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Default 6NOV: The Apocolypse Cometh

November 7th, 2012, 20:02
Originally Posted by dteowner View Post
What do you fine them for? There was certainly (and still is) a huge conflict of interest in the ratings biz, but that's not illegal under the laws of the time nor the laws of today. I'm not sure how you can penalize companies for following the rules that are presented to them. Sure, the rules were stupid and destructive, but the companies didn't make them.
The setup of the business is bad, but the agencies that have only taken money from clients have always had issues with solvency.

The reason they should be fined (and stripped of their status as Nationally Recognized Statistical Rating Organizations) though is not due to that inherent conflict of interest. The reason is that they were at best negligent and at worst fraudulent in their ratings of MBS and CDO securities.

They were required, but statute, to do certain amounts of back testing to validate the models they were using to value those securities. They generally didn't and where they did, they often didn't have people in place to adequately understand the results. There was an article shortly after the debacle titled something like "Part-time MBA's vs PhD Rocket Scientists: How the ratings agencies were outmanned and outgunned". The gist of it is that they hired some really, really smart people back in the 90's to build the ratings systems for their securities. Those guys got hired off by hedge funds and I-banks for massive raises. They replaced them with people that, while smart, weren't up to the task of modeling these types of securities. It all came down to cost, they didn't want to pay what it would take get the right people, and even if they did, they didn't want to lose the revenues from the Ibanks for rating these securities.

If you want a short synopsis of why the MBS world blew up, it goes like this:

1) Package up a bunch of crappy mortgages from different locations into one security because "there is no national real estate market" (just ask any realtor)
2) Divide it up such that roughly 80% of the buyers will have a 99% chance (based on the model) of getting paid on time and in full. Sell the other 20% at a big discount to reflect the increased risk.
3) Get the rating agency to slap a AAA rating on that 80%
4) Now buy up the bottom 20% of 5 MBS's and start back at 2 again. and again and again

While its true that there is no national real estate market (not in terms of how the economy is doing or people migration trends), the model completely ignored the fact that almost 100% across the country, housing prices were rising due to the easy credit afforded by the above scheme.

Now there is nothing wrong with the above scheme (outside of the ratings), SO LONG AS IT IS DISCLOSED TO BUYERS WHAT THEY ARE GETTING INTO. That is where the ratings agencies come it. They are supposed to impartial 3rd parties.

Well guess what, there are emails, memos, etc. of the few really smart people there, raising questions about the models lack of credit risk accountability! And those people being told to shut up and be a team player. That is at best a serious breech of ethics and at worst outright fraud.

Those ratings enabled pension funds, money markets, etc. to buy those securities when they otherwise would have been prohibited to do so. And they wanted to buy them, because everyone has been yield crazy (who hasn't complained about the yields on their savings or checking accounts, even when they were a few percent?).

The ratings agencies had a fiduciary responsibility that they completely punted on, and no one has held them accountable.

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November 7th, 2012, 20:02
Show me anywhere in there where the dems "s[a]t down at a table, both sides prepared with a list of possibilities to draw from". You can't, because they didn't. Not a single proposal. Just "No". By your own definition, the dems did not show any attempt at compromise. Thus, your original point is invalidated. Thanks for making my job easy.

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November 7th, 2012, 20:02
Originally Posted by zahratustra View Post
For misleading (lying to) investors? Just like Australian Federal court did?
False advertising, purposeful deceit apparently is something that is demanded in the financial world. Coincidentally, the same thing for US politics. Anyway, finance and security businesses should get a cleanup of existing regulations and new better laws. I guarantee that the republicans will do everything in their power to prevent this. Yay for the protectors of thieves, liars, and corruption!
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November 7th, 2012, 20:04
Originally Posted by dteowner View Post
Show me anywhere in there where the dems "s[a]t down at a table, both sides prepared with a list of possibilities to draw from". You can't, because they didn't. Not a single proposal. Just "No". By your own definition, the dems did not show any attempt at compromise. Thus, your original point is invalidated. Thanks for making my job easy.
As the leaders of the house, it was the republicans responsibility to coordinate this. Of course they failed at this by shutting out the Dems from their closed door "proposals". Again you fail to understand the most basic concepts.
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November 7th, 2012, 20:07
Originally Posted by Thrasher View Post
That may be so, but the debt/deficit in and of itself didn't cause the downgrading, it was the politics of rightwing extremists unwilling to compromise that caused it. And apparently it may happen again:

http://www.latimes.com/business/mone…,6939564.story
Thrasher, you're wrong. I can't say it any plainer than that. No matter how many times you say that it was the politics of anyone (rightwing or not) that caused the downgrade, it wasn't.

