The Root of the Financial Crisis Isn’t Government
Via Kevin Drum, here’s an IM conversation between Rahul Dilip Shah and Shannon Mooney, who are (were?) analysts at Standard & Poor’s. They were discussing the structure of some mortgage-backed securities S&P had been asked to rate.
RDS: btw: that deal is ridiculous
SM: I know right … model def does not capture half of the risk
RDS: we should not be rating it
SM: we rate every deal
SM: it could be structured by cows and we would rate it
Not exactly inspiring, is it? Here’s more on the actions of credit rating agencies in improperly rating mortgage-backed securities.
As mortgage delinquencies and defaults have skyrocketed over the last 18 months, it has become clear that the agencies that assigned high ratings to the securities that contained these loans severely underestimated their risks. Indeed, Mr. Waxman noted that S.& P. had downgraded more than two-thirds of its investment-grade ratings and Moody’s had reduced assigned ratings on more than 5,000 mortgage-backed securities.
Among the documents uncovered by the committee was an internal board presentation delivered by Mr. McDaniel to Moody’s directors in October 2007. According to the presentation, he told his board: Analysts and managing directors “are continually ‘pitched’ by bankers, issuers, investors.” At times, he conceded, “we drink the Kool-Aid.”
It’s stuff like this that irks me when both Democrats and Republicans each try to scream at each other to somehow take the blame for the current crisis. The fact of the matter is the root of this issue revolved around the risk of taking on these mortgage backed securities. Were it not for these securities, the increase in defaults in subprime mortgages would have had damages limited to the lending institutions involved, not the entire system.
Let’s face it: nobody in government was forcing any company to create these securities or to buy them. There were no regulations that forced financial firms to ignore the slew of economists who were warning that we were in a housing market bubble. There were no statutes forcing banks to buy mortgage-backed securities. There were no federal agents holding a gun to the head of credit rating analysts to give higher ratings to securities than they deserved. Big players in financial firms were gung-ho in taking on risky investments, and credit rating agencies were happy to play along with the charade that the risk wasn’t that bad.
Government didn’t have anything to do with that.