Memorial Day 2010

Today is Memorial Day. Take a moment to think about all our people in uniform and those who wore the uniform in service to our country. We are a big country, spread across several time zones and coming from many different lands, but the freedoms we enjoy every day did not come cheap. People lost their lives in defense of those ideals we hold dear to us.

On a separate note, the Top Kill did not work, so I suggest that BP start spending its money on clean up and restitution to the peoples of the gulf and their way of life that they so callously destroyed. To those that believe the federal government has a role in enforcing safety to the environment and to oil rig workers, let your representative know where you stand. I believe the concept of less government is better government is a joke, a bad joke. The federal government has a responsibility to protect our lands and waters from those that would ruin our lands and waters to maximize the profits of their corporation. Now that there is a major spill, people want the federal government to do more. The time for the federal government to be doing more is before the spill. Safety and proper offshore drilling procedures should be enforced by a government that looks out for the well being of her people's lands and waters.

Stay tuned.

Plug The BP Oil Spill Today

Where is Superman when we need him? The BP oil spill in the Gulf of Mexico just keeps coming. We need two patriotic Americans to come forward and give their all to plug the leak. I think it only fitting if Dick Cheney and Rich Limbaugh would volunteer to plug the hole with themselves.

Stay tuned.

Happy Safe Memorial Day Weekend 2010

I have a full day planned, so everyone have a nice safe Memorial Day weekend, and I will be back with more commentary about the political-economy next week.

I do wish we, Americans, could learn to come together on issues such as the use of our lands and waters, and realize that this is our treasure. Letting a corrupt Congress and greedy business people destroy our environment holds all of us back from enjoying the land we all live in. Yes, we need oil and we need other sources of clean energy too. 1973 should have been our wake up call to get off of imported oil, but we lacked, as a nation, the resolve to make energy independence a matter of national security.

People that abuse our environment by knowingly placing our environment at greater risk to maximize profit should be held accountable for the damage they create to our lands and waters. Holding up a bank or a 7-11 are not the only crimes committed today in the USA.

Stay tuned.

The Federal Government Should Protect Our Lands and Waters

I think I am like most people in that I would like our Federal government to work. Work efficiently, honestly and competently would be nice for everyone. We all pay taxes. Yes, even the poorest of us pay taxes. They might not be income taxes, but there are other taxes we all pay.

The idea that less government is the answer is, in my opinion, one of the most overrated ideas to ever come down the pike. Just stop for a few seconds and think about all the services that we depend upon that are more practical to have government providing the service. Let's take the Fire Department. Does anyone believe that having multiple private Fire Departments competing to put out a fire would be a good idea? How about multiple private Police Departments? Should we have that too?

The role of government is ever changing as our country changes, and it should be everyone's political philosophy to want those services where we do not need private business competing to provide the service, to want government to do the job right. Those are the operative words - doing the job right.

If the Congress and the President do not want a piece of the government to work efficiently, honestly and competently, they can cut its funding, reduce its personnel and basically convey that the services a given department provides is not important. That is my opinion what has happened to too many departments and agencies of the Federal Government.

This oil spill in the Gulf of Mexico is not a natural disaster. This oil spill is the result of a Federal Department that has gotten too close to the people they are suppose to monitor and regulate. But, I think, it is important to reexamine the idea that less government is better. Would more oil spills by the oil companies and drilling companies make our lives better?

It is time for people start to thinking about the need for effective and honest regulation. Government is not the problem. The Federal Government should be the vehicle by which we protect our lands and waters.

Stay tuned.

Freedoms vs Responsibilities At The CRAs

For many years, I have heard that it is not free speech to yell fire in a crowded theater. Panic would ensue and people might be trampled to death making their way to the exists. This makes sense. In other words, peoples' lives trump free speech. How much is it of a stretch to say that peoples lives trump freedom of the press? Can a business exercise their right to freedom of the press to the detriment of peoples' lives?

