Payback time; “US Inquiry Eyes S&P Ratings of Mortgages,” the New York Times reports:
The Justice Department is investigating whether the nation’s largest credit ratings agency, Standard & Poor’s, improperly rated dozens of mortgage securities in the years leading up to the financial crisis, according to two people interviewed by the government and another briefed on such interviews.
The investigation began before Standard & Poor’s cut the United States’ AAA credit rating this month, but it is likely to add fuel to the political firestorm that has surrounded that action. Lawmakers and some administration officials have since questioned the agency’s secretive process, its credibility and the competence of its analysts, claiming to have found an error in its debt calculations.
AdvertisementIn the mortgage inquiry, the Justice Department has been asking about instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S.& P. business managers, according to the people with knowledge of the interviews. If the government finds enough evidence to support such a case, which is likely to be a civil case, it could undercut S.& P.’s longstanding claim that its analysts act independently from business concerns.
A week ago, Alex J. Pollock noted “The Delicious Irony of the Downgrade” at the Wall Street Journal:
In the wake of all the angst about Standard & Poor’s downgrading the credit of the U.S. government, we need to consider what rating agencies are. They are exactly what they themselves say they are: publishers of opinions. In other words, they are one group of scribblers among others, trying to forecast the future and its risks like hundreds of other people, naturally making many mistakes, like everybody else.
It is a delicious irony that the opinions of these particular scribblers get special weight only because the federal government has given it to them. Government regulations require financial entities to use the ratings issued by government-designated rating agencies for investment decisions. Now S&P has turned on the source of its privileged position and profits. If the government does not like the force of this disloyal pontification, that’s its own fault.
As Pollock concluded, “From an overall financial perspective, it is perfectly logical to think that internationally diversified, cash-generating, well-managed companies with low leverage are better credit risks than nationally concentrated, negative cash flow, poorly managed, highly leveraged governments.”
Heh. Of course, the triple-A rating that S&P supplied for decades helped to ease the government into mortgage equivalent of the corporate junk bond market, via the Community Reinvestment Act, begun under Jimmy Carter, wildly accelerated under Bill Clinton, and continued by President Obama. In 1999, Howard Husock wrote a remarkably prescient City Journal article on the topic:
The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities—and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation’s banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being.
The CRA’s premise sounds unassailable: helping the poor buy and keep homes will stabilize and rebuild city neighborhoods. As enforced today, though, the law portends just the opposite, threatening to undermine the efforts of the upwardly mobile poor by saddling them with neighbors more than usually likely to depress property values by not maintaining their homes adequately or by losing them to foreclosure. The CRA’s logic also helps to ensure that inner-city neighborhoods stay poor by discouraging the kinds of investment that might make them better off.
The Act, which Jimmy Carter signed in 1977, grew out of the complaint that urban banks were “redlining” inner-city neighborhoods, refusing to lend to their residents while using their deposits to finance suburban expansion. CRA decreed that banks have “an affirmative obligation” to meet the credit needs of the communities in which they are chartered, and that federal banking regulators should assess how well they do that when considering their requests to merge or to open branches. Implicit in the bill’s rationale was a belief that CRA was needed to counter racial discrimination in lending, an assumption that later seemed to gain support from a widely publicized 1990 Federal Reserve Bank of Boston finding that blacks and Hispanics suffered higher mortgage-denial rates than whites, even at similar income levels.
In addition, the Act’s backers claimed, CRA would be profitable for banks. They just needed a push from the law to learn how to identify profitable inner-city lending opportunities. Going one step further, the Treasury Department recently asserted that banks that do figure out ways to reach inner-city borrowers might not be able to stop competitors from using similar methods—and therefore would not undertake such marketing in the first place without a push from Washington.
But for generations, mortgages were a closed loop which would have minimized the damage of the CRA somewhat. Savings & loan executives were known as the 3-6-3 club: pay interest on passbook accounts at three percent; loan money at six percent, hit the golf links at 3:00 PM. It’s a relaxing way to do business in small-town America, but Wall Street saw an opportunity to dramatically shake up the banking world in the years before CRA went into overdrive.