The concern of the ratings agencies is that medium to long term growth of the debt, fueled by the deficit, will make servicing the debt in the future less likely to eventually impossible.

The only way you would be right is if the plan the left wing was touting would have addressed those concerns. It didn't. Neither did the right wings plan. No one's plan has adequately addressed the concerns about a future default.

The inability of ALL the politicians to find a solution is what caused the downgrade. Not whether or not we could make the next coupon or principal payments (we could and did). Neither side presented a plan that adequately addressed the concerns about the growth in the debt.

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November 7th, 2012, 20:09
Originally Posted by Thrasher View Post
False advertising, purposeful deceit apparently is something that is demanded in the financial world. Coincidentally, the same thing for US politics. Anyway, finance and security businesses should get a cleanup of existing regulations and new better laws. I guarantee that the republicans will do everything in their power to prevent this. Yay for the protectors of thieves, liars, and corruption!
Sadly the Dems will too. Don't forget that one of the biggest financial con artists out there, Corzine, is both a Democrat and pretty good buddy's with Obama.

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November 7th, 2012, 20:20
Originally Posted by blatantninja View Post
Thrasher, you're wrong.
No actually you are wrong. The inability of Republicans to compromise on this issue was the root of the problem. period. They demonize and extricate anyone who even uses the "compromise" word. For some reason they think a vow to Grover Norquist is more important. Sad fact.
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November 7th, 2012, 20:23
Originally Posted by blatantninja View Post
Sadly the Dems will too.
Uh no. When proposals to change the laws were proposed guess who was the first to put up roadblocks. Republicans.
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November 7th, 2012, 20:33
How typical lets blame the republicans. People need to wake and realize it's the cumulative mess of many decades. One president can't fix the system and mismanagement since are government was founded.

Fix the god dammed broken system and quite whining it's the republicans fault. "Those who have been angry about all this – don’t investigate the people, investigate the system." It's easy to point fingers and blame either party.

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November 7th, 2012, 20:55
Originally Posted by Thrasher View Post
No actually you are wrong. The inability of Republicans to compromise on this issue was the root of the problem. period. They demonize and extricate anyone who even uses the "compromise" word. For some reason they think a vow to Grover Norquist is more important. Sad fact.
Do you not comprehend that NEITHER side had a plan that was going to address the deficit to the satisfaction of the ratings agencies? If both sides' plans fell short, how would a compromise between the two have satisfied the ratings agencies?

You're out of your league on this Thrasher. I work in this industry. I literally live this crap day after day.

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November 7th, 2012, 20:56
Originally Posted by Thrasher View Post
Uh no. When proposals to change the laws were proposed guess who was the first to put up roadblocks. Republicans.
Of course they were, because it wasn't their plans and they are in high finance's back pocket. I hate to brake it to you, but the dems are too!

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November 7th, 2012, 21:05
They are the extremist obstructionists in this debacle that protect the moneyed interests that have the most to gain by the status quo. Hell, the republican leader in the Senate, Mitch McConnell said their highest priority was to make sure Obama failed and was not reelected, above the good of the country. If you can't see this, then this is your problem. This false equivalency promoted by righties that "both parties do it" is pure bullshit. There is nothing in recent history comparable to the obstructionists that have failed in Congress and failed the country.

Just look at the graph of filibusters. They almost DOUBLED under McConnell's "leadership"




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November 7th, 2012, 21:12
Originally Posted by Thrasher View Post
They are the extremist obstructionists in this debacle that protect the moneyed interests that have the most to gain by the status quo. Hell, the republican leader in the Senate, Mitch McConnell said their highest priority was to make sure Obama failed and was not reelected, above the good of the country. If you can't see this, then this is your problem. This false equivalency promoted by righties that "both parties do it" is pure bullshit. There is nothing in recent history comparable to the obstructionists that have failed in Congress and failed the country.

Just look at the graph of filibusters. They almost DOUBLED under McConnell's "leadership"




If this was directed at me, I don't completely disagree with you. The Republicans have taken partisanism much farther IMO than the Democrats. It just doesn't change the facts around the cause of the downgrade. The Dems have presented no solutions that tackle our medium to long term debt problems.

