Posts filed under “Really, really bad calls”
On Monday, Moody’s downgraded Greece’s government bond ratings to junk status of Ba1 from A3.
As legislators debate new regulation for the financial sector, this action yesterday serves as a reminder to the folks in DC that the current regime of ratings agencies has become an unmitigated disaster.
It also raises a simple question: What possible reason on God’s green earth do the ratings agencies currently serve?
Consider the following facts about Moody’s and S&P:
• They are not unbiased observer of credit issuers.
• They do not provide actionable intelligence for bond or equity investors.
• Their positive credit ratings are, as we learned during the collapse, mostly worthless.
• Downgrades and negative ratings are also mostly worthless — but downgrades do have the redeeming quality of providing comic relief, to wit, the astonishingly belated downgrades of Enron, Lehman Brothers, Bear Stearns, Citi, AIG and now Greece. (Good times!)
• Last, they seem to be incapable of providing any sort early warning about potential systemic credit issues with major economic ramifications.
Other than that, they are a terrific group of folks who have done a bang up job paying themselves huge bonuses for previously unimaginable levels of incompetence.
When the Nationally Recognized Statistical Rating Organization NRSROs were created in the 1975, there seemed to be this genteel belief that no management team would willingly risk their entire firm merely to enrich themselves via short term bonuses. And — Of course! — no firm would ever behave so recklessly as to put the entire economy at risk for profit motives. Indeed, market discipline would insure such was the case.
We now know that this idealistic belief system is completely false, and relying on the efficiencies of the market to enforce regulations is sheer folly.
Joe Nocera cuts right to the heart of the “Blame Fannie and Freddie” argument in today’s NYT. It is an article well worth your time to read. He looks a the CATO/AEI narrative — that the government forced the GSEs (and the banks through the CRA) to make ill advised loans to people who could…Read More
Today’s must read media piece comes from former Fed Chair Paul Volcker, in the NY Review of Books: “Some five years ago, at a conference of the Stanford Institute for Economic Policy Research, I lamented that “the growing imbalances, disequilibria, risks” were giving rise to “circumstances as dangerous and intractable” as any I could recall—intractable…Read More
To a man whose only tool is a hammer, pretty soon everything begins to look like a nail. I couldn’t help but be reminded of that aphorism as I read the most popular article on WSJ.com yesterday — Tax Hikes and the 2011 Economic Collapse — a screed on the Laffer curve and Supply Side…Read More
WSJ: A commission probing the financial crisis denounced Goldman Sachs Group Inc., saying the firm first dragged its feet over requests for information then dumped hundreds of millions of pages of documents on the panel. The Financial Crisis Inquiry Commission issued a subpoena to Goldman, demanding that the firm provide a key for identifying customer…Read More
Why the ‘Experts’ Failed to See How Financial Fraud Collapsed the Economy
By James K. Galbraith
The following is the text of a James K. Galbraith’s written statement to members of the Senate Judiciary Committee delivered this May. Original PDF text is here.
Chairman Specter, Ranking Member Graham, Members of the Subcommittee, as a former member of the congressional staff it is a pleasure to submit this statement for your record.
I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis. Concepts including “rational expectations,” “market discipline,” and the “efficient markets hypothesis” led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on, and that widespread fraud therefore could not occur. Not all economists believed this – but most did.
Thus the study of financial fraud received little attention. Practically no research institutes exist; collaboration between economists and criminologists is rare; in the leading departments there are few specialists and very few students. Economists have soft- pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the dot.com bubble. They continue to do so now. At a conference sponsored by the Levy Economics Institute in New York on April 17, the closest a former Under Secretary of the Treasury, Peter Fisher, got to this question was to use the word “naughtiness.” This was on the day that the SEC charged Goldman Sachs with fraud.
There are exceptions. A famous 1993 article entitled “Looting: Bankruptcy for Profit,” by George Akerlof and Paul Romer, drew exceptionally on the experience of regulators who understood fraud. The criminologist-economist William K. Black of the University of Missouri-Kansas City is our leading systematic analyst of the relationship between financial crime and financial crisis. Black points out that accounting fraud is a sure thing when you can control the institution engaging in it: “the best way to rob a bank is to own one.” The experience of the Savings and Loan crisis was of businesses taken over for the explicit purpose of stripping them, of bleeding them dry. This was established in court: there were over one thousand felony convictions in the wake of that debacle. Other useful chronicles of modern financial fraud include James Stewart’s Den of Thieves on the Boesky-Milken era and Kurt Eichenwald’s Conspiracy of Fools, on the Enron scandal. Yet a large gap between this history and formal analysis remains.
The big flaw in the business critique of regulation is not so much that it overstates the costs, but that it understates its benefits — in particular, the benefits of avoiding low-probability events with disastrous consequences. Think of oil spills, mine explosions, financial meltdowns or even global warming. There is a natural tendency of human…Read More
There are a variety of estimates as to the total spillage from the Deepwater Horizon disaster.
As of yesterday, they were all significantly losses worse than the 10.8 million gallons of crude the drunk captain of the Exxon Valdez spilled. The range is 23.2 million gallons by the US government, to the worst case scenario of BP itself at 92.5 million gallons.
When this is done, it will dwarf the Valdez in total spillage, economic an d environmental damage.
Tracking the Oil Spill in the Gulf
click for interactive timeline
Graphic via the NYT
Size of Oil Spill Underestimated, Scientists Say
NYT, May 13, 2010
The FT is reporting that Goldie is on the verge of 9 figure settlement with the SEC: “Goldman Sachs is hoping to avoid the Securities and Exchange Commission’s charge of fraud by reaching a settlement on a lesser offence and agreeing to a fine of hundreds of millions of dollars, according to people familiar with…Read More
I left Vegas on Friday, but before I split, I took one final lap around the Skybridge Alternative Investment conference to say goodbye to a few people.
On the way out, I interrupt a tall old codger making time with Sandra, who works as Roubini’s Research Strategies Director. She is quite fetching, and since I was late, I bulled in, barking “Pardon the interruption.” I hurriedly air kiss her goodbye (European style, MWA! on each cheek), all the while thinking about my flight to San Diego. She introduces me to Lurch, but I’m only half listening, and I shake the old guy’s hand before bolting for my flight.
In the cab from the Bellagio to the airport, it dawns on me just what Sandra said: “Barry, this is Robert Rubin.” No bullshit, that’s who it was. He looked terrible; Clinton who just had quadruple bypass, looked much better.
Then again, Slick Willie’s biggest crime was sexual, not economic in nature. Whatever rationales Rubin’s conscious mind may have made about his role in the collapse, his subconscious knows better. And while no one else seems to be doing this, his subconscious is in the process of kicking his own ass. He seems to be slowly dying inside, at the behest of his own brain’s sense of guilt.
Regardless, I was reminded of that when I came across this list of the “corrupt corporate capitalists who leveraged their connections in government for their own personal profit . . . Today we know these opportunists as deregulatory hacks hellbent on making a profit at any cost.”
And look at this! Number 1 (with a bullet), turns out to be the former Treasury Secretary of State, whom I barely acknowledged while I was rudely interrupting his rap to a young hottie so I could say good bye to her:
America’s Ten Most Corrupt Capitalists
1. Robert Rubin
2. Alan Greenspan
3. Larry Summers
4. Phil and Wendy Gramm
5. Jamie Dimon
6. Stephen Friedman
7. Robert Steel
8. Henry Paulson
9. Warren Buffett