Here is a useful cite about the CRA. Anyone who is interested might want to grab the source material before it disappears down the memory hole:
The National Community Reinvestment Coalition (NCRC) found [1] that from 1997 to 2007, $4.7 trillion in home loans were made under the Community Reinvestment Act (CRA). In 2007, over 50% of home loans were made to people who would normally have not qualified for one. According to a Reuters’ story [2], “S&P now projects defaults on subprime loans issued in 2005, 2006 and 2007 at 11 percent, 30 percent and 49 percent, respectively.” These losses represent a good fraction of the $4.7 trillion lent under the CRA.
[1] NCRC, NCRC Documents Trillions of CRA Dollars in Communities since 1977; CRA Commitments: 1977-2005,
Link: http://www.communityinvestmentnetwork.org/nc/single-news-item-states/article/ncrc-documents-trillions-of-cra-dollars-in-communities-since-1977-cra-commitments-1977-2005
[2] Reuters, S&P raises loss expectations for risky US mortgages, July 6, 2009,
Link: http://www.reuters.com/article/idUSN0626699620090706
When S&P’s rating affected millions of homeowners and ultimately required the federal government to spending billions to trillions of dollars via TARP purchases to bail out the bank/bankers that made bad loans, the government was silent. This, of course, costs the taxpayers an untold sum of money, now until the end of time (since we’ll never pay of the principle).
Now that the government has been handicapped in their ability to borrow because of S&P’s decision to downgrade the nations credit rating, they care.
I have to say…typical.
The DoJ is going to be-clown themselves badly with this. In the end it will be a circular democrat firing squad. The CRA that forced banks to make the loans that were blessed by federal regulators and thanks to Freddie and Fanny were backed by the full faith and credit of the US Government. So S & P is guilty of believing the US Government’s implied full backing of the toxic waste loans that were created by the government’s own policies and regulations.
I’m not trying to exonerate them but someone should have been able to predict that banks and money-men would figure out a way to protect themselves from the bad loans they were forced to make. And that it wouldn’t end well. Ya think?
exactly
If I tell you that I’m going to deliberately bankrupt you in 5 to 15 years, chances are that you won’t just sit there and cry your eyes out until it happens.
I don’t blame the mortgage bankers at all, 0%. They were the most conservative people in the financial industry for decades. Their process worked perfectly. They didn’t become wild-eyed craps shooters without a reason. And the reason was the federal government and the CRA.
Any entities standing in the way of the CRA/Fannie/Freddie bogus-mortgage scheme were threatened with criminal sanctions by the Clintonistas. As I see it, S&P was only one rating away from Janet Reno’s Sapphic savagery. They undoubtedly knew what the result would be of any whistle-blowing on the CRA scam. If the Right wants to reverse this Leftist slide into oblivion, they have to read history regarding the destruction of bad ideas. Hint: have you ever driven past an Albigensian Church? No, because a fighting bishop, as his troops breached the walls of an Albigensian city, ordered his men to “kill them all, God will know His own.” That’s how you win. If you view Leftists as a species of invasive weed, it helps clear your thinking.
Don’t forget to keep checking Fitch’s to see how they get rewarded for not downgrading anything but states with fiscally responsible governments.
This is Eric Holder’s poisonously partisan DOJ. Why is there any reason to think it will pursue S&P’s benign ratings of the Fannie-Freddie-CRA-driven subprime bamboozlement bubble, in a way that would expose ANY of the Democrat party policies of chicanery and extortion that mandated the mortgage bubble?
In the previous post, Ed, you wrote of Obama: “Wow, he really is the second coming of Nixon.”
Well, siccing the DOJ on S&P after they embarrassed Obama with that credit downgrading nicely satisfies the Nixon’s “enemy list” portion of that comparison.
2008 the major problem was, and will be, they can’t unwind the trades. When Joe defaults on his mortgage can it be tracked back to a specific holding now?
Just last week the WSJ had a story on Main St bank in Texas which is surrendering its charter and selling off its branches. http://online.wsj.com/article/SB10001424053111904480904576498442951766826.html
The article has this to say: “Mr. Depping [the CEO] plans to set up a new lender that will operate beyond the reach of banking regulators—and the deposit-insurance safety net. Backed by the private investment firm of Microsoft Corp. co-founder Paul Allen, the company won’t be able to call itself a bank, but it will be able to do business the way Mr. Depping wants.”
In Taxachusetts where Romneycare is the disease rather than the fix, physicians exiting tradional practices and are setting up “concierge practices” which do not take insurance, only cash.