In yesterday's post, I argued that a company or individual should not be allowed to wrap themselves in the First Amendment of our Constitution to avoid prosecution of a crime. Billions of dollars of phony (bogus) Triple-A mortgage-backed bonds flooded the bond market and were purchased by not just individuals, but by pension funds for millions of people across the United States. The damage that these credit rating agencies did to millions of people and the pension funds of state employees and teachers is massive. And, yet, there are judges that buy into the argument that the credit rating agencies are protected by the First Amendment's guarantee of freedom of the press.

If we protect people in a theater from the careless exercise of freedom of speech by someone that would yell fire, does it not make sense to protect the financial security of millions of people by the careless exercise of freedom of the press. The models that were supposed to be used in the credit rating process were placed aside for the sole purpose of growing the bottom line and the earnings of these corporations. This kind of reckless behavior should not be protected by the First Amendment any more than yelling fire in a crowded theater protects someone's right to free speech.

The credit rating agencies (CRAs) have a long history of abusing their responsibilities when it comes to bond credit ratings, and the courts should consider this history of abuse in their decision, in my opinion.

Stay tuned.

P.S. I am not an attorney. I have never been an attorney. I have no desire to become an attorney. I write a blog, period.

Claim Protection of Free Speech To Avoid Criminal Prosecution?

Can the First Amendment of our Constitution be used to protect a crime? That is the question for the day. The Credit Rating Agencies have argued that their credit ratings that they placed on mortgage-backed bonds is protected by the First Amendment. I disagree.

Making counterfeit money by that same reasoning should be protected by freedom of the press, again a First Amendment issue. But, what U.S. court would hand down a decision saying that someone printing $100 dollar bills in their basement is protected by freedom of the press?

The investment bankers and the credit rating agencies entered into a mutually beneficial deception of the investing public. Their crime is no less than the crime of counterfeiting. They minted Triple-A bonds that were clearly not Triple-A. Furthermore, there is evidence that by working together to deceive the public, they both stood to gain. The investment bankers sold investors junk bonds at Triple-A prices and yields, and the credit rating agencies saw their earning grow as the market for structured assets grew.

I can not see how a judge could find for the credit rating agencies on First Amendment grounds. It is clear to anyone with an ounce of common sense that using the Free Speech clause to protect a crime, such as counterfeit bond ratings to fleece investors of their money, should not be protected by the Constitution. If this reasoning is up held, I would not be surprised if other free speech like crimes come to the surface. Create a swindle and wrap yourself in the free speech clause to protect yourself from criminal prosecution will become all the rage.

Stay tuned.

Free Speech vs Corporate Corruption & Greed

This Sunday's edition of The New York Times, in the Sunday Business section, has an article that is of particular interest to me. It is about the Credit Rating Agencies (CRAs). "Suddenly, the Rating Agencies Don't Look Untouchable" by David Segal is an article worth reading.

While some headway seems to be taking place with regards to suits brought against the big three of the credit rating agencies, it seems that a number of cases have been dismissed by judges on the argument of the First Amendment's protection of Free Speech. I disagree with this, and in fact, in my opinion, these judges are not just wrong, they are friggin wrong. Now I will explain.

There were ten ratings agencies recognized as of September 25, 2008 by the Nationally Recognized Statistical Rating Organization (NRSRO). A NRSRO member is a credit rating agency which issues credit ratings that the U.S. Securities & Exchange Commission (SEC) permits other financial firms to use for certain regulatory purposes. One of these purposes is that of an institution's Net Capital Requirements. The Net Capital Requirement is important for the SEC's monitoring of the safety of such things as money market funds and other types mutual funds.

This has nothing to do with free speech in my opinion by virtue of the fact that these credit ratings, used in the performance of a Federally created institution's work, and not just the exercise of free speech under the protection of the First Amendment. Judges that are throwing out law suits brought against the CRAs on grounds of free speech are, in my opinion, deaf to the whole purpose and responsibilities of the SEC and the NRSRO. But, who ever said judges know everything. In this case, again, in my opinion, they do not have the knowledge of the position of the NRSROs in the financial industry to make the correct decision.

