Some accountability for the Financial Crisis

[KevinNYC]

It's been a long time coming, but this is a good news. There were a lot factors/actors that bore the some responsibility, but right at the top were the ratings agencies. (http://www.pbs.org/newshour/bb/business-july-dec10-allthedevils_11-18/)Wall Street couldn't being selling pile after pile of subprime mortgages unless the ratings agencies said buying the top of these piles was risk free.
JOE NOCERA: I certainly would put the rating agencies right at the top of my list of bad guys, or my list of devils.

A place like Moody’s took a culture that had a reputation for some integrity, and completely corrupted it in a drive for market share and profits.

PAUL SOLMAN: So, biggest culprit, ratings agencies; you agree?

BETHANY MCLEAN: I do agree. If they hadn’t taken subprime mortgages and rated enormous quantities of them AAA, meaning they gave those bonds the same credit rating as the U.S. government debt has, this — this whole thing couldn’t have happened, ....

JOE NOCERA: ...They are supposed to be protecting investors. That’s what their job is. They’re not supposed to be in cahoots with the Wall Street firms that are ginning up these securities.

Today comes the news that Standard and Poor's are going to settle with the Department of Justice and pay a billion dollar fine. (http://www.reuters.com/article/2015/01/20/us-s-p-lawsuit-settlement-idUSKBN0KT2CX20150120)
Standard and Poor's is in talks to pay as much as $1.5 billion to settle U.S. government lawsuits over mortgage ratings issued in the run-up to the 2008 financial crisis, a person familiar with the matter said on Tuesday.

[KevinNYC]

Standard and Poor's is also getting hit in a separate SEC investigation. $60 million fine and a one year ban on rating mortgage bonds.

Standard & Poor’s will be suspended for a year from rating bonds in one of its most lucrative businesses in a $60 million settlement with the U.S. Securities and Exchange Commission, according to a person with knowledge of the matter.

The deal, which the person said may be announced as soon as tomorrow, is the agency’s toughest action yet in an industry blamed for fueling the 2008 financial crisis by assigning inflated grades to risky mortgage debt. Instead of securities created during that period, though, the SEC’s investigation has looked at whether S&P bent its criteria to win business on commercial-mortgage bonds issued in 2011.

The suspension will ban S&P from rating debt in the biggest portion of that market, those that bundle multiple loans tied to anything from shopping malls to skyscrapers, into securities that are sold to bond investors, according to the person, who asked not to be identified because the discussions are private.

[It's A VC3!!!]

S&P's and Moody's certainly had a large responsibility. Still, to say they were the culprit is not true. The banks were the culprit, plain and simple. They used complicated CDO's that in order to fully understand them you needed a math or statistics degree from an Ivy league school. The two primary rating agencies assumed that if it was coming from Goldman Sachs that it had to be trust-worthy and worthy of a triple A rating. The banks manipulated the public, investors, AIG and rating agencies.

Glad to see these fines, though.

[Nanners]

typical

http://www.90sreality.com/wp-content/uploads/2012/04/The-slap-bracelet.jpg

[rezznor]

good to hear but i also see real, meaningful jail time for the people responsible

[Akrazotile]

Were their tactics malicious in terms of knowing everything would crash as a result of their actions and they wanted to make out like bandits before it did?

Or did they simply get too greedy during a time of prosperity and delude themselves a bit and bite off more than they could chew, much like the millions of americans who took out mortgages for homes they had no business trying to afford, or using credit cards to buy things and just assuming they'd find a way to pay it later and then couldn't?

In times of prosperity everyone gets a little greedy and a little grabby. It's not as if these guys (from what I can tell) were running some kind of scheme to rob people. A lot of this stems from the same mentality ordinary Americans had about trying to get a little extra for themselves instead of being cautious and prudent.

