The Great Debate

Taking on the rating agencies

The credit rating agency, Standard & Poors, announced Monday that it was the target of a civil lawsuit by the Justice Department for its actions in rating the complex securities that played a major role in the 2008-2009 financial collapse.  The company also said that it had not been apprised of the details.  It is interesting that the other two major rating agencies, Moody’s and Fitch made no announcements.

There is much that all the agencies should worry about.  What is publicly known — and it is a great deal — was laid out in the two-year Senate investigation led by Senator Carl Levin (D-Mich.), which ended with the release of a final report in spring, 2011.

The committee staff laid out a formidable case. As early as 2004 and 2005, and increasingly by 2006, the email chatter among the rating agency staffs suggested they were expecting a crisis.  One email said: “This is frightening. It wreaks of greed, unregulated brokers and ‘not so prudent’ lenders.” Staff analysts asked why the regulatory agencies hadn’t “come down harder on these guys.”  One wrote worriedly about the possibility of “another banking crisis.”

One damning sequence occurred in spring, 2007.  Early that year, it became clear that the subprime mortgage market was in serious trouble. Two major subprime issuers failed in December 2006, and in the first quarter of the new year, another 20 failed, including the giant New Century. This was also the period, as we now know, that Goldman Sachs embarked on an aggressive internal clearing of its inventory, or “The Big Short” as it was called, which was largely accomplished by selling to greater fools.

But for the most part, Wall Street and the credit agencies shrugged off the worries and carried on with business as usual. The agencies issued triple-A ratings even on booby traps like the security that Goldman devised for the hedge fund manager John Paulson, so he would have a $1 billion plus security that he could bet against with confidence in its shakiness.

First 100 days: A fix for the housing crisis

Elena Panaritis – Elena Panaritis is an institutional economist. She spearheaded property rights reform while working at the World Bank, and lectures at Insead, The Wharton School and Johns Hopkins University-SAIS. A social entrepreneur, she now heads the investment advisory firm Panel Group. Her recent book is “Prosperity Unbound: Building Property Markets with Trust”. The views expressed are her own. —

In his speech to Congress, President Obama spoke of how the proper response to the economic crisis is not just a matter of immediate fixes, but also an opportunity to make investments that will serve the nation’s long-term interests. The same idea should govern the housing recovery plan. Otherwise, we get nothing more than a crutch when we need a cure.homesales

As much as short-term help is needed to keep more people from foreclosure, there is a big opportunity to get to the end of the crisis by starting at the beginning of the problem. The conventional wisdom is that subprime mortgages represent the beginning. In fact, the beginning goes back much further. The current crisis stems from the absence of a system that provides stability to the value of properties in the United States.

Fed unleashes greatest bubble of all

John Kemp Great Debate– John Kemp is a Reuters columnist. The views expressed are his own –

Like the sorcerer’s apprentice, Federal Reserve Chairman Ben Bernanke and his predecessor Alan Greenspan have unleashed a series of ever-larger asset bubbles they cannot control.

Now the Fed’s decision to cut interest rates to between zero and 0.25 percent, coupled with a promise to keep them there for an extended period, and the threat to conduct even more unconventional operations in the longer-dated Treasury market risks the biggest bubble of all, this time in U.S. government debt.