Expect to see more of this. John Edwards’ said there were “Two Americas” and thanks to excessive government pushing, prodding and poking, that may turn out to be correct. One America will be public for the “traditional” way of doing business with the gubbermint gumming up the works each step of the way, the other will be private, cash-only and both profitable and effective.
Ed, for a more up to date in depth investigation into the shenanigans that occurred in the securitization of dodgy mortgages in the form of collateralized mortgage obligations (CMO’s), read Michael Lewis’s latest “The Big Short”. Many of these sub primes did not qualify under Fannie and Freddie but were sliced and diced in their securitization and presented directly to the rating agencies such as S&P which blessed them with AAA and AA without any credit inquiry into the underlying borrowers. The rating agencies accepted the investment bankers word that the individual borrower data was not available, only average credit score data, and indeed the relationship guys did lean on the analysts to accept that claim. These securities were so complex that nobody could understand them. The book traces the few guys in the market who purchased naked credit default swaps betting against the credit worthiness of the CMO’s and made a killing. The largest underwriter by far of the credit default swaps was AIG who was selling these credit backstops for a pittance (20 basis points) and this is what brought them down.
There were two pre-cursors to the carnage of the financial implosion of 2008, the first was the government mandate to loan to un-creditworthy borrowers with the mandate being that 40% or more of loans originated had to be to credit challenged borrowers. This was a direct result of the ACORN harassment of lenders during the Clinton administration of which Obama was a direct participant. It also gave rise to the hare brained zero down floating rate loans products that were time bombs in the making. The second, was the inexplicable AAA rating given by the credit rating agencies for securities composed of subprime loans. The theory behind the high ratings was that even though they were all poor quality, they represented borrowers from all over the country and were therefore not likely to go bad all at once.
Of course the easy credit led to the real estate bubble which became a national phenomena and the bad loans did go bad all at once since the equity had been pretty much all drained out of the underlying assets once the values started going down.
So S&P has a lot to answer to with it’s participation in the fraudulent rating of these lousy securities. But the real question in this fiasco is, would this have happened if the government had not leaned on the lenders for social justice in the credit business and the answer is quite clearly no.
@Driscoll
“the triple-A rating that S&P supplied for decades helped to ease the government into mortgage equivalent of the corporate junk bond market, via the Community Reinvestment Act, begun under Jimmy Carter, wildly accelerated under Bill Clinton, and continued by President Obama. ”
I could be wrong, but I seem to recall that there was a President, somewhere between Clinton and Barry Obama. Let’s see, a name of Jorge comes to mind.
Oh, yes, Jorge Boosh, that’s it. The best, by far, President, Mexicans ever had. The one who thought it is a tragedy that People of Color are under-mortgaged. And so, not to be a racist, pushed hard for 0-down lier-loans. Especially via his good friend Angelo Mozillo of Countrywide.
And during his tenure, the GOP at least tried to investigate Freddie and Fannie, only to be continually rebuked by Democrats such as Barney Frank — and as Karl Rove told Matt Lauer (who walked right into this):
More here.
Wasn’t there more than mere mention of the “ownership society.” How compassionate was that in the end? 50% unemployment sure is ownership George.
I like the man, but his ideas stunk (other than taking it to the Islamists and protecting life)
Funny that the corrupt Lederer department of attorney general has not said a word about the morally corrupt Chris Dodd D Conn and the equally lying fraud Barney Frank D Mass who were totally responsible for the housing collapse. Apparently Dodd is enjoying his millions at his Irish castle where he lives like the putrid corrupt pig that he is. Frank continues to inflict himself and his partner on the afflicted American economy. quo usque tandem abutere patientia nostra?
This looks so childish. We don’t like what a company says about us, so we try to destroy them with our Justice Department. Pathetic. Obama doesn’t stop to think about WHY our rating was downgraded, only that the people who dared go against him should be destroyed. Played just like a typical Chicago politician. How embarrassing. I can’t wait until this guy gets voted out of office in 2012.
Sounds like Nixon. “Enemies List”, or Alinsky. Take your pick. If you don’t like what they say demonize them.
Isn’t it time for congress to hold a parallel investigation of Fannie and freddie as well as Dodd and those Dems who were using them as a personal pile of stash? Tight the pressure as Holder tightens his. Save the best for 2012 and nail those who brought this down on the worlds necks -the left and their big over-regulating government!
