naked capitalism

insurance guy says:

I think the rating agencies will be able to argue that they actually thought the diversification from structured finance would be a good idea.

As Yves says, the Rating Agencies were naive in their view of the structured finance business. One can “cynically wonder” if they were influenced by the fees they were earning in that business. At this point though, all anyone is doing is wondering cynically. Its just as probable, if not more so, that the agencies were just naive.

Charlottesvillain says:

I love the blog and read it daily. I don’t usually comment on posts but feel compelled in this instance.

I have worked both in the structured finance side of a rating agency, and in strategy at a financial guaranty company (bond insurer). (All in the 90s, before all this nonsense began).

I can certainly confirm that A) for a monoline, maintaining the AAA is the highest priority, and the threat of losing it trumps all other business considerations. B) The rating agencies certainly encouraged a diversified book of business, although in my experience they tended to view any new business with considerable skepticism, and needed considerable evidence that the insurer had the skills to assess different sorts of risk.

Further more, I can also say that in my experience, there was little contact between the side of the rating agency providing ratings on monlines, and the side rating the structured financings. The insurance group would tell us how to calculate a capital charge as it related to insured pools of assets, but I think that suggestions of active collusion with the goal of generating more structured finance business is far fetched.

Just my two cents, and worth about that much.

Anonymous says:

In addition to this search for market share cash, I read in snip someplace that Moody’s rushed into rating CDOs and all the fun derivatives, even though they didnt understand how to rate them, i.e, they did not have models to really understand the nature of the risk or the accounting of the risk transfer. However there was a race for market share and organizations like SIFMA and various derivatives peddlers were very anxious to get these ratings going so they could start buying AAA ratings so that underwriters could start mass producing packages of AAA rated synthetic junk and connect it all as if it was collateral to back various CDO, SIV, VIE, SPE/subprime trash.

This type of un-regulated collusion did provide the perfect storm and one can only hope that just as in the Perfect Storm movie, these derivative fisherman that stuffed their boats beyond capacity, hit the tsunami waves of reality and sink to the deepest depths of the dark sea from whince they came! And if God is out there, ake along the Bush conspirators in the hull and all the politicians that bought tickets in this un-sinkable voyage to chaos! A pox on them all!

Anonymous says:

OT, kinda, but it is funny how these shadow systems that enjoy darkness want things to be unregulated and to be un-enforced, un-ethical, un-accountable, un-real:

Blueprint For Reform
http://www.futuresindustry.org/fi-magazine-home.asp?v=p&a=1224
NFA, the futures industry’s self-regulatory organization, emphasized the historical and cultural differences between the CFTC and the SEC. The CFTC’s primary mission is to protect the price discovery and risk management functions of the markets, NFA said. Futures markets have mostly institutional participants, and the CFTC’s philosophy and internal culture encourage innovation and competition. In contrast, the SEC’s primary mission is to protect investors, and its internal culture tends to be more risk adverse. One telling example of the differences in their outlook is in their views regarding short sales, NFA said. “To the SEC, ‘short sales’ must be restricted, while to the CFTC they are the very life blood that ensures [that] futures prices mirror prices in the cash markets. To the SEC, ‘speculation’ has a negative connotation, while to the CFTC it provides the liquidity that makes futures markets run.” Given the differences in their histories, philosophies, and markets, the two agencies are simply “incompatible,” NFA concluded.

Anonymous says:

Trivia: Under Skilling, Enron adopted mark to market accounting, in which anticipated future profits from any deal were tabulated as if real today. Thus, Enron could record gains from what over time might turn out losses, as the company’s fiscal health became secondary to manipulating its stock price on Wall Street during the Tech boom. But when a company’s success is measured by agreeable financial statements emerging from a black box, a term Skilling himself admitted, actual balance sheets prove inconvenient. Indeed, Enron’s unscrupulous actions were often gambles to keep the deception going and so push up the stock price, which was posted daily in the company elevator. An advancing number meant a continued infusion of investor capital on which debt-ridden Enron in large part subsisted. Its fall would collapse the house of cards. Under pressure to maintain the illusion, Skilling verbally attacked Wall Street Analyst Richard Grubman[3], who questioned Enron’s unusual accounting practice during a recorded conference call. When Grubman complained that Enron was the only company that could not release a balance sheet along with its earnings statements, Skilling replied “Well, thank you very much, we appreciate that . . . asshole.” Though the comment was met with dismay and astonishment by press and public, it became an inside joke among many Enron employees, mocking Grubman for his perceived meddling rather than Skilling’s lack of tact.

Skilling wants outta the slammer now and is suspected to not call the regulating judge an asshole, but this is probably just a matter of paying the right person to look the other way and call Enron shareholder assholes?? Pardon me for my French… Sorta fits the MO of rating agencies though and the lack of integrity that these top notch snake oil crooks live by!