I mean if they broke any rules, sure, punish them. I'm just curious if they really did anything different than what everyone in the country was doing at that time, just on a larger scale by virtue of their jobs? If rich people break rules of course you have to address it punitively but honestly I think Americans have become accustomed to scapegoating them way too often rather than looking in the mirror first.

[KevinNYC]

S&P's and Moody's certainly had a large responsibility. Still, to say they were the culprit is not true. I didn't say THE culprit. That was the point about the many actors involved. The authors I quote found many "Devils." You may want to read their book if you haven't. It very good about the whole scope of the crisis and the fact there isn't one single scapegoat, but the ratings agencies are at the top of their list with good reason. If they started ratings MBSs and CDOs at BBB instead of AAA back in 2005, the whole merry-go-round would have stopped immediately because the Wall Street banks wouldn't have been able to sell them and thus would have stopped buying suprime mortgages to make these MBSs and CDOs in the first place.

http://img2.imagesbn.com/p/9781591844389_p0_v1_s260x420.JPG


The banks were the culprit, plain and simple. They used complicated CDO's that in order to fully understand them you needed a math or statistics degree from an Ivy league school. The two primary rating agencies assumed that if it was coming from Goldman Sachs that it had to be trust-worthy and worthy of a triple A rating. The banks manipulated the public, investors, AIG and rating agencies.

Glad to see these fines, though.The ratings agencies did not assume if it coming from Goldman Sachs, it had to be trustworthy at all. They were pretty clear about who Goldman was. However, the ratings agencies executives wanted future Goldman business found it very profitable to serve who paid them (Goldman's) and not their supposed audience (bond buyers.) There is some truth to charge they didn't really understand the risks of what they were ratings, but this was also true of Wall Street bigshots like Lehman Brothers, Bear Stearns and others, particularly AIG. Goldman too, but Goldman just got out early.

If you can't under the bond, then the bond is too complex to be AAA rated. Ratings agencies did have sophisticated statistics folks, they just didn't have a model that included declining real estate prices (like a lot of Wall Street banks.) Also if they just took a look at the individual mortgages, they would have seen that more and more of the mortgage back securities were being made of riskier and riskier mortgages, that 2006 was a far worse crop of mortgages than 2002. Moody's model for rating mortgages (http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_chapter7.pdf) didn't even consider sub-prime until 2006.

The main issue was Wall Street scrambled to buy more and more of the most profitable loans, the high interest, high fee sub-prime loans, lending standards deteriorated because otherwise there wouldn't be enough loans to meet the demand. The ratings agency never accounted for deteriorating lending standards and as a result
[QUOTE]Of all mortgage-backed
securities it had rated triple-A in 2006, Moody

[KevinNYC]

Were their tactics malicious in terms of knowing everything would crash as a result of their actions and they wanted to make out like bandits before it did?
Basically, yes.

They were charged with fraud. The evidence the government used was internal documents and emails of their own employees raising serious concerns about the deals, they were given ratings too.

Here's how S&P employees put it
[QUOTE]Let

[KevinNYC]

S&P originally offered to settle this for $100 million and it looks like they are going to have to pay 5 times that.


However, it seem that they will not have to admit guilt.

[Cactus-Sack]

How about we see some accountability from the crooks in congress and HUD that loosened restrictions on mortgages that led to the sub prime mortgages in the first place?

[KevinNYC]

How about we see some accountability from the crooks in congress and HUD that loosened restrictions on mortgages that led to the sub prime mortgages in the first place?
Look everyone, a unicorn!

[HitandRun Reggie]

Lots of blame to go around. Greedy bankers, idiot politicians who thought everyone should be able to get a home loan whether they could afford it and pushed for regulations, but most of all the fvcking retarded home buyers who put the signature on the loan docs.

Everyone I know who lost a home and cried foul(not the people who lost their jobs) was a complete idiot. Even if a person can afford it, some people should not be given large loans period. So in that aspect, the politicians and bankers are at fault. They sometimes need to step in and save stupid people from themselves.

[tontoz]

Glad to see this. I have really become fed up with Wall Street.

