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.