Underwriters Laboratories is an independent products safety certification organization. When buying an electrical product, such as a hair dryer, people will look to see if the UL is on the product's box or container. Yet, UL does not approve products: however, acceptable products carry a UL certification. The CRAs do approve of a product in degrees. That is what the whole credit rating system is all about. Triple-A, Double-A, Single-A and so on are ratings of degree of safety and suitability for purposes spelled out by the SEC. The very fact that the SEC requires money market funds and other types of mutual funds, as well as financial institutions, such as banks, to heed credit ratings for Net Capital requirements, removes credit ratings from the arena of free speech. This has nothing to do with free speech, and these corrupt corporations should not be able to shield themselves behind the protection of the First Amendment. This is not what the First Amendment was written to protect. The First Amendment was written to protect Free Speech not corporate corruption and greed.

Stay tuned.

P.S. I am not an attorney, I have never been an attorney, These views come out of my head and are not the views of any network.

Temporary Tribute To Ellsworth Kelly

I don't understand Ellsworth Kelly's art work. But, having worked at Central Trust Bank in the late 1970s and been there when Ellsworth Kelly's mural, 8 large paint chips, were hung on the first floor wall behind the tellers, I am familiar with his work. Each of the eight pieces were painted in one solid color that Ellsworth mixed himself, and then painted the rectangular shaped canvas with his color from edge to edge. Later, when in New York on business, I saw an exhibit of his work at the Metropolitan Museum of Art in 1979. While every artist has his own style, I find Ellsworth Kelly's art work interesting. My own comment about Ellsworth is: "It is great work if you can get it." Hell, I wish people would pay me a fraction of what he gets for his art work today. Today I am putting up a piece of work that I am just starting. It reminds me of a finished piece of his. When my piece is finished, I will post it, but for now here is my temporary tribute to Ellsworth Kelly. Enjoy.

Stay tuned.

Saturday Is For Art: A Few Photos

I have not painted in a while. I guess I am taking a break. My energy to paint runs in cycles. Right now the cycle I am riding is of the two wheel kind. I am still getting in condition for RIDE CINCINNATI on June 13Th. RIDE CINCINNATI is in its fourth year and raises money for breast cancer research for the Barrett Cancer Center of the University of Cincinnati.

Here are a couple of photos I took recently. They will have to do. I am not by any means a photographer. I have a little Canon point and shoot digital camera, so please don't tell me these are not very good photos, I know that. Just try and enjoy them for what they are. The first photo is my interpretation of the Ashcan School. The Ashcan School of painting was an American school of painting in the early 20TH century. The next few photos are of my neighbors white cat taken through a metal screen. Bud and I thought the cat photos would be a welcome change of pace from my usual fare.

I hope everyone has a safe and pleasant weekend.

Stay tuned.

Accountability, Transparency & Enforcement

It will be interesting to see what this new legislation aimed at improving the financial services industry is like. Everyone has their own idea as to what is needed in order for this legislation to do the job.

I believe that the Credit Rating Agencies (CRAs) need to be watched. For me, they are the key. Eliminate phony ratings and you eliminate the bubble in housing, reduce the popularity of credit default swaps, eliminate one of the causes of a liquidity crisis and ultimately prevent another mortgage-backed bond market meltdown which can lead to a financial crisis and an economic recession.

Counterfeiting, whether by engraving or misapplied bond ratings, will eventually undermine a currency or the investment services industry. The need for accountability, transparency and enforcement will still be needed, Bernie Madoff was not the only thief on Wall Street.

Stay tuned.

Congress: Don't Shoot The Economy In The Foot

Today I am playing golf and I have a few things to do before I play so I will try to be brief.

CONFIDENCE. Confidence in an industry where, at best everything is written on paper, and more so today nearly everything is in book entry form, is of utmost importance. It is imperative that those on both the buy side and the sell side have confidence in the "paper" (investment securities) they are trading and investing. Without confidence, there is nothing. There is meltdown - no one will give a bid because no one wants to position a bond that is not what it is represented to be. The credit rating agencies by the act of rating bonds, give them a value. If there is a rating and it is found out that there is no value, then the whole bond market has problems. Even US Treasuries that are used to secure loans to carry inventory come under pressure. Liquidity becomes an issue and trading grinds to a halt.