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November 7th, 2012, 21:14
Originally Posted by blatantninja View Post
Do you not comprehend that NEITHER side had a plan that was going to address the deficit to the satisfaction of the ratings agencies? If both sides' plans fell short, how would a compromise between the two have satisfied the ratings agencies?
No, that is incredibly stupid reasoning. Don't you understand basic math? This is another major failing of Republicans. An inability to understand basic arithmetic. Here, let me give the basics and see if you can learn something. It amazes me that someone in the finance world can't understand basic accounting.

Given

A-B<0
and
C-D<0

that does not mean

E-F<0

OK?

The problem is that righties were unwilling to compromise with the Dems to come up with an E and F budget that worked.

(i.e. and E and F such that E-F>0)

No feasible plan could be brokered because of rightwing intransigence.

EDIT:

Now for something completely different. Have you seen this video interviewing people at a Romney rally. Very scary stuff. Halloween is over, already!

Ohio Romney Rally - Interviews with Supporters
Last edited by Thrasher; November 7th, 2012 at 21:34.
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November 7th, 2012, 21:24
Originally Posted by Thrasher View Post
No, that is incredibly stupid reasoning. Don't you understand basic math? This is another major failing of Republicans. An ability to understand basic arithmetic. Here, let me give the basics and see if you can learn something. It amazes me that someone in the finance world can't understand basic accounting.
I am not a Republican and even if I were, well I've been doing Linear Algebra and Calculus as part of my job for close to a decade, so I think my math skills probably are OK.

Given

A-B<0
and
C-D<0

that does not mean

E-F<0

OK?

The problem is that righties were unwilling to compromise with the Dems to come up with an E and F budget that worked.

No feasible plan could be brokered because of rightwing intransigence.
You seem to think that a feasible plan was the goal of the Democrats. Since you want to see some math, try this one:

As it stands, the national debt is roughly 70% of GDP (per CBO estimates). That is up from 40% in '08. Based on current expected expenditures and revenues, it will cross over 100% (and remember this is where Greece was a few years ago) by 2016 and could hit 200% (We won't get there, we'd collapse first) by 2037 at the latest.

The Democrats plan reduced the debt increase projections, but not enough to where we wouldn't still hit 100% by 2020. The Republicans plan(s) were even worse.

How does compromising between those two plans, neither of which satisfy the need to keep the debt from approaching, and exceeding, 100% of GDP, satisfy the concerns of the ratings agencies about the future ability of the US government to service the debt?

What they were concerned about was that neither side was actually coming up with a plan that would avoid the fiscal cliff. The fact that they arguing about quickly we'll hit the cliff rather than avoiding it was just icing on the cake.

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November 7th, 2012, 21:37
Don't you understand the idea of compromise? This seems to be a rightie defect. No wonder they are against abortion.

You take the best things from both plans (hopefully) and come up with a plan that is better than either. But if one side won't compromise, this is impossible.
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November 7th, 2012, 21:43
Originally Posted by blatantninja View Post
They were required, but statute, to do certain amounts of back testing to validate the models they were using to value those securities. They generally didn't and where they did, they often didn't have people in place to adequately understand the results.
By "back testing", do you mean putting historical trials into the model and see if the prediction matches the historical result? If that's the case, wouldn't it be hard to do historical checking on a mechanism that had no real history? The bundling scheme was a new approach at the time.
Originally Posted by blatantninja View Post
There was an article shortly after the debacle titled something like "Part-time MBA's vs PhD Rocket Scientists: How the ratings agencies were outmanned and outgunned". The gist of it is that they hired some really, really smart people back in the 90's to build the ratings systems for their securities. Those guys got hired off by hedge funds and I-banks for massive raises. They replaced them with people that, while smart, weren't up to the task of modeling these types of securities. It all came down to cost, they didn't want to pay what it would take get the right people, and even if they did, they didn't want to lose the revenues from the Ibanks for rating these securities.
Big difference between a poor short-view business plan and illegal, though.
Originally Posted by blatantninja View Post
Now there is nothing wrong with the above scheme (outside of the ratings), SO LONG AS IT IS DISCLOSED TO BUYERS WHAT THEY ARE GETTING INTO. That is where the ratings agencies come it. They are supposed to impartial 3rd parties.
Impartial does not equal infallible. Besides, wouldn't the whole thing be covered by that generic "investments can lose value" disclaimer that's on everything? Caveat emptor, and all that?
Originally Posted by blatantninja View Post
Well guess what, there are emails, memos, etc. of the few really smart people there, raising questions about the models lack of credit risk accountability! And those people being told to shut up and be a team player. That is at best a serious breech of ethics and at worst outright fraud.

