Saturday, October 8, 2011
No One Likes To Be Made A Mark
No one likes to be made a mark. Whether you are buying a hot dog at a game or investing for your children's education or your own retirement, no one likes to be taken advantage of.
The investment securities business has a long history going back over 100 years. Brokers and investment bankers have sold the public worthless securities for generations. In the 19th century, stocks were sold, money was collected and pocketed and no railroads were built. After the Stock Market Crash of 1929, the Federal Government created the Securities & Exchange Commission (SEC) and Congress wrote laws aimed at protecting the public from fraud. The SEC did a fair job and a major financial fiasco was averted. But, Wall Street got greedy. Making money the honest way meant that you could not shoot fish in a barrel. In simple language, making a mark of someone became a lot harder to do.
But, money changed the rules as politicians were told that the old rules, the securities laws of the 1930s and 1940s, were no longer needed. Changes were made and more risk became the norm.
The final straw that lead to the financial crisis, in my opinion, was the breakdown and corruption of the credit rating agencies. To understand the importance of the lettered grade that the credit rating agencies gave to new issues is to understand how important the lettered grade on a bond issue was to the placement of the new issue by the sales people working on the desks of the investment bankers. Sales people as a rule knew very little about the credit behind any new bond issue. They knew the interest rate, maturity, re-offering price and finally they knew the lettered credit rating issued by the credit rating agency. Bottom line, the sales people that sold the mortgage-backed bonds knew just enough to sell their bonds and not much more.
When the credit rating agencies gave the mortgage-backed bond issues their triple-A credit rating, sales people included that key piece of information in their sales pitch. Unfortunately, many of the mortgage-backed bond issues that received the triple-A rating were not worthy of the rating.
Lots of people that never heard of a mortgage-backed bond got hurt by the credit rating fiasco. Pension funds and institutional buyers got killed when the house of cards fell.
As I said, no one like to be made a mark. Congress needs to learn that lesson as much as Wall Street bankers.