 times what it was 11 years ago…but bear markets make it very hard, as an investor, not a trader, to make money..and I think the average American who doesn’t trade on a daily basis, would do well to do as I do..
You traders..fine, I wish you luck…but the old saying probably still holds…
I know some old traders
I know some bold traders…
But I know no old bold traders….
February 12th, 2009 at 4:57 pm
Wasn’t Greenspan’s latest book published by McGraw-Hill?
February 12th, 2009 at 5:03 pm
@ B in TN: I am of the mind that an excess of extreme bearishness in the media and the blogosphere likely increases the chances of an unexpected rally in equities before too long. You know that there has to be one so that the Long-Only Fund guys can keep busy.
I am not saying that it makes sense, but I would like to get a piece of the action when it happens.
My nest egg is also a lot bigger than 10 years ago. One only has to be correct a few times in one’s life on the major directions of the market, and the rest is discipline. 1999, 2002, and 2007 in my case, being just a lad.
As this bear market has progressed I have become more inclined towards commodities, anyway. The Rogers/Faber thing. Although I was too young to invest, I have very strong memories of 1970s stagflation.
February 12th, 2009 at 5:03 pm
I’ve said before – every mortgage was also accompanied by an appraisal and, discounting for some of those where pressure was applied to match a number, every appraisal was based on comps. When a bubble starts, the comps rise. The appraisals follow and soon are simply deceptive – and those inflated appraisals sucker people into believing a house has a certain ‘value’. How could the rating agencies be expected to say that house prices would fall for the first extended period since the Great depression in the face of all those appraisals?
Appraisals ought, at the least, have multiple parts. Comps may or may not be valid but a replacement construction cost estimate should also be included and maybe a 5 or 10 year weighted value. The notion that house prices rise and fall speculatively has become ingrained and is a real contributor to the bubble problem.
February 12th, 2009 at 5:08 pm
Appraisers, realtors and mortgage originators got fees too, baby…!!
Everyone lied and got paid !! What a country !!
February 12th, 2009 at 5:16 pm
A big game of musical chairs, when the music stopped no chairs remained.
February 12th, 2009 at 5:27 pm
crack wrote, “The intriguing thing to me is that there were no buy side funded rating agencies. These weren’t prohibited by law, why weren’t members of the giant pool of money clamoring for such agencies?”
That’s what I thought, until someone pointed out that there’s a huge freerider problem.
February 12th, 2009 at 5:48 pm
oh, greenie…when you point a finger at someone remember there are three pointing back at you! i mean weren’t the rating agencies under your purview also??
February 12th, 2009 at 6:02 pm
the great bull market was a bacchanalia of finance and spending which included expanding the credit pie to include everyone. We can’t get that hamster wheel going again so I do not see a reason for the market to march upward anytime soon. People have no cash and are not seeking credit- we are deleveraging and that means deflation and all the negative consequences that go with it.
February 12th, 2009 at 6:19 pm
@ ahab: if only a pure and rapid deflationary scenario were permissible. Alas, it is unlikely.
You do realize that this can end up being a lot uglier than simple deflation and deleveraging? Those with no cash or employment will have to borrow just to find food and shelter – or the government will have to do it for them. As the wealthier less indebted parts of the rest of the world begin to recover (already signs of that in Taiwan and Singapore for example) and competes for the same pool of limited fuel and agricultural resources we will see the price of things we need start to crawl back up, even as the price of assets (housing) continues to stagnate. Stagflation, baby.
February 12th, 2009 at 6:34 pm
“Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. . . . With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. . . . Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending . . . fostering constructive innovation that is both responsive to market demand and beneficial to consumers.” -Alan Greenspan (At the Federal Reserve System’s Fourth Annual Community Affairs Research Conference, Washington, D.C. April 8, 2005).
when will the country issue a deportation of this man
February 12th, 2009 at 6:41 pm
Funny, I don’t remember Greenspan warning us all not to trust the ratings agencies. I do remember him telling people they should run out and get an ARM, though.
Too little, too late from Uncle Greenspan.
Why did the market fail here? Why did AAA rated products that were junk get purchased?
What else were people going to buy?
Since Reagan, the economic trajectory and the policy decisions associated with it have overwhelmingly funneled wealth up–everything from unionbusting to declining marginal tax rates to massive deficit spending.
And hey, Masters of the Universe don’t stuff their money in mattresses and they can only spend so much of it. So, they invest it. Wall Street had so much money to invest that they’d run out of sane investments.
So everyone makes riskier and riskier bets as the real economy underneath weakens and becomes more likely to produce financial shocks, but it all looks like it makes sense because a steady stream of money keeps coming in and, like high tide, hiding all the rocks that smart people KNOW must be here, given the waters we’re in.
