Now that the SEC has had some time to sift though all the evidence of why credit rating agencies were so wrong in their view of mortgage-backed securities, the most disturbing finding is that S&P analysts thought their own conclusions about risk were often wrong.
According to The Wall Street Journal (subscription required), an S&P analytical staffer emailed another that a mortgage or structured-finance deal was "ridiculous" and that "we should not be rating it."
What should the government do now that it has the goods? It could fine S&P, and probably will. The fine could never be large enough to match the hundreds of billions of dollars lost by financial firms that put money into the securities. The SEC could bring charges against some of the analysts. As it is, some of them will probably lose their jobs.
The most sensible solution would be to bar S&P from rating derivatives at all. Would that leave a hole in the market? Probably. Other credit agencies might have been involved in similar misdeeds. That would mean they would have to exit the business as well.
The net effect of moving credit ratings out of the business of covering derivatives would almost certainly mean a huge drop-off in the market for the instruments. That might not be such a bad thing.
Douglas A. McIntyre is an editor at 247wallst.com.
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Reader Comments (Page 1 of 1)
8-02-2008 @ 11:10AM
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8-02-2008 @ 2:10PM
william lindblad said...
I have a better idea. Get rid of the SEC. I am not being cynical, I am being truthful. This agency KNEW that there were serious problems in the financial sector over two years ago. At that time they issued some fines and went back to sleep. It appears to me that the major contribution of the SEC is nothing more than additional government cost that the taxpayer can do without.
When people think of the "great depression", nearly all believe that it was the result of the 1929 stock market crash. While this is true, it is not the only part. What is forgotten is that weather had a big hand in the economic problems, with the dust bowl conditions being a major addition. Compounding problems, just like today's housing and fuel. How do the two relate? Starting in 1934 the government started to put safeguards in place to prevent re-occurrence. As long as some common sense was applied by the banking industry and the guidelines adhered to, this works. We have traffic lights and speed limit signs to regulate drivers. You run a light, speed,etc you are going to get a citation as there is someone from law enforcement to make it happen. What created our present problems could be equated to the police staying at the station house and not making any attempt at law enforcement.
Since we have financial police in the form of both Congressional finance committees, the Fed, The Treasury, The SEC, The FDIC and all of the various housing entities under the FHA we should not have any mortgage backed security, SIV or related problems. The government is doing little more than CYA/damage control. I cannot believe that that many people, with so much knowledge, could not see that "0" down, 120% financing, 45 year mortgages, no credit check, bad credit OK and a housing market geared to 1/2 million+ residences was not a recipe for economic chaos.
Since this type of financing was advertised all over, papers, web, billboards and real estate magazines, I, like a multitude of others, find ignorance a lame excuse.
8-02-2008 @ 6:39PM
Dan Barnett said...
Rare as my disagreements with Mr. Lindblad are, I must dissent on this one.
First, though, the major problem with farm prices in the 30's was not lack of production, but rather over-production driving the wholesale prices down to a level where it was not profitable to farm/ranch. The early New Deal programs tried to restrict production to support prices & thus farms.
Next, I don't see how abolishing the SEC will fix any particular problems cited. The SEC would not have had jurisdiction to deal with the terms & rates of mortgages. Mr. McIntyre's point is that those rating the Mortgage Backed Securities failed by fraud or otherwise to account for a downturn in Real estate values. And it is good to remember also that the SEC has been under political pressure to keep the "good times rolling" as well as a limited budget.
Sorry, Mr. Lindblad, I don't think abolishing the SEC is the answer.