Years ago, I was our Bank’s CRA officer. When it came time for our CRA audit, the FDIC came in and looked at our lending portfolio, our community service record, and our evidence of innovative financing to help LMI (low and moderate income) groups and locations. At the exit interview, they told our Board that they would possibly rate us “needs to improve”. This was devastating news to the Management team and the Board. With that rating, the FDIC would make it very difficult for us to undertake branching and expansion. The bull’s eye was on me because I was in charge of CRA.
The head of the FDIC team then offered to meet with me privately as he could see we were all pretty shook up over the possible rating. We met and he told me that his team had just finished an exam of a bank that had received an “outstanding” rating. He offered to show me their report so I could see first-hand the types of lending they were doing to get them the outstanding rating. He then opened up a file labeled “Washington Mutual” and showed me the list of innovative loans they were making that gave them their “outstanding” rating.
A month later they granted us a satisfactory rating. I now believe that the threat of a bad rating was meant to jolt us into a greater effort to comply with their vision of the future. I wish I could find that FDIC examiner today.
Bush, Dems and CRA from
http://marginalrevolution.com/marginalrevolution/2011/07/the-four-flavors-of-financial-crisis-more-on-the-mortgage-agencies.html:
Do not “… underestimate George W. Bush’s role in the mortgage meltdown. Throughout the 1990s, Democrats such as Clinton, Cisneros, and James E. Johnson were edging in this direction, but they tended to be cynical enough about what they were doing to remain cautious, or at least concerned about criticism by Republicans if they went too far.
In contrast, George W. Bush was more of a true believer, and Republicans in Congress let him get away with stuff that they wouldn’t have let Clinton get away with. In particular, Bush’s call at his 10/15/2002 White House Conference on Increasing Minority Homeownership for 5.5 million more minority homeowners and his denunciation of down payment requirements as the chief impediment to racial equality in the American Dream served to give the greenlight to pedal-to-the-medal lenders and restrain federal regulators. See, for example, Angelo Mozilo’s February 2003 Harvard address where he quoted Bush at length and offered a CRA-like pledge of $600 billion in mortgages to minority and lower income communities in return for regulators easing up on down payment requirements and documentation requirements.
The Democrats loaded the gun, but Bush pulled the trigger.”
No investigation of Moody’s? Perhaps they overlooked Warren Buffett’s favorite rating agency in all of the hubbub about the downgrade. Or, maybe they were too busy swooning over ol’ Warren’s “My secretary pays a higher tax rate than I do” reprise.
Every expenditure of federal money requires that both houses of congress pass the spending bill and the president sign it into law. Some bills are retroactive to cover things like the failure of Fan and Fred.
LBJ and the Democrats passed the War on Poverty with minimal, and non-decisive, GOP support. The WoP cost $6.6 trillion and left us with a total national debt of $6 trillion. No Republican legislative action or presidential signature had any effect on LBJ’s WoP, and consequently Democrats alone created the $6 trillion dollar national debt as of 1995.
Everyone knew we were in an economic bubble starting in 1996 (irrational exuberance). Greenspan seemed to have his doubts, but Democrats celebrated the “Clinton Surplus” which peaked at $236 billion, and neither Greenspan nor Clinton took any steps to reduce the horrific economic damages that were developing. The Bubba Bubble cracked in January 2000, and by the time Clinton left office one year later, the NASDAQ had lost $2.5 trillion. All economic leading economic indicators were falling like a coyote off a cliff at the time Clinton departed. Regardless, the Democrats still insist that there was a $5 trillion surplus developing, but it was ruined by Bush. The national debt increased by $3 trillion to pay for Clinton’s foolishness.
For those with a minimal technical appreciation, the NASDAQ P/E ratio was 65 at the peak of the Bubba Bubble and the DOW P/E ratio was 45 at the peak of the Bubba Bubble. Both values were absolute records for index ratios, which normally range from 7 to 26. The highest previous value for the Dow was 32 just before the start of the Great Depression. Only a Democrat could project a $5 trillion surplus when the ratios were the highest in history and all indicators were falling.
