U.S. to sue S&P over ratings ahead of financial crisis
reuters.com
reuters.com
Most of the money that went all-in was pension funds. So in a very real perverse way, the public was entirely responsible for this mess. The public bids up house prices - this skews up the asset correlations of the CDO models. The house prices keep going up, & the public parks its profits & savings in pension funds. The pension funds then buy up the very CDOs! You have a nice positive feedback loop that eventually collapses on itself.
Here's a good primer we used back in school ( http://bit.ly/14AHP5q ). start on page 13.
We had an asset bubble with a painful pop right at the turn of the century; and while it appears the Fed and many economic pundits such as Paul Krugman advised pumping up the housing market a bit to compensate (since houses have considerable utility independent of their asset performance), housing bubbles aren't exactly unknown either. I got caught in the early 90s UK housing bubble as a callow youth and luckily had the good sense (or risk aversion) to sit the recent bubble out because there was just way too much easy cash sloshing about to believe that it could last.
I have some understanding of economics and a basic grasp of finance, so I'm no expert, but how many standard deviations away from the long-term average do you need before something triggers the 'too good to be true' warning? While 'the market can remain irrational longer than you can remain solvent,' and everyone hates a party pooper, I feel that when ratings agencies say they are helpless in the face of public irrationality, it's like inviting consumers to buy a car with no brakes.
Impersonal words like "ratings agency" actually consists of a bunch of really smart math, stat & physics phds ( & the occasional finance phd who didn't get into the buyside IBs & hedgefunds :) The ratings are spit out by models. The models ar driven by simulations upon giant matrices whose input is historical correlations. When the inputs fuck up, the outputs will get hosed too.
> Adjusting the models when they produce incorrect answers
Nobody adjusted the models when they produced incorrect answers because the answers weren't incorrect. They weren't the answers you like in hindsight, but they were correct insofar as the model was vetted & the input was correct.
Lemme give you a crazy, absolute bizarre scenario. Lets say there is massive acceptance of sexting pics among US youth starting tomorrow. Youtube is flooded with penises & vaginas. Then the churches start filing lawsuits against google because youtube is actively promoting pornography. You see what I'm getting at. For youtube to be relevant, it has to cater to the youth & not actively censor content especially stuff that has mainstream acceptance among youth. At the same time, it becomes liable. Rock & hard place. This is the exact sort of crazy bizarre stuff that happened during the financial crisis. The models are predictive, not normative. House prices actually went up, year after year, & the cdo ratings simply reflected that. Then people got burnt & are deciding the models are responsible! If the models priced normatively, the investors would simply look elsewhere for different models that priced predictively.
Yeah, that's pretty crazy and actually self-serving and disingenuous. If ratings labelled themselves "free-expression platforms for Math PhD's who don't guarantee nothin' but garbage-in, garbage-out" well then they'd have no obligation beyond that of youtube. But they signed up, actually put pen-to-paper and got money, for the responsibility of being "the adult in the room". You seem to think that their failure to actually be that is just a terribly unfortunate coincidence that they should have no responsibility for, despite their claiming that it earlier.
I can't believe you are seriously arguing this. According to you, ratings agencies have no responsibility for the accuracy of their models as long as they fit historical data. By this logic, it's "correct" to rate Greek bonds at AAA right now because they have never defaulted before (this is a simple and completely accurate model that fits past data). Also see: http://xkcd.com/605/
Ratings agencies aren't paid to make models, they are paid to make predictions. When those predictions are wrong, it's on them. It's not reasonable to give a AAA rating that is based on an assumption that housing prices will rise at 10%/year forever, just because they have for the last ten years.
Rating agencies aren't paid to be a cultural zeitgeist that analyzes and summarizes the way financial markets are right now. They aren't paid to "go with the flow" and accept assumptions uncritically. They are paid to predict what will happen in the future, and to make especially sure that the most confident ratings (which grannies depend on to make sure they don't lose their retirement) are only given to financial instruments that make the most conservative assumptions.
I'm just astounded that you so freely deflect blame for this onto the public. I hope that this isn't the general sentiment inside the financial industry.
Yes, I believe that was what was happening and it wasn't something the rating agencies became aware of after that the fact.
There's agency which is tasked with testing the goodness of milk. Let's the some milk suppliers have figured out a way of doctoring the milk so that it appeared to be good while actually being bad or even poisonous. Suppose the agency was aware of this doctoring and instead did nothing.
If that agency happened to promise the goodness of said milk, would that agency be liable, despite the milk "honestly" passing their tests?
http://en.wikipedia.org/wiki/2008_Chinese_milk_scandal
Should we feel like because the figures of various sorts used to rate CDOs etc were "poisoned" in 2005-2008 and the rating agencies were "unlucky" enough to make a lot of money knowing certifying a lot of BS, that these agencies shouldn't be punished for their good, "honest" work?
"Don't hate the player, hate the game and keep your hands off my ill-gotten gains..."
I sometimes struggle to figure out why the political system is such a mess in the US, being a recent citizen, coming from another country and system. Disengagement is obviously a huge factor, as it gives extremists disproportionate influence. Corruption is another, directly, as in directly steering policy in directions contrary to the directly stated will of the people in their voting.