The new legislation must contain serious reform as far as the credit rating agencies and the way they operate is concerned. Without this, the economy can not recover with the speed it is capable of. Borrowing and securitization are not the enemies. What is needed is reform of the conflict of interests that exist on Wall Street between the bankers and the credit rating agencies. Without this reform in the new securities legislation the Congress is shooting the economy in the foot.

Stay tuned.

Congress: Wake Up Before It Is Too Late

We had some election yesterday. In some cases new people won. But, the real question, for me, that remains is: is there too much money coming in from Wall Street and the financial industry in the form of political contributions? Can Congress pass the necessary legislation to help prevent another financial crisis despite the large amounts of political contributions and lobbying money spent by the financial industry?

If money spent on political campaigns determines the laws and how this country is run, then the question has to be asked: do we still have a democracy. A pure democracy is where everyone votes on everything, but in a republic such as ours, we elect members of congress to represent us and they vote for our interests. If money is the determining factor in every election, and the financial industry uses their financial resources to control the outcome of elections and thus legislation, what will it take to turn the system around to represent the middle class?

The Congress can't even protect the military personnel in our armed forces when they buy a car. If the Congress will not stand up and protect those in uniform, that are putting their lives on the line for us, how can we expect these same members of Congress to do the right thing for middle class families that need to borrow money or use a credit card? Truth in lending is a joke.

This can only go so far. Once the 1% of the people have 90% of the money, the scales will move, and revolution will not be far behind. Capitalism can work, but there must be a level playing field so that everyone has a fair chance to compete. The financial services industry, banks and investment bankers, better realize before it is too late that their greed will eventual kill our republic. Without a middle class this country does not exist. Someone in Washington better wake up before it is too late.

Stay tuned.

Monetary Policy Is No Match For Criminal Activity

I have just finished reading another article about the Chairman of the Fed, Ben S. Bernanke, in the Sunday New York Times. The article discusses Mr. Bernanke's role as the head of our central bank and talks about the fact that even the smartest men in the room did not see the crisis coming. I agree with that to a point.

The problem, as I see it, was not purely economic, but rather criminal. Yes, criminal. No amount of regulations can prevent a financial crisis that is born of criminal activity. Whether counterfeit money overwhelms the system or phony Triple-A mortgage-backed bonds overwhelm the system, makes little difference. I would go so far as to suggest that the counterfeit money problem would have at least had the Department of the Treasury and the FBI working on the matter. Unlike the phony Triple-A mortgage-backed bonds that had no one any the wiser until the mortgages started going belly up.

A few bright people realized that all these mortgage-backed bonds could not be Triple-A in quality, and created the credit default swaps that permitted the doubters to bet against these bonds from eventually paying off. Those that realized the huge problem that was going to take over the whole housing market - the bubble that was unsustainable, became very wealthy from betting against these phony Triple-A bonds.

While there are other facets of the financial system that needs attention, the credit rating agencies that bestowed their elegant Triple-A rating on billions of dollars of mortgage-backed bonds, is in my opinion, the biggest and most critical pothole in the road to financial stability. But what do I know, I am just an old man writing a blog.

Stay tuned.

Time For Abusers Start Going To Jail

When you look at all the money the Federal Government spends, you would expect that the money spent by agencies and departments that deal with our money, the Treasury Department, The Federal Reserve Bank and the SEC, and the energy question (oil, natural gas and coal) that would at least get competent administration of these very vital areas. Our money and banking and investing, and our energy situation effect our lives every day, and yet the people charged with the responsibility to oversee these two sectors of our life are asleep at the switch. I wonder if the people in charge of these agencies and departments are not throwing out those that try to do a good job, and holding onto those that look the other way. Enforcement of laws mean nothing if those in charge refuse to do their job by enforcing the rules and regulations. Whether it is investment products on Wall Street, coal mining in West Virginia, or deep sea drilling for oil in the Gulf of Mexico, the lack of creditable supervision appears to be the norm. We, the People, are tired of excuses and double talk, we expect our Federal Government to hold people accountable for their actions. It is time that the abusers start going to jail.

Stay tuned.