There was absolutely no Republican congressional action or presidential signature on any of the Housing Bubble legislation, nor on Obama’s fantastic waste. Republicans had learned their lessons, and refused to support Obama’s Marxist programs, so Obama called Republicans the Party of No! Hell, yes, No! Democrats are responsible for every penny of the national debt, and want Republicans to cooperate in driving the debt even higher. NO!
See also http://www.americanthinker.com/2009/01/markets_and_marxists_dont_mix.html
This is a good article. There should be many more like it. You could have been a bit more bi-partisan however and pointed out Bush’s role. He made a famous speech in 2002 announcing the no-down-payment policy to close the “housing gap” – in similar fashion as No Child Left Behind was supposed to close the “education gap.” The road to hell is paved with good intentions, or so I’ve heard. These, and other Republican initiatives to placate “minorities” in the past 60 years, have they lured any to their side? Personally, I don’t blame blacks, and others competitively challenged, for taking various entitlements if the powers-that-be are stupid enough to hand them out. Trouble is, now the majority of the population is competitively challenged after years of dependency. C’est la vie.
you watch, they’ll all get away with it, and what’s-his-name will win again in 2012
This was known before the 2008 election but never used effectively or at all by McCain or anyone in his campaign. I suspect the reason is that it is considered too complicated for public consumption and their notoriously short attention span. It’s obvious from this video and from scant pre election reports that Republicans saw the threat, attempted, if not forcefully enough, to rein it in and were thwarted by the Democrats who were the root cause of the problem.
Obama and his handlers successfully deflected all blame from the real culprits behind the mess America finds itself in today. Barney Frank and Chris Dodd, two of the prominent perpetrators, were, unbelievably, put in charge of investigating and crafting a bill to “correct” the evil committed by the “greedy bankers” and “filthy” rich Wall Street luminaries on unwary, unsophisticated, innocent poor folk and “blessed” us with the odious Financial Reform Bill. An amazing piece of the fraudulent deflection of potentially career destroying scrutiny aided and abetted by a complicit media and a feckless, largely non-existent, Republican effort to disclose what could have been a 2008 death blow to the Democrats, exactly the opposite of what happened
One has to reluctantly admire the way the Democrats and their fellow travelers turned a potential disaster into a huge win that gave them the opportunity to continue their quest to “transform America.” Distressing how easy it was. Nobody even asked them how they intended to do that or what were their “noble” intentions. They so successfully demonized Bush 43 and the Republicans that the intended transformation was taken for granted; no need to define. Obama was the anti-Bush, the 1st Black President, long overdue and now, with a unique, Black American’s perspective he would finally fulfill all those promises the Democrats have been making since the days of FDR. Racism was finally dead in America; a symbolic reparation for past sins.
So, other than Obama turning out to be what history will likely describe as the worst President in American History, what’s changed? Here a comment by Reid Wilson from a NationalJournal article posted on msnbc.msn.com yesterday
“But President Obama, whose job-approval ratings are mired well south of 50 percent, has an important factor breaking his way as he seeks another term: Americans still overwhelmingly like the guy.”
Not sure who these Americans are or how big a voting bloc they represent but as long as this remains the case a Republican sweep in 2012 or even just the defeat of Obama remains almost as uncertain as it was in 2008. The guy has charisma, chutzpah, he’s “cool,” somewhat goofy looking (some would say “adorable”) but with a great smile and mingles well with the “common folk” and for many it’s not what he says but how he says it. The competition? What competition!
Standard and Poors was the only credit rating agency with the integrity to do the right thing. Any country that borrows, spends, and wastes taxpayer money on the way to a $14+ trillion debt that exceeds its GDP does not deserve a AAA rating. Obama is a Chicago thug in control of the White House. This is political payback.
The American “Community” is Obama’s petri dish; And he hasn’t the slightest idea (or cares about) what happens in a petri dish.
If Obama was 100% white, he would have been impeached by now for breach of Oath. He’d have so many Special Prosecutors investigating him, there’d be a shortage of lawyers.
Becoming President is now a legislated privilege for anyone that is racially and/or intellectually insufficient. ( ??; ask Congress or the media. They’ll define it for you. Or just give them a call like Obama tells his audience when they have a question about POLICY.)
America is gone.
This nation shall become the P.P.P.U.P.E. (Politically Perfect Peoples Union of the Planet Earth).
As a unprotected, undesirable white male in America, I’d feel more accepted in South Africa as an illegal alien.