However corruption has a nefarious influence on the first factor - disengagement. When the average joe on the street lives in a world where laws are almost arbitrarily vague and enable arrest and detention on a whole host of grounds - for example, relevant to this community, the hounding do death of folks like Aaron Swartz, but most communities have ehtir own examples - and where jobs are being lost and real hardship is experienced by large percentages of the country... it is not surprising that when we see these huge crimes, terrible consequences on the common man from dramatic misbehavior among the wealth elites who remain largely unscathed suffering few consequences of their actions... and when we see the wealthy and connected elites absolutely immune to legal recourse - no jailtime, nothing more than slaps on wrists, on companies forced to shut up shop... is it really surprising so many people just give up?
What did you expect, the cultural revolution?
I suppose it's the broader point that concerns me, and that I was really focused - the fact is that the tanking of the economy based on fraud and negligence resulted in no jailtime. I feel, and folks may think I'm wrong in this, that this is very visible to ordinary men and women in America and has a corrosive effect on the nation and its body politic.
And when it comes to tanking the economy, I'd like to figure out how it happened and put systemic reforms in place, more than I really want specific heads to roll. There are some well-run countries that don't tolerate corruption that don't jail people very often— they just see to it that anyone corrupt is shown the door. If you can do that consistently, it hardly matters if you show them the door into jail or a quiet retirement. I.e. keeping a hold on the situation directly, rather than trying to deter malfeasance with jail time.
That being said there are zero consequences of impact to disincentivize widespread corruption and illegality in the financial sector, and that is the biggest systematic failing. So long as you can make $100MM screwing people over, then retire with it all when you get caught, and effectively zero chance of any sanction even if your actions were criminal, people will take that bet every time.
That this TOTALLY SUCKS does not change the actual facts on the ground, which the DOJ and the President have to evaluate and judge before acting on.
That said, I don't see anything criminal here.
I suppose I was making a broader point about the crisis in general and its aftermath. The fact that all of the shenanigans, fraud and outright illegality that led to the financial crisis and its life-ruining effects on millions of Americans, resulted in more wealth for the perpetrators and no significan punishments or disincentives for future bad behavior is a very troubling thing.
A ratings agency is neither an engineering firm nor is it a food-review newsletter. I suppose it's the job of the courts to decide which of the two it more closely resembles and if its "opinions" can be protected by free speech laws.
Why?
Hell, frankly, I think that heads should roll for the bailout. It is not authorized under the constitution, and it is the largest financial heist in history.
A bunch of politicians can simply steal american money and give it to banks, and get away with it? Really? And people are upset, but they blame the banks only?
And then forgive the "debt" they created and pretend like it was "paid back".
It's still going on too.
Right now, every month, they are handing out $40B a month buying "distressed assets".
You know how to get rich? Be well connected, make a loan to someone who then turns around and defaults (he got the loan money, so he's well paid) then get the politicians to write you a check!
There's no oversight now, the Federal Reserve-- a private bank owned by Goldman Sachs, JP Morgan, probably Rothchild family, et. al. is the one spending the money. No legislation is needed to make it legal.
It's stealing more money every month than all the organized crime has stolen in this countries entire history!
And it's not even worth a mention in the local papers.
That's messed up!
Or do you think the suit against S&P is a good thing, but not enough of it?
Could you substantiate this claim?
I'm genuinely interested. I was under the impression that the overwhelming majority of the bailout money was paid back. I'd read in reputable newspapers that this was the case. If it was "forgiven" instead, I'd be very interested to see the proof.
As of December 31, 2012, the Treasury had received over $405 billion in total cash back on TARP investments, equaling nearly 97 percent of the $418 billion disbursed under the program. [Wikipedia]
Can you give some specifics about why this is so?
(Not really going to touch the rest of this...)
In a bi-party world, your odds of getting anyone out of office and preventing them from coming back later are, unfortunately, pretty damn low.
Seeing Obama reelected was the final proof I needed. Whether the alternative was worse or better does not even matter, the system is doomed. People will vote whatever they see on TV, and will fall for the same old politician tricks. Get the poor and the naive, win the elections, and then steal from everyone through things like inflation and bailouts.
I'll just drop here this perverse quote from Obama, after he saw that the current president of Argentina (who absolutely destroyed what was left of the country) got 54% of votes and got reelected on 2011. He said something like "I have things to learn from you". Sure, it could be nothing, don't listen to me.
It wouldn't show that it was not bound for the same fate, but at least it would show you have the minimum level of self-respect, pride as a nation, and awareness needed to fix the issue in the future. Money, charm, and favoritism shouldn't drive and win a political campaign. Idealists should be able to get attention and be elected, instead of being hidden and smeared: establish a number of TV slots at random, say 10 or 20, pick candidates at random (if there are more than the available slots), and let them have the same air time. Also, corporations shouldn't be allowed to make donations to finance political campaigns. That's bribe in our faces. Teach the basics of economics in schools, so they understand where inflation comes from, and how it's not a natural disaster.