Saturday Is For Art & Screwing The People

The rose bush in my front yard in all its splendor.

I haven't written a word about the oil spill in the Gulf of Mexico. By now almost everyone with any sense of fairness or honesty will admit that the Federal Government has failed us again. First, the Securities & Exchange Commission, The Congress, The Federal Reserve Bank and other duly authorized governmental organizations failed to protect the investing public from the greed of Wall Street bankers. The creation of phony Triple-A rated mortgage-backed bonds fleeced billions of dollars from both individual and institutional portfolios. Created a housing bubble that lead to a bond market meltdown which brought about a financial crisis of liquidity and ultimately lead to the worst economic recession since The Great Depression of the 1930's. All this with perhaps hundreds, if not thousands, of government workers getting too close to the people they are suppose to be monitoring.

The same case can be made for those in the Federal Government that were charged with the responsibility to look out for the nation's interests in the drilling of oil offshore. They, the government employees, were literally in bed with the people they were suppose to be monitoring. I guess you can't get any closer than that if your monitoring.

The Federal Government needs to start putting people in prison for failing to do their job and looking the other way. As long as Congress treats such behavior as acceptable, it will continue. But, then again, where do they learn such behavior if not from the Congress? These whores are so corrupt that they can't even pass legislation to correct the problem with the drilling.

Stay tuned.

They Too Will Get Their Pink Slip

For the last few days I have been reading a biography of Trotsky by Robert Service, copyrighted 2009. This is to date the most complete biography of the man who along with a handful of other Russian revolutionaries brought about the Russian Revolution of 1918 that resulted in the Bolshevik take over of Russia.

Revolutions, whether the French model, or the American model that proceeded it, have several things in common. Basically, I think it is safe to say that people become angry with the corruption and/or the repression of their government. Europe had several revolutions in the 19TH century, as workers realized that they, like the French people, could throw off a government that no longer served the majority of the people. The age of the divine right of kings had long passed, and workers in the cities wanted an honest government that represented their interests and met their needs.

The Tea Party movement in the United States should not be ignored. While some will try to demonstrate that it is not solely a grass roots movement, there are several reasons for the middle class to be unhappy with the government in Washington. The financial crisis was man made. You don't have to be a PhD in economics to understand what took place, or for that matter the fact that the Federal Government gave billions of dollars to the big banks in spite of their greed and reckless behavior.

Political movements start out small. They grow because the people in political power chose to ignore them and their grievances. As a result of such thinking, many incumbents will not get reelected in November 2010. This will just be the beginning. The Tea Party may not be the ultimate political vehicle that will bring about change, but it has some points that need to be addressed. I am not a Tea Party member, but I recognize that the politicians in Washington are not addressing the problems that face middle class families with regards their being able to invest their savings and not be cheated with financial products that are rigged to fail.

Unless the bankers and Wall Street are policed properly, that Federal legislation creates a framework for accountability, transparency and enforcement, people and institutions will continue to have their pockets picked by those working in the capital markets who have no ethics and regard everyone as a mark. This culture of greed and excess will not change on its own. Now is the time to bring about strong comprehensive legislation to level the playing field for all investors. Members of Congress that do not or will not see that time is running out will get their pink slips in November.

Stay tuned.

The New York Times Continues To Dig

Prosecutors ask if 8 banks duped rating agencies

http://www.nytimes.com/2010/05/13/business/13street.html?hp

With The New York Times doing the digging, more information comes to the surface about how the investment bankers and the credit rating agencies brought about the collapse of the mortgage-backed bond market.

Stay tuned.

The Dollar, Inflation & The Capital Markets

It is a warm wet morning here in Cincinnati. The grass is green and the flowers are blooming. Rain continues to fall and every now and then there is thunder in the distance. So, why on a day like today do I feel like talking about money? I have said about as much as I can about the credit rating agencies (CRAs), so, I think it is time to give that a rest. Now that the Justice Department is awake to the role the CRAs played, perhaps more truths will come to the surface.

But, like the credit rating agencies that, in my opinion, provided the conduit to blow up the housing bubble, the Federal Reserve Bank is another villain in my story. Keep in mind that a central bank like the Federal Reserve Bank does not have to be a villain, if run properly, but here lies the jump off point for my discussion. What is the proper role of a central bank?

