Posts filed under “Really, really bad calls”

Regulation AB: Downgrading the Ratings Agencies

We know the major ratings agencies suck. We know their business model was payola. We know they sold ratings for cash, committed fraud on structured product investors. We know they hid significant modeling errors, and then hid these problems from the public and regulators.

Might their free ride be coming to an end? The SEC is tightening existing regulations that might restrain the big 3′s worst instincts.

First, a reminder of how criminally corrupt they are:

“In early 2007, according to the S.E.C., a Moody’s analyst discovered a significant flaw in one of its ratings models that inflated the grades assigned to a new type of debt called constant proportion debt obligation notes. Roughly $1 billion of these securities had been issued — carrying high Moody’s ratings — when the flaw was detected.

Rather than own up to the error, Moody’s officials fixed the model quietly, the S.E.C. said, leaving the inflated ratings intact. Because the notes were performing well in the market then, a Moody’s downgrade would have raised many questions and might have pushed Moody’s to disclose the existence of a problematic model. Recognizing the harm this would cause its reputation, Moody’s covered up the problem, the S.E.C. said.”

That is but one reason why Moody’s senior management, IMO, should be in Federal prison.

The SEC’s latest attempt to reign in the Rapings Ratings Agency is an extension of Regulation AB.

What is Regulation AB?

-Boilerplate offering statements (shelf registrations) are no longer allowed. Individual disclosures are required;

-Complex securities cannot be sold without adequate time for investor investigation;

-Requires increased disclosures and more detailed data about assets in the pool;

-The cash flow waterfall — the order of loan cash flow disbursements to investors — is required upfront, and must be made available to the public;

-CEO certification: prior to any issuer/sponsor making a shelf offering, their CEO must certify asset quality (the pool is “as advertised”). This creates a Sarbanes-Oxeley like liability.

-New disclosures MUST show prior securitized failures. Prior pool asset of originators/sponsors that were repurchased due to failure must be disclosed, with actual dollars amounts of losses/repurchases revealed;

-Independent parties must monitor the pools post-sale to see if the securities are performing as forecast;

-Most important of all, structured product registration can “no longer be based solely on the fact that its securities have received an investment-grade rating.”

In other words, the Ratings agencies are being downgraded by the SEC.


BB? AAA? Disclosure Tells Us More
NYT, September 4, 2010

Category: Analysts, Bailouts, Credit, Legal, Really, really bad calls

Dick Fuld’s Fantastic Revisionism !

“Lehman was forced into bankruptcy not because it neglected to act responsibly or seek solutions to the crisis, but because of a decision, based on flawed information, not to provide Lehman with the support given to each of its competitors and other nonfinancial firms in the ensuing days.” -Richard S. Fuld Jr., Lehman Brothers former…Read More

Category: Bailout Nation, Bailouts, Credit, Real Estate, Really, really bad calls

Attention RE Agents: NAR Spin is Counter-Productive !

We have had a god-awful run of Housing data. New and Existing Home Sales, Defaults and Foreclosure data, even the Case Shiller report — all have been utterly horrific. In light of this, I want to make the following announcement: Attention RE Agents! The National Association of Realtors are doing you a terrible disservice. Consider…Read More

Category: Real Estate, Really, really bad calls, Television

What Makes America Great: Layoffs!

I am watching Squawk Box around 6:30am as I get dressed this morning. The conversation turns to various incentives in Germany, where firms are actually paid not to lay people off in a downturn. (Firms cut hours, but keep most of their staff). The lower German unemployment rate of 7% has less people with financial…Read More

Category: Employment, Really, really bad calls, Taxes and Policy

Mortgage Defaults Driving Retail

What ever happened to the theme that Mortgage Defaults were driving consumer spending? Forget the anecdotes, I am compelled to point out that defaults, foreclosures and walkaways are at record levels, and retail sales have fallen dramatically. I am just asking . . .

Category: Consumer Spending, Credit, Really, really bad calls

Exisiting Home Sales Plummet 27.2%

Everyone knew that Existing Home Sales were going to stink the joint up today — but I just had to laugh when I read the NAR commentary; The headline along was priceless: July Existing-Home Sales Fall as Expected but Prices Rise. Too bad they don’t cover other events: “Lincoln attends theater opening; leaves early with…Read More

Category: Real Estate, Really, really bad calls

Celebs’ & Billionaires’ Economic Warnings ?

One of the things we have harped on around here is the tendency for humans to be backwards looking in their sentiment. The Recency Effect means we monkeys place disproportionate emphasis on recent stimuli or observations, regardless of worth or significance. Indeed, investors become bullish after they buy stocks, bearish after they sell them, as…Read More

Category: Contrary Indicators, Markets, Psychology, Really, really bad calls, Trading

Luxury Condos Get FHA Backing

“Something has to happen for this product to be marketable. I just find the whole thing ironic that FHA is providing financing for luxury housing.” -Jonathan Miller, Miller Samuel Inc. > That’s my pal JM discussing condos in today’s WTF?! article. Via Bloomberg, we learn: “The Federal Housing Administration agreed in March to insure mortgages…Read More

Category: Credit, Real Estate, Really, really bad calls

Fannie Freddie NYT OpEds

There are two OpEds in today’s New York Times regarding the GSEs. One of them is full of insight and intelligence and rationality. The other is by John Carney. The insightful column, Say Goodbye to Fannie and Freddie, was written by former St. Louis Fed president Bill Poole. During the credit bubble and housing boom,…Read More

Category: Bailout Nation, Credit, Federal Reserve, Real Estate, Really, really bad calls

Road to Nowhere?

While it’s interesting to see how the Fed statement changes from one meeting to the next, it’s also instructive to see how it changes over time.  That said, let’s look at almost one year’s worth of commentary on the housing market and see how far we’ve come:

Sept. 23, 2009 (link is to all statements and minutes):

Conditions in financial markets have improved further, and activity in the housing sector has increased.

Nov. 4, 2009:

Activity in the housing sector has increased over recent months.

Dec. 16, 2009:

The housing sector has shown some signs of improvement over recent months.

Mar. 16, 2010

However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls.

April 28, 2010

Housing starts have edged up but remain at a depressed level.

June 23, 2010

Housing starts remain at a depressed level.

Aug. 10, 2010

Housing starts remain at a depressed level.

When something is “depressed” long enough, is it fair to say it’s a “depression”?

And my post would not be complete without a few words about Mr. Hoenig’s dissent (making five in a row).  Today’s Yesterday’s release says:

Voting against the policy was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected.

“As projected?”  As projected by whom?  Back in April, the Fed upgraded — yes, upgraded — its central tendency for 2010 GDP from its January forecasts.  January’s forecasts had been for 2010 to fall in a range of 2.8 to 3.5, and that was raised in April to a range of 3.2 to 3.7.  We’ve now got Q2 coming in at 2.4 (with a downward revision likely) and no one looking for anything better for the balance of the year.  So what, exactly, is he talking about?

Read More

Category: Federal Reserve, Real Estate, Really, really bad calls