Monday, December 8, 2008

Too Kind A Title

The New York Times, Sunday December 7, 2008, 67 years to the day after the attack on Pearl Harbor, has placed Gretchen Morgenson’s article, (one of my favorite business writers that appears in The New York Times), about Moody’s, (the rating agency that I have talked about as arming the bomb that lead to the mortgage bond meltdown), on the upper left hand corner, above the fold, of the front page of their Sunday newspaper.

Finally, after all these months, the story of the rating companies makes the front page. Buy, borrow or go the library and read this article by Gretchen Morgenson. While the article does not have all the good stories about Moody’s, the article, nevertheless, gives important information about why the rating companies and structured finance lead to the present situation in the asset-backed bond market. Those that want to know what lead to the present situation and the financial crisis we are in, and those in Congress that need to know because it is their job to know, should read this article.

“Debt Watchdogs: Tamed or Caught Napping?” is too kind a title for an article of this magnitude. I did a little research on Ms Morgenson, and found that she was only a teenager, probably still in high school, when the bells of the munifacts machine went off near my desk in the early 1970’s. Back in those days financial information came to those of us in the securities business by phone or munifacts. I remember it was five bells and everyone came running over to the machine to see what the news was about. Moody’s had downgraded the City of New York from an A-rating to a Baa-rating on their General Obligation bonds. Municipal Bonds, to keep it simple, in those days were either GO’s or revenue bonds. GO bonds were paid from taxes as opposed to revenues like say a turnpike revenue bond. The age of structured financing was still a few years away. What is so important about the New York City downgrade was the fact that the next day the five bells rang out again, only this time the news was that Moody’s had reconsidered the rating downgrade and returned New York City GO municipal bonds to their A-rated status. Moody’s caved to pressure from the Director of Finance of the City of New York. A few years later the City of New York would default on its GO notes and Felix Rohatyn, a very bright and capable man, would come to the aid of the City and work his magic and restructure New York City’s debt.

The rating of debt in this country needs to be removed from the private sector, period. Companies that are publicly traded, that answer to shareholders, that have profit as their foremost goal can not be expected to give bond rating opinions that are worth the paper they are printed on if the main goal of the company is to generate a return on equity. Is no one out there, with enough ethical high ground to back me up? I can not be the only person who has ever worked with bonds that sees this problem.

There are more stories to tell, but this is not the time to tell them. Today’s point is, if you want to know more about the role that the rating companies played in the current financial crisis, read Gretchen Morgenson’s front page article in the Sunday edition of The New York Times. I wonder if the editors of the Times had any motive in saving this great article for Sunday December 7?

Anyone who would like to read the article I have talked about can go to this link.

Stay tuned.


winslow said...

I find it simply amazing that individuals that are experts in a given area, that have valid opinions and recommendations, are not listened to in our government (or some businesses).
I listened to multiple individuals over the last 3-4 years warning about the dire economic outlook. Don't you think someone in a powerful office would have at least acknowledged this information. In real life, the chieftans said the complete opposite.
Perhaps it's related to the Peter Principle. The incompetants are now in control.
Not to continue to drag Bush thru the mud, but he seemed to select totally incompetant individuals.

There are often points that are recognized by an outsider that are invisible to someone close to the problem. We need to develop a system of better concensus.

moneythoughts said...

Many people own a piece of this disaster, and some of them were in positions to know better, like Alan Greenspan, Chairman of the Fed.

The Bush administration had no interest in what was happening as it does not affect them. People in Washington, D.C. at the top, live in another world.

The purpose of this post was to develop a grass roots movement in favor of the Federal Government taking over the responsibility for the rating of all debt issued in the United States, or sold to investors in the United States. Take away the mortgage bond meltdown and you remove the biggest obstacle to the recovery. That is my opinion.

LceeL said...

Is anyone but me angry that the banks, so prominent in the recent bailout headlines, have tightened credit to the point that companies are going out of business because credit lines are cut to the point they cannot pay their employees? That people with credit ratings over 700 can't get a loan to buy a car? What good to bail out Ford, Chrysler and GM if no one can buy the cars and trucks that the big three produce? this is rapidly starting to smell, to me. To stink to high heaven.

moneythoughts said...

One name: Paul Volcker.

Volcker is chair of the Economic Recovery Board, and he will have an answer to that one too. Yes, you are right in everything you say. Unfortunately, we may have to wait until January 20, 2009 before this problem will be addressed. The banks are running scared too, but that is no excuse for lending qualified people money to buy cars.

Butch said...

Here is a link for your readers to get to Gretchen Morgenson's articles. Copy and paste into your browser.

moneythoughts said...

Thanks Butch! I am going to try and copy that to the end of my posting.