First, I am not an economist. I do not have a PhD in anything. My ideas come out of my own head. Now, that said, I will give you my take on the proper role of a central bank. Some would no doubt argue that the work of a central bank is not that simple. That a central bank, like our Fed, is a most complex fixture of a very complex financial system that is world wide in scope. Yes, all this is true, but the principles that should govern a central bank, in my humble opinion, are not that complex.

First and foremost the central bank must protect the integrity of the nation's currency. What do I mean "must protect the integrity of the nation's currency?" The central bank needs to provide enough reserves to the banking system so that the nation's economy can function, but if the central bank prints too much money (Federal Reserve Notes) this can cause inflation, and a disincentive for people to save their money in traditional savings accounts.

When there is a disincentive to save, people are forced to invest their money in an effort to maintain the purchasing power of the money they have saved. If placing your money in a savings account with a bank at a low interest rate over a period of many years will not permit one to save for their retirement, their child's college education, or even a state run pension fund, or a university's endowment, or a foundation's philanthropy, people turn to investing those monies in the stock and bond markets.

With the trillions of dollars that are flowing into the capital markets to keep pace with inflation and maintain purchasing power, people and institutions place themselves in the direct line of fire for those that regard them as marks or so many fish to be shot in a barrel. When given the choice of keeping their money in savings accounts or investing in the markets, responsible people that have to provide for the retirement of millions choose the investment alternative. In fact, the actuaries will tell those in leadership positions with various organizations what number they will need down the road to meet their financial obligations to the people they represent.

In plain English, knowledgeable and responsible people know that in order to provide for the people that they are entrusted to provide for, must invest in the capital markets. With the trillions of dollars pouring into our capital markets and an attitude among those in political power (the President, the Congress and the Federal Reserve Bank Chairman) that these capital markets will self regulate, the scene is set for the greatest money grab since the formation of this republic.

Several words ago, I started out talking about the role of the central bank and its responsibility to the integrity of the currency. I have attempted to draw a line showing how the policies of the Federal Reserve Bank and the idea of self regulating capital markets brought about the financial crisis which lead directly to the economic crisis of 2008.

While the Congress plays with ideas for more comprehensive regulations for the capital markets, they just might want to turn their attention to the policies of the Federal Reserve Bank. If monetary policy in the United States started with the integrity of the currency, the U.S. dollar, then perhaps people and institutions would not be forced to place so much faith in investing in the capital markets to make up for the erosion of the dollar's purchasing power.

Stay tuned.

Mr. Buffett & My Economic Coloring Book

The problem for most of us, when it comes to understanding finance and all the related connections, is that we just do not know all the players and their relationship to each other. Today, I am going to give the readers of MONEYTHOUGHTS a glimpse of one of the most interesting connections in the United States.

Remember how I have written about the credit rating agencies, and how I believe that because of their corrupt behavior (giving out their Triple-A rating on all those mortgage-backed bonds) the bond market meltdown lead to the financial crisis that lead to the economic crisis which lead to the loss of jobs and the worst economic situation since The Great Depression of 1930s. Well, today, just for fun, I am going to color in some of those areas in my Economic Coloring Book.

Moody's Corporation is the holding company of Moody's Investors Services. Moody's Investor Services is the credit rating agency that passed out their Triple-A rating to the investment bankers on Wall Street that underwrote the billions of dollars in mortgage-backed bonds. Berkshire Hathaway owns a 19% share of the publicly traded New York Stock Exchange listed Moody's Corporation. The Chairman & CEO of Berkshire Hathaway is no other than Warren E. Buffett considered to be the second richest man in the United States after Bill Gates.

Berkshire Hathaway owns positions of more than 5% in the following corporations that are involved in finance: Wesco Financial 80%, USG* 19%, American Express 13%, Wells Fargo 9% and let us not forget Moody's Corporation at 19%. That along with a sizable piece of preferred stock in Goldman Sachs, and you have our Economic Coloring Book filled in. Please use a BLACK crayon as Mr. Buffett does not like to see his companies colored in RED.

