Must Read: Triple-A Failure

Do-not-walk-run to read Roger Lowenstein’s piece coming out in this Sunday’s NYT Magazine about the rating agencies, titled, Triple-A Failure.

There is so much good stuff here, almost any random paragraph is worth quoting:

"Mortgage volume surged; in 2006, it topped $2.5 trillion. Also, many
more mortgages were issued to risky subprime borrowers. Almost all of
those subprime loans ended up in securitized pools; indeed, the reason
banks were willing to issue so many risky loans is that they could fob
them off on Wall Street.

But who was evaluating these
securities? Who was passing judgment on the quality of the mortgages,
on the equity behind them and on myriad other investment
considerations? Certainly not the investors. They relied on a credit
rating.

Thus the agencies became the de facto watchdog over the
mortgage industry. In a practical sense, it was Moody’s and Standard
& Poor’s that set the credit standards that determined which loans
Wall Street could repackage and, ultimately, which borrowers would
qualify. Effectively, they did the job that was expected of banks and
government regulators. And today, they are a central culprit in the
mortgage bust, in which the total loss has been projected at $250
billion and possibly much more."

Go.

>

Hat tip Paul.

Source:
Triple-A Failure
Roger Lowenstein
NYT, April 27, 2008
http://www.nytimes.com/2008/04/27/magazine/27Credit-t.html

This article will appear in Sunday’s New York Times Magazine.

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What's been said:

Discussions found on the web:
  1. michael schumacher commented on Apr 23

    Quote of the Day:

    The chief executive of Bank of America Corp. (BAC) says the $4 billion acquisition of troubled Countrywide Financial (CFC) “still looks like a good idea”.

    I bet…..

    Ciao
    MS

  2. pmorrisonfl commented on Apr 23

    From the article, my nominee for Quote of The Day (or maybe year):

    “We’re structure experts,” Yuri Yoshizawa, the head of Moody’s’ derivative group, explained. “We’re not underlying-asset experts.”

    Lowenstein is a splendid writer.

  3. DL commented on Apr 23

    No doubt something like this will happen again at the top of the next credit cycle, be it 5 years from now, or 10.

  4. Ross commented on Apr 23

    Hammering dead equine.

    Ponzi like schemes, conflicts of interest, and no ‘risk’ returns were bound to implode as anyone who reads your stuff has understood for years. It brings up an interesting question. For those who want to invest in the financials, how about a list of banks that did their own due diligence and never owned any traunched trash?

    Seems that some good middle tier banks might be worthy of a look since the yield curve is a license to print big money. Is a new wave of consolidation coming where middle banks are gobbled up just to get their tier one capital instead of diluting shareholders of toxic waste banks?

    Just a thought.

  5. michael schumacher commented on Apr 23

    OT:

    That Head and shoulders on AMZN in the last hour is textbook.

    Now watch it open tomorrow at 150…..LOL

    Ciao
    MS

  6. Steve Barry commented on Apr 23

    MS

    Amazon looks to be trading down…another hit for Mr. Bill Miller who owns more of it than any human would consider sane outside Bezos.

  7. Steve Barry commented on Apr 23

    Now Starbucks and Apple are tanking…maybe we bears are onto something ;)

  8. Steve Barry commented on Apr 23

    Apple short ratio is .6!!! Bulls were frothing and they were just disappointed it looks like…and yes today was the 24th straight trading day QQQQ volume could not reach its 100 day MA.

  9. michael schumacher commented on Apr 23

    someone has spent an enormous amount of $$ propping up SBUX in the last two months….

    They are still at it in AH….no way that thing stays up w/o massive “help”

    You know….actual results….what a concept. Stocks trading on actual results. Have not had a chance to say that in a very long time….it IS AH though.

    What rosey POS news are we going to get tomorrow AM??

    Ciao
    MS

  10. larster commented on Apr 23

    Here in western Washington I paid $3.64 at Costco for gas and $3.05 for a 16 oz. latte today. So Starbuck announces that results will be down. Go figure.

  11. DL commented on Apr 23

    Steve Barry wrote @ 4:42:36 PM

    “…yes today was the 24th straight trading day QQQQ volume could not reach its 100 day MA”

    Add to that the fact that the options traders have lost all fear.

  12. OhNoNotAgain commented on Apr 23

    So, the question I have is:

    Is *anyone* going to do a perp walk for *any* of this ?

    I mean, being stupid and ignorant only gets you so far. After a while you almost have to start getting into fraud and misrepresentation territory.

  13. BG commented on Apr 23

    OhNoNotAgain,

    You are on the money.

    These people are brilliant when talking about all of the money they are supposedly worth; but when it comes time to find out who is responsible for this horrendous mess nobody know a fuc&ing thing! Absolutely amazing when you think of the scope and long-term effect of this debacle.

  14. Robert- commented on Apr 23

    Don’t know who evaluated me but…

    A few years ago I was working in Phoenix, AZ. I noticed the housing prices were still rising. Since I knew I’d be working there for almost 2 years I decided to buy 1, maybe 2 homes and sell them in a year or two. Countrywide said I qualified easily. They did this using my bank statements which included my per diem deposits. Funny thing is they didn’t use my debt charges (motel, gas, food, etc…) which the per diem paid for. How could they only use per diem income and not per diem expenses? They were basically a wash when you added it all up. This sounds criminal to me but I bought the homes and 13 months later I sold them both for about $40K profit each. I did donate my fair share of the profits to the IRS though because my CPA didn’t know how to do the same book keeping as CWF.

  15. Bharat123 commented on Apr 23

    >> today was the 24th straight trading day QQQQ volume could not reach its 100 day MA.

    Steve Barry << Steve, I am pretty new to investing, so i am going to ask you a basic question. In your comment you are suggesting that small numbers of investors are putting money into market and hence the market prices may not be correct indicator. Is my understanding correct? Why are you using QQQQ for this analysis? Where do you get the MA data?

  16. Moses commented on Apr 24

    Someone please tell us why you need a rating agency to tell you sub prime debt is not AAA?

    Talk abt unaccountable, irresponsible idiots.

    Same people must have been buying Enron stock.

    The problem is not the rating agencies,
    the problem are the unnaccountable, irresponsible investors who seem to be flocking into alternative energy now that the RE boom is over.

    The blame everyone but the idiot who actually thought sub prime debt was AAA paper.

  17. pft commented on Apr 24

    Maybe we should send some of these guys down to GITMO for a little waterboarding to get the truth. Root out the financial terrorists. They ain’t hiding it caves, should be easy to round them up. We can then seize their assets when the fess up, then give them the old Saddam treatment.

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