Thursday, December 11, 2008
I Was Going To Give It A Rest, I Guess I Can't
I am giving it a rest. I have expressed my opinions on a number of things as they relate to our economy and the markets. I have also written about my belief that the present situation with regards to the rating companies is unsatisfactory and needs to be changed. I strongly believe that much of the financial crisis that in part lead to and complicated the economic crisis, was brought about by the disaster created in the mortgage-backed bond market. Low interest rates presented the underwriters with the fertile ground that made mortgage-backed bonds attractive to institutional investors that were shopping for a higher yield than was available in a more conventional type of debt, such as treasuries or straight corporate debt. With a potential market of buyers of the mortgage-backed bonds running into the billions and even trillions of dollars when the international investors are added in, gave the investment bankers of Wall Street enough incentive to "pull" more mortgages through the system. The only speed bump in the road was the rating companies, and it appears that a few dollars were able to remove that hurdle from the straight line between the home buyer, the mortgage lender, Wall Street and the mortgage bond buyer. Once the mortgages were made in to marketable mortgage-backed bonds, and given the good housekeeping seal of approval by the rating companies, their AAA-rating, it was pedal to the metal for the institutional sales forces of the Wall Street firms that were the underwriters of the bonds. With the process of securitization completed, the AAA-rating on the wrapper, and a hungry bunch of fixed-income portfolio managers shopping for a better yield, also known as a higher return, the stage was set for an international bond market meltdown.
If our Federal Government does not see the need for the rating of complex debt securities to be the responsibility of the Federal Government, then it is just a matter of time before we visit this crisis again. It maybe 20 or 30 years, but then again it could happen in as little as 5 or 10 years. Institutional investors, here in the United States, as well as around the world, will get back into the market when they can be assured that the bond ratings mean something, and, that the ratings were not bought.
Naturally, there will be a lot of politics that will influence the direction that our Congress and President take in dealing with the rating issue. The political-economy was alive and well in 1803 when President Jefferson bought the Louisiana territory from France for the reported sum of $15 million dollars. The purchase, I discovered when I did a little research and wrote my paper for my class in the Economic History of the United States, had more to do with the economics of the interior and the movement of commodities down the Mississippi River from the states, than the idea of Manifest Destiny, which came about many years later. How many more times are we, the American people, going to tolerate a man made financial crisis of this magnitude? I guess we will find out.