Then, whammo. Real economy generates a financial shock, Wall Street collapses, real economy collapses. And unless Uncle Sam figures out how to stop it, we all fall into a deflationary spiral and start wondering where we can get a stick and bandana for our worldly possessions. Hey, how do you ride the rails?
Of course, nobody ever sees it coming. Greatest concentration of wealth since 1929, a stock market that looks a lot like 1929, housing ownership bizarrely skyrocketing as median wages stagnate and even fall, a lot of financial players owning assets they don’t begin to understand and claiming the fundamentals have all changed and now we can make money by giving people loans they can’t pay off…but hey, nobody saw it coming. Even though we’ve been here before.
February 12th, 2009 at 6:41 pm
@ leftback
the dollar will ultimatley fall. Our standard of living will fall- it has been proped up by leveraged spending for 30 years. What once took one income to do in this country now requires two. I read an article on CNBC a little while ago talking about the new subsidized mortgage plan by the Obama administration with a quote in their indicating that home proces are now at 2003 levels and we don’t want prices to fall further. Why wouldn’t we want them to fall further? Let’s don’t prop up whole sections of the economy with phony incentives. Let prices fall- let things go down to their natural level- let’s start with a clean slate. That lower price helps someone else buy a home- let’s not take sides on winners and losers.
February 12th, 2009 at 7:05 pm
@ ahab:
I agree, of course, let the market work – allow prices to fall so that houses become affordable.
But “they” will not allow it, and so I must invest accordingly.
February 12th, 2009 at 7:14 pm
These rating agencies have had this anti-trust exemption ala MLB. Why weren’t they taking the juice? They might have had enough time to read the CMBS and CDO documentation and sent them from AAA down to the pony leagues.
February 12th, 2009 at 7:50 pm
@VennData: LOL. Do they still call those leagues the “pony leagues?” I think you’re dating yourself there…
Brings back memories for me thought.
February 12th, 2009 at 8:06 pm
When does someone go after the people who borrowed $$$ with no down payment , refinanced and took $50-100,000 out , only to walk away from their homes.
The lack of outrage toward these people is a joke .
Picking on Easy Al …… is too easy
spare us the false outrage already
February 12th, 2009 at 8:29 pm
Financial advisers always talk about diversification in investing. Well the blame game is no different, you need to diversify! Here is my recommendation for general blame allocation:
- 20% Alan Greenspan for keeping rates so low for so long
-20% Rating agencies for thinking a handful of junk equals high quality
-20% Lenders for handing out loans to anybody with a pulse
-20% Borrowers for thinking they could take on more than they could handle and outright lying
-20% The media for convincing everyone that they need to buy a home and there is something wrong with renting.
-
February 12th, 2009 at 8:36 pm
I was struck by this quote in the NY Times article on the collapse in Dubai….
“Now, like many of the foreign workers who make up 90 percent of the population here, she has been laid off and faces the prospect of being forced to leave this Persian Gulf city — or worse.
“I’m really scared of what could happen, because I bought property here,” said Sofia, who asked that her last name be withheld because she is still hunting for a new job. “If I can’t pay it off, I was told I could end up in debtors’ prison.”
Debtors prison – what a quaint idea.
link to the article –
http://www.nytimes.com/2009/02/12/world/middleeast/12dubai.html?em
February 12th, 2009 at 8:53 pm
I just read the same article, Grindstone. If we had that here, nearly half the population would be in prison.
February 12th, 2009 at 10:21 pm
It is terrible to so discuss this subject without dealing with the cause of their failure. Gov’t regulation requires them to be paid by the wrong people, the SELLERS OF THE DEBT!, instead of the purchasers of the debt. We do not have a free market & we are suffering for it.
February 13th, 2009 at 5:18 am
We used to have debtors prisons, well so to speak, they were know as poor farms here in New England. If you could not pay your obligations, you were sent there. Some times you were lucky and someone in town liked you and paid your debt, this kept you from being dragged off to the poor farm. Now we have the government, those who were fiscally irresponsible are bailed out by the taxpayer. Those that were always current on there debt or have none get the bill. Game Over!
February 13th, 2009 at 9:01 am
“It is terrible to so discuss this subject without dealing with the cause of their failure. Gov’t regulation requires them to be paid by the wrong people, the SELLERS OF THE DEBT!, instead of the purchasers of the debt. We do not have a free market & we are suffering for it.”
This is ridiculous. No government regulation prohibited people from paying for a buy side appraisal. Why did the market fail to produce a buy side ratings agency? It is so annoying to hear people blame the government for horrible horrible market failures. Read my first comment.
February 13th, 2009 at 10:20 am
@ lb
“As this bear market has progressed I have become more inclined towards commodities, ”
and in that regard, soliciting opinions on vehicles for long on oil…???
especially usl vs. uso