Those ratings enabled pension funds, money markets, etc. to buy those securities when they otherwise would have been prohibited to do so. And they wanted to buy them, because everyone has been yield crazy (who hasn't complained about the yields on their savings or checking accounts, even when they were a few percent?).

The ratings agencies had a fiduciary responsibility that they completely punted on, and no one has held them accountable.
I guess the real question is, is the financial industry itself pissed off at these guys for what they did (as opposed to, for the end result of losing a ton of money in the crash), or does the industry see them as scapegoats? Seems to me like the latter, but I'm no investment banker. If people in the industry see the ratings guys as crooks, I'd certainly have to correct how I'm reading the tea leaves from the outside.

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November 7th, 2012, 21:44
I'll give you that a there's a remote possibility that the best parts from the opposing plans may have helped, but I don't think it would have been enough.

As I said, I live this crap every day. Two of my closes friends are traders on the treasury curve (one on the 10yr notes and another on the 5yr swaps). Neither of them were worrying about compromises, they were worried about how we were screwed either way.

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November 7th, 2012, 21:50
The fact that they weren't even willing to try and compromise I think would be the most serious concern for any rating organization. If you don't even try, then it's impossible. Worst case, really.
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November 7th, 2012, 22:01
Originally Posted by dteowner View Post
By "back testing", do you mean putting historical trials into the model and see if the prediction matches the historical result? If that's the case, wouldn't it be hard to do historical checking on a mechanism that had no real history? The bundling scheme was a new approach at the time.
Back testing is taking the actual results (day to day market value changes for instance) and testing them against what your model predicted. Nothing is 100% of course, but the model results should show some level of correlation with the actual results. Additionally, they should have been doing stress testing. The Big Bank Stress Tests were all the rage a few years ago, but I assure you that risk departments have been doing them for decades. We spent a significant amount of time every month doing stress scenario analysis, as did they, but as I said, they missed the credit bubble aspect. The bundling scheme wasn't entirely new. MBS have been around for decades, even CDO's have existed in various forms. The real new item was the idea that you could diversify amongst different piles of crap and turn it into gold. At best, you can turn it into bronze.

Big difference between a poor short-view business plan and illegal, though.
There is, but what they were doing violated their fiduciary responsibility, which was illegal.

Impartial does not equal infallible. Besides, wouldn't the whole thing be covered by that generic "investments can lose value" disclaimer that's on everything? Caveat emptor, and all that?
There is a difference between infallible and simply prudent. They played fast and loose with their obligations because the times were good.
The defense of "I didn't" know doesn't hold up when you SHOULD have known.

Think of it like this. You want to buy a house. You know virtually nothing of electricity outside of how to flip a light switch, so you hire an inspector to inspect the house. He gives the house a clean bill, so you buy. The first night you are there, you turn on the TV and the house goes up in flames due to faulty wiring. Upon inspection afterwards, its determined that the electrician was in fact an actual drunken monkey and wired the house so badly that it was not to code and was a fire waiting to happen.

You're going to sue the builder and the electrician of course, but what about the inspector? Well if it was just some buddy that said he knew what he was doing, you're shit outta luck. But as a licensed inspector, this guy claimed he knew what he was doing, represented himself as such and gave your place the A-OK. He is held to a higher standard because he presented himself as such. He can't just say "Well really I don't know a damn thing about electricity." He's going to lose his license, get fined by the state and sued into the ground by you. He wasn't the only one at fault, but he WAS the guy you paid to protect from the other people at fault because he said he could do that.


I guess the real question is, is the financial industry itself pissed off at these guys for what they did (as opposed to, for the end result of losing a ton of money in the crash), or does the industry see them as scapegoats? Seems to me like the latter, but I'm no investment banker. If people in the industry see the ratings guys as crooks, I'd certainly have to correct how I'm reading the tea leaves from the outside.
Mostly we see them as incompetent. When I was a Portfolio Manager, ratings on bonds was extremely important to how we allocated assets. I'm not a PM anymore, but most of the ones I know at best take it with a grain of salt, and at worst either use alternative agencies or largely ignore ratings all together.

However, there is one additional factor here. Many bonds are insured. You often hear the expression on Muni's as AAA Insured. The number of defaults cost the insurers BILLIONS and nearly put many of them out of business. Now you can say "well they should have done their due diligence" and while that is true, the long term theory had always been the ratings agencies know better than anyone else. That's essentially fraud on agencies against the insurers.

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