[Cactus-Sack]

Lots of blame to go around. Greedy bankers, idiot politicians who thought everyone should be able to get a home loan whether they could afford it and pushed for regulations, but most of all the fvcking retarded home buyers who put the signature on the loan docs.

Everyone I know who lost a home and cried foul(not the people who lost their jobs) was a complete idiot. Even if a person can afford it, some people should not be given large loans period. So in that aspect, the politicians and bankers are at fault. They sometimes need to step in and save stupid people from themselves.

Yeah, that shit pisses me off too. If some idiot loses his life's saving playing slot machines I don't feel too sorry for him. Accept some responsibility.

[Blue&Orange]

can someone explain me how a rating agency makes enough money that it can settle for a one billion fine?


who would guess that rating would make so much money.


If there was any justice they should be disbanded and their existence forbidden. wtf is even a rating agency and what's it's purpose other that fool people for the highest bid.

[Akrazotile]

Basically, yes.

They were charged with fraud. The evidence the government used was internal documents and emails of their own employees raising serious concerns about the deals, they were given ratings too.

Here's how S&P employees put it



Interesting. Certainly if there was an intent to defraud they should get slammed. Pretty amazing how slimey some of these people are.

[KevinNYC]

can someone explain me how a rating agency makes enough money that it can settle for a one billion fine?


who would guess that rating would make so much money.


If there was any justice they should be disbanded and their existence forbidden. wtf is even a rating agency and what's it's purpose other that fool people for the highest bid.

Here's some recent revenue figures for the ratings agencies.

Moody's US$ 2,972.5 million
Standard and Poor's $2.61 billion
Fithc $732.5 Million

[Jailblazers7]

Yeah, ratings agencies failed on a ton of levels. The incentive structure was/is terrible. I read a good article about regulatory capture at the NY Fed regarding Wall Street banks and I'm sure it applies to rating agencies as well.

http://www.propublica.org/article/carmen-segarras-secret-recordings-from-inside-new-york-fed

[KevinNYC]

Lots of blame to go around. Greedy bankers, idiot politicians who thought everyone should be able to get a home loan whether they could afford it and pushed for regulations, but most of all the fvcking retarded home buyers who put the signature on the loan docs.

Everyone I know who lost a home and cried foul(not the people who lost their jobs) was a complete idiot. Even if a person can afford it, some people should not be given large loans period. So in that aspect, the politicians and bankers are at fault. They sometimes need to step in and save stupid people from themselves.

You should look into that book or Financial Crisis Report. Regulation didn't cause the crisis. Enforcing regulations that were on the books could have stopped it.

Why did it happen in Florida, Nevada, Arizona and California and not Texas? Were there no stupid people in Texas? Were there no greedy bankers? No. The difference was there were strong mortgage regulations that made it illegal to do the type of loans they subprime machines were dreaming up in California.


The other thing most folks don't understand about this crisis is that the original mortgages were just a small part of the problem. In fact, the housing bubble popped in 2006 but the real crisis didn't start until 2008 when Wall Street imploded. What Wall Street did with these mortgages multiplied and magnified the problem until it became a financial crisis all around the world. It's only when you understand the shadow banking system and Wall Street (and London and Berlin, etc) mispriced the risk of these assets do you understand why the whole system came down. It wasn't just blackjack dealers in Vegas buying too big a house. Banks were using these mortgage securities and other derivatives as collateral to borrow even more money, to take more risks. Basically in a very short time, the whole financial system created way AAA rated paper than ever existed. This was then borrowed upon and lended on and bet against over and over until you had what happened in 2008.

I mentioned this before, there was a guy on Wall Street who made about $25 million dollars selling bets (credit default swaps) that mortgage backed securities wouldn't go down. This one guy, on one trade, lost $9 billion dollars. And he isn't a household name. 9 Billion Dollars. That is the stuff that brought the economy to its knees. No matter how many idiots bought too big a house, it was what the sharks were doing that caused the crisis, not the minnows.