Warren Buffett may act like he is just a simple folk from Omaha, but the truth is a whole lot different. He says he does not understand derivatives, but if you believe that then you should not be reading my blog. With Berkshire Hathaway owning such a chunk of insurance and financial companies, does it make sense that he would not understand one of the most used tools of finance to hedge risk?

Stay tuned.

* USG is involved in building materials, like sheetrock for building homes.

The Credit Rating Agencies: Sometimes You Need To Build A Fire

The investment business, for whatever reason, has remained over the years an area of modern/contemporary life that the vast majority of people have not taken much of an interest. My own interest in cars does not go very deep either. I love to drive, and I love to drive my BMW on the highways, but do not ask me any questions about what is under the hood or how it operates. I know how to put gas in the tank (I even know how to put in an extra quart of oil when it needs some). I am happy with that, and if something goes wrong, I take it to my BMW dealer for maintenance and repairs. I almost never read an article about the latest in automotive engineering, and yet I love to look at new and classic cars.

The investment business is not that complex, but there are a lot of terms and jargon that one needs to know to understand the finer points of the business. Without a knowledge of this specialized vocabulary, the world of bonds is a world of mystery. I have over the last two plus years written a great deal about bond terms and the bond market. One area, the credit rating agencies has remained "under the hood" so to speak for the general public. People working with bonds and bond portfolio management know what that credit ratings agencies do and the importance their credit ratings are to the process of taking a new issue of bonds from the underwriting through to the sale of the public offering of the bond issue.

Last week, on May 2, 2010, The New York Times wrote an editorial about the fact that the three largest credit rating agencies, the same agencies that gave out their Triple-A credit rating to the billions of dollars of mortgage-backed bonds, were somehow not included in the financial reform legislation that is making its way through Congress. This does not surprise me because they, the credit rating agencies, have some very powerful players involved in their business as investors. As I have written many times, "money talks and bullshit walks." Mr. Warren Buffett is a big time player and he owns a nice size piece of Moody's parent company as well as a nice size piece of Goldman Sachs. It is no mistake that the politicians glossed over this finer point of corrective legislation.

But, let us give credit to The New York Times for bringing this point to the greater public's attention. Now all we need is for the talking heads on the network news and the cables news people to pick up on this and keep it in front of the public's eye. As I have written many times, economics is easy, politics is hard. Removing the low hanging fruit from the reach of powerful old men is no easy task. They and the politicians that they contribute to will not do the right thing just because it is the right thing to do. Sometimes you need to build a fire.

Stay tuned.

Happy Mother's Day 2010

Wishing all the mothers that read MONEYTHOUGHTS a Happy Mother's Day.

Hugs,
Z

Saturday Is For Art & Mother's Day Weekend Too

This isn't a painting, but it is nevertheless a piece of art. I see a lot of paintings of flowers, pieces of fruit and vegetables and they all are so nice and colorful and without a political edge. But, that isn't what I do. I have tired to paint sunflowers, and, I will probably try painting them again as well as perhaps a few non-political pieces. But, my mind always turns back towards the political art that I enjoy doing. This photo of the cone flowers in my front yard I took last year, but with this being Mother's Day weekend, I thought it would be nice to put up something colorful and apolitical.

I hope everyone has a safe and enjoyable Mother's Day weekend.

Stay tuned.

Project Completed: Mission Accomplished

My project completed, I will be back writing about the economy on Monday. I drove to western New York State to pick up a picture frame molding chopper for an artist friend that wants to do framing. This was a unique opportunity because you just don't see choppers like this very often. The chopper was made in Denmark and is operated by stepping down on a foot pedal. No electricity is necessary to operate this extremely fine piece of equipment. In a matter of just seconds the eight cuts of 45 degree angles can be cut and then assembled into one complete picture frame. So, I drove my pickup truck to a farm outside of Clymer, NY and transported this over 300 pound piece of equipment to a little place on a lake just north of Detroit. Now I am back home. Mission accomplished.

Stay tuned.

