This morning I have many ideas running around in my head and I really do not know where to begin. Last night, before I went to sleep, I read an article about Larry Summers in VANITY FAIR (magazine), December 2009. At the same time I was reading this article, I was thinking about the fact that in Tuesday's post about Goldman Sachs "doing God's work", I did not ask the question: How can people that refer to themselves as "Masters of the Universe" be "doing God's work"? Does not that make them Gods being "Masters of the Universe"? So much for that. Making fun of these highly educated and polished men and women from Wall Street does not bring us any closer to the solutions to our problems, so enough.
I enjoyed reading the article about Larry Summers, a former Secretary of the Treasury, President of Harvard University, etc, etc. The article went on about how smart Larry Summers is, but it did not give one example of his creative mind. Being an expert on public policy and economic policy is well and good, but what the Obama administration needs is not genius so much as a good repairman.
In previous posts, I have mentioned the godfather of securitization and how securitization changed the financial scene in the United States and the world. This man, who changed mortgages into bonds, is Lewis S. Ranieri. A guy who came out of the back office of Salomon Brothers to change the world. Not only are mortgages bundled in to bonds, but so many other loans, such as car loans and credit card debt, made into securities that are then sold around the world. All of this is a good thing, but if any part of the creation of these securities is compromised, the entire financial product will fail.
Tools are a great thing. Tools help us do a job, but tools can not be abused or they will not produce the desired results. Bundling mortgages, car loans and credit card debt is not the problem. The problem stems from the fact that the credit rating agencies (CRAs) are being bought by the underwriters (investment bankers) to place their triple-A credit rating on bonds that should not receive a triple-A rating.
The new legislation coming out of the Senate from what I have read does not address the problem of the credit rating agencies in a meaningful way. This must be corrected in order for the economy to recover. Credit ratings must mean something in the future. There is nothing wrong with the genius of securitization. The weak link in the process is the credit rating agencies and the fact that the underwriters, the investment bankers, are paying the CRAs for the ratings. Here is your conflict of interest, and where the abuse begins and must be stopped!
My idea is to continue to let the CRAs do the ratings, BUT have the triple-A ratings approved by the Federal Reserve Bank. In this way there is a check and balance to the CRAs handing out their highest rating, the triple-A, to every piece of shit that comes across their desks. The Fed has a direct interest in what constitutes a triple-A because the Fed requires banks to hold triple-A credits in their portfolios.
Having a Harvard education is nice, but it is not the only kind of education. Lewis S. Ranieri did not go to Harvard, yet the Obama administration would be smart to get Lewis Ranieri helping them put this economy back on track. Lewis Ranieri built this railroad.
* And Paul Volcker too!
Stay tuned.
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2 comments:
The man who built the railroad had to be, also, the man who could see the problems that would derail the railroad, as well. Warren Buffett saw it - and others. They saw it and either didn't care enough to raise a stink or they were ignored.
The railroad needs to be re-built with 'guardrails' in place that will keep the train on the tracks. Maybe banks should be required to get their AAA purchases approved by the Fed - who would then be obligated to review the rated instrument with an objective, if not jaundiced, eye.
The credit rating agencies are the weak link. They were the weak link when New York City defaulted on their municipal notes. The CRAs and the product they sell, their credit ratings, needs to be checked out and approved by a higher power, such as the Fed. This, in my opinion, would keep the CRAs from passing out the triple-A rating like candy on Halloween. The Fed would provide a check and balance.
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