[Akrazotile]

You should look into that book or Financial Crisis Report. Regulation didn't cause the crisis. Enforcing regulations that were on the books could have stopped it.

Why did it happen in Florida, Nevada, Arizona and California and not Texas? Were there no stupid people in Texas? Were there no greedy bankers? No. The difference was there were strong mortgage regulations that made it illegal to do the type of loans they subprime machines were dreaming up in California.


The other thing most folks don't understand about this crisis is that the original mortgages were just a small part of the problem. In fact, the housing bubble popped in 2006 but the real crisis didn't start until 2008 when Wall Street imploded. What Wall Street did with these mortgages multiplied and magnified the problem until it became a financial crisis all around the world. It's only when you understand the shadow banking system and Wall Street (and London and Berlin, etc) mispriced the risk of these assets do you understand why the whole system came down. It wasn't just black dealers in Vegas buying too big a house. Banks were using these mortgage securities and other derivatives as collateral to borrow even more money, to take more risks. Basically in a very short time, the whole financial system created way AAA rated paper than ever existed. This was then borrowed upon and lended on and bet against over and over until you had what happened in 2008.

I mentioned this before, there was a guy on Wall Street who made about $25 million dollars selling bets (credit default swaps) that mortgage backed securities wouldn't go down. This one guy, on one trade, lost $9 billion dollars. And he isn't a household name. 9 Billion Dollars. That is the stuff that brought the economy to its knees. No matter how many idiots bought too big a house, it was what the sharks were doing that caused the crisis, not the minnows.


Name/link? Not saying youre making it up, just seems like a hard idea to even fathom. Would like to know more about it.

[Jailblazers7]

Name/link? Not saying youre making it up, just seems like a hard idea to even fathom. Would like to know more about it.

http://en.m.wikipedia.org/wiki/List_of_trading_losses

Name is Howie Hubler. You can def find some stuff on him I think there was a portion about him in The Big Short by Michael Lewis.

[KevinNYC]

http://en.m.wikipedia.org/wiki/List_of_trading_losses

Name is Howie Hubler. You can def find some stuff on him I think there was a portion about him in The Big Short by Michael Lewis.

Yup. and I did learn about him in The Big Short which they are now making into a movie. Lewis also pointed out that at the time, nobody knew this guy's name. He worked at Morgan Stanley which didn't go under, so he's not as well known as the guy who took down AIG.

[KevinNYC]

Another guy I remembered about on the way home was the Head of Merrill Lynch, Stan O'Neal. He created a culture where traders who wanted to take risky bets had more power than the risk managers, in fact the risk managers pushed aside
Here's an excerpt from that book, where one of the risk managers (http://www.vanityfair.com/business/features/2010/11/financial-crisis-excerpt-201011#) who had pushed aside has to explain to the boss that nobody will let him look at the real books, but by his calculation they have just lost 6 billion dollars because AAA slices of mortgage derivatives aren't going to be worth much.[QUOTE]By mid-September, Semerci was conceding $1.3 billion in triple-A losses, a number that other Merrill executives still thought was absurdly low. Seeing the problems grow, Greg Fleming reached out to his old friend Jeff Kronthal. Although Fleming was still under strict orders to stay away from fixed income, the problems on the mortgage desk seemed too deep to just look the other way. Kronthal began tapping into his own sources at Merrill Lynch to see if he could find out what was going on. One of those sources was Breit, who told Kronthal that he thought the write-downs were going to be much bigger than anyone on the mortgage desk was admitting. Kronthal conveyed this to Fleming, who conveyed it to O

[CeltsGarlic]

Its a shame that those type of companies has such a huge influence on the market.. Nice to see recent decline in their influence as more and more are starting to think themselves.

I had to read some of reviews they do and there are so many assumptions, you would think a lazy ass student is the author.

[RoundMoundOfReb]

How significant is that fine?

