Wednesday, October 6, 2010
There Is Plenty of Cash on The Sidelines
Yesterday I heard from a friend on the west coast that I went to high school and college. He could not make it in for our 50th high school reunion, but called to say he enjoyed the pictures I posted on Facebook. I told him some of the guys that were there that we were at UC with in the early 1960s.
Then we talked about the economy. He has his own software company that writes financial software for many of the largest Wall Street firms. He is somewhat retired and working with a foundation to bring meds to people that have little or no money. We have talked about the role of the credit rating agencies in conversations before, but this time I mentioned PREDATOR'S BALL by Connie Bruck. He had read it 20 years ago he said, about the same time I read the book.
This book is about the junk bond era and the insider trading that went on in the 1980s. How does this relate to the credit rating agencies? Well, back then everyone was looking for an edge as they are today, and insider information was that edge. When the Feds came down on insider trading, those on Wall Street moved on to another "edge" if they could find one. In the 1990s, the growth of mortgage-backed bonds became the big game on Wall Street. Knowing that not every bundle of mortgages was worth a triple-A rating, the investment bankers shopped the rating with the major credit rating agencies. These so called agencies are nothing more than for profit corporations with shareholders and CEOs that answer to a board of directors.
We both agreed that until the conflict the bankers have with the credit rating agencies disappears the economy is going to continue to falter. Then he said perhaps the Federal Government should take a hand in deciding what is triple-A. I told him I had suggested that because the Fed requires banks to hold so much triple-A paper that they should pass on both triple-A and double -A bonds to make sure the ratings are not bogus. Wall Street would rather that our domestic economy suffer than let the government do the right thing to fix the conflict of interest, and the politicians go right along with it.
There is plenty of cash sitting on the sidelines waiting to be invested. If mortgage-backed bond investors could trust the ratings, the housing industry could possibly get back up on its feet. But, it is not just mortgaged-backed bonds that would benefit from an honest credit rating system. There would be buyers for several types of securitized debt issues too.
The politicians take their orders from Wall Street and Wall Street doesn't want to give up its edge to making money.