A Project on Deck: No Blogging For A Few Days

I will be busy the next few days as I will be working on a little project and will not be able to blog. As I have written a great deal about the economic crisis over the last two years, there are several posts that are still timely and informative as it relates to the credit rating agencies. They, the credit rating agencies, remain, in my opinion, a major cause of the financial crisis. Whether our leaders in Washington understand this, I do not know, but leaving things as they are will eventual mean we will return to another financial crisis at a future point in time.

Stay tuned.

A Systemic Flaw: The Credit Rating Agencies

If you hang around this planet long enough, you begin to realize that certain things are harder to change than others. Now, some of my contemporaries realized this right away and they left me in the dust years ago. I am a little slow to learn and perhaps observe things around me. Powerful institutions, where many people are involved, do not change direction on a dime. There are too many people involved and they have too much influence and also, there is a great deal of economic power on the table.

Sunday, The New York Times printed an editorial about the credit rating agencies, and in their opinion, the role they played in the recent financial crisis. This blog, MONEYTHOUGHTS, has been writing about the role that the credit rating agencies played in the bond market meltdown that lead to the financial crisis almost since its inception in February, 2008. I have even broken it down to the cellular level of the bond business, and tired to show how the Triple-A credit rating placed on a new issue of mortgage-backed bonds gave it a certain currency among bond portfolio managers.

Unlike the ratings given to corporations (corporate bond ratings) or municipalities and states (municipal bond ratings), where additional information about the issuer's ability and willingness to pay principal and interest in a timely manner is available from several sources, if one is inclined to do the research, this is not the case for mortgages bundled together and securitized into mortgage-backed bonds. While there is some information available to the mortgage-backed bond buyer, the details of each mortgage and the ability of each mortgagor to pay principal and interest must of necessity be assumed by the quality of the credit rating given by the rating agency.

I have written many times that, in my opinion, the housing bubble could not have been inflated without the help of the credit rating agencies and their willingness to give out their highest bond rating, the Triple-A rating, to the billions of dollars of mortgage-backed bonds that they rated. That in a nutshell made the eventual bond market meltdown possible.

Unless Congress takes a position and changes the way the credit rating agencies do business, we are all headed down that same road again. It might not be right away, but within a few years, after all this has passed, the weakness in the way the credit rating agencies operate will bring about another bubble, bond market meltdown to be followed by a financial crisis. A financial crisis is a fancy way of saying that there is no marketability of these bonds and thus the market makers find themselves in a liquidity crisis as market values fall.

Knowing that there are powerful forces lined up on the side of the status quo, I can not be too hopeful that real change will take place. The conflict of interest that the credit rating agencies have with the investment bankers that underwrite the new issues and pay for the credit rating will continue to present a systemic flaw.

Stay tuned.

NY Times Editorial On The Credit Rating Agenices

Finally a New York Times editorial about the credit rating agencies.


http://www.nytimes.com/2010/05/02/opinion/02sun1.html?emc=eta1


Let us hope the Congress in Washington reads this and acts.

Stay tuned.

May Day 2010

May Day is a day around the world that is associated with labor. Labor as in people doing labor. But, what I am going to write today, some people are going to jump to conclusions and perhaps think that I am in favor of the new legislation that was signed into law in Arizona. Let me say at the outset that this is not the case, but let us look into this further.

Why now? Why was this law passed in Arizona now? I think we should ask ourselves a few questions before jumping to conclusions. The bottom line in this issue of immigration is that the Federal Government has a responsibility to protect and regulate the borders of the United States. Stopping the immigration of illegals through California has pushed the flow of illegals coming into the United States to Arizona. I think it is fair to say that this has put a heavy burden on the resources of Arizona.

Unfortunately, the Congress has not taken up the issue of a new immigration bill and as a result of their failure to deal with a problem that should be dealt with at the Federal level, we have a state, Arizona, trying to cope with the problem.

It is my opinion, that if the Congress in Washington, that is charged with protecting the borders had dealt with the issue of immigration from Mexico, the State of Arizona would not have passed this onerous legislation.

Arizona may not be my favorite state, but then again, I haven't walked a mile in their shoes either.

Stay tuned.