[KevinNYC]

How significant is that fine?
I don't know if they have to pay it all off at once, but it's more than half of their total revenue, I think.

And it's 15 times what they agreed to settle for. Also it could go up if more states join the lawsuit.

seems fairly significant.

JP Morgan paid a 13 billion fine, but they have over 90 billion in revenue.

[I<3NBA]

paying a fine is too light, people should be jailed.

shot even.

financial fraud should be a capital crime punishable by death.

[Godzuki]

honestly the whole market is stilll controlled by the people up top. even with the ratings agency's being more diligent, and the financial crisis outing people abusing what they could for profits, the whole way the market works is a extremely flawed system. people think its based so much on a companys strengths, or ingenuity of start up's going public, which partly it is, but way more people are making money regularly and easily by manipulating the system through the various ways investments work with supply/demand of shares, and public sentiments of company situations.

i'm not complaining too much since anyone can ride the waves those at the top make with the ups and downs. its just a misconception when people think making money from the market is so based on a company doing well, or dividends.

market is the main reason why the rich get richer.

[NumberSix]

Don't buy things you can't pay for. You should be fine.

[n00bie]

Don't buy things you can't pay for. You should be fine.

Can you imagine if everyone stopped buying things they can't pay for? Consumer spending would come to a halt. Bye bye economy. :lol

[KevinNYC]

S&P agreed to pay the fine.

Admits no guilt.

[QUOTE]Standard & Poor

[KevinNYC]

How significant is that fine?
We now know it's more than a year's profits.

[KevinNYC]

http://www.wsj.com/articles/morgan-stanley-to-pay-2-6-billion-to-settle-mortgage-cases-1424904275

Morgan Stanley agreed to pay $2.6 billion to settle U.S. claims stemming from the sale of mortgage bonds, handing the Wall Street firm its biggest legal bill from the financial crisis.

The accord ends a U.S. Justice Department probe into allegations Morgan Stanley deceived investors by misrepresenting the quality of the home loans the firm packaged into bonds and follows multibillion-dollar pacts the government struck with other big banks.

.....The Morgan Stanley pact was a fraction of the amount paid by other banks in mortgage-related settlements with the Justice Department: Bank of America Corp. paid $16.65 billion, J.P. Morgan Chase & Co. $13 billion and Citigroup Inc. $7 billion.

The Morgan Stanley number was smaller in part because it wasn’t a major mortgage lender during the housing boom.

Morgan Stanley’s archrival, Goldman Sachs Group Inc., is believed to be next in line with the government to potentially hammer out an agreement.
http://www.nytimes.com/2015/02/26/business/dealbook/morgan-stanley-in-2-6-billion-mortgage-settlement.html
Morgan Stanley said on Wednesday that it had reached a $2.6 billion settlement with the Justice Department over the sale of mortgage securities before the financial crisis.

Other large banks have already struck similar settlements, with Bank of America agreeing to pay a record $16.7 billion last year and JPMorgan Chase settling for $13 billion in 2013.

Compared with other Wall Street banks, Morgan Stanley was responsible for a smaller volume of securities backed by troubled mortgages, the investments at the heart of the settlements.

The deal is expected to be one of the last major steps in the Justice Department’s push to make banks pay for their role in the subprime crisis. Goldman Sachs, which has had preliminary talks with the government, is the last major bank that has not yet reached an agreement with the Justice Department.

Morgan Stanley bought mortgages from New Century and other subprime mortgage originators and packaged them into securities that it sold to investors. Many of those securities ended up sustaining significant losses.

Last year, Morgan Stanley paid the Federal Housing Finance Agency $1.25 billion to resolve claims that it sold bad mortgage securities to Fannie Mae and Freddie Mac.

[KevinNYC]

Morgan Stanley bought mortgages from New Century and other subprime mortgage originators and packaged them into securities that it sold to investors. Many of those securities ended up sustaining significant losses.
This is a great example of what I have been saying that Wall Street drove the subprime bubble not the government. The Government is at fault for not enforcing regulations and not cracking down on mortgage fraud, but New Century was a not a bank. It was a mortgage originator. It didn't take deposits and it wasn't subject to the Community Reinvestment Act. New Century got it's money from Wall Street and it wasn't snookered by people who couldn't pay their mortgage, New Century and Wall Street, in this case Morgan Stanley, absolutely were upfront about how their business worked. (http://www.investopedia.com/articles/07/new-century.asp)
New Century's approach to the mortgage market was made clear in its March 2006 10-K filing, in which it stated that "[New Century Financial lends] to individuals whose borrowing needs are generally not fulfilled by traditional financial institutions because they do not satisfy the credit, documentation or other underwriting standards prescribed by conventional mortgage lenders and loan buyers."Their basic business model was they gave loans to people who couldn't qualify for a mortgage that confirmed to Fannie/Freddie's standards to buy? Why did they do this? Was it the government who forced they to do this?
Borrowers were constantly willing to take on the risk of higher mortgage payments and a flat or rising mortgage balance because the ability to refinance down the road seemed certain. Housing prices continued to climb.

Wall Street and big investors were willing to take on risk that seemed quantifiable and diversified in exotic mortgage-backed security (MBS), asset-backed security (ABS) and collateralized debt obligation (CDO) structures.

Everybody was making money and virtually everyone was happy. As in most bubbles, the belief by most was that the good times were sure to go on forever. And New Century was on the leading edge.Once home price stopped rising, it was like a game of musical chairs with not one, but half the chairs removed.
First quarter 2006 - The rapid pace of home price appreciation ends. However, New Century and the mortgage industry in general continues to originate subprime loans under the previously valid assumption that subprime borrowers will be able to refinance out of adjustable-rate mortgages. Wall Street continues to churn out subprime MBS, ABS, and CDOs that are easily sold to investors.

Fourth quarter 2006 - Things begin to fall apart. The assumptions used in automated credit underwriting engines are proved to be invalid as the percentage of subprime loans in default begins to rise. Investor appetite for subprime securities dries up. Loan repurchase requirements for New Century and other subprime originators increases as early payment defaults rise. This is because mortgages sold into the secondary market frequently have clauses stating the mortgage must be repurchased if it goes into default within a certain period of time.

[KevinNYC]

So what does Morgan Stanley have to do with this? They pushed New Century to make their loans worse, and more consumer-unfriendly. (http://dealbook.nytimes.com/2014/12/29/court-filing-illuminates-morgan-role-in-lending/)
Now, though, a trove of emails and confidential documents, filed in court, reveal the extent to which one of Wall Street’s leading banks, Morgan Stanley, actively influenced New Century’s push into riskier and more onerous mortgages, and brushed aside questions about the ability of homeowners to make the payments.

“Morgan Stanley is involved in almost every strategic decision that New Century makes in securitized products,” a Morgan Stanley internal report from late 2004 said, referring to the loans the bank packaged into mortgage bonds.

The new documents and emails...provide an inside picture of the process through which Morgan Stanley pushed New Century to issue more mortgages with burdensome conditions that would be lucrative for Morgan Stanley — including loans with balloon payments, adjustable interest rates and prepayment penalties that made them harder to refinance.

The bank appears to have gained its influence, in part, because it was regularly the largest single buyer of subprime loans from New Century.

The documents indicate that Morgan Stanley employees were aware of the low credit quality — and occasionally joked about it — even as they continued to snap up loans from New Century. A top due diligence executive at Morgan Stanley, Pamela Barrow, wrote to a colleague in 2006 sarcastically describing the “first payment defaulting straw buyin’ house-swappin first time wanna be home buyers.”

[GimmeThat]

the failure to spot and identify the real and true "safe haven"



also the term "told your congressman"
may have only re-iterate how replaceable they are



sorry people