Breaking news on our broken economy. Is this snark?

Are Bernanke and Paulson actually dumber than President Bush? Or, are they just definitively insane?

Joseph Stiglitz, the Nobel Prize-winning economist, Columbia University Professor and former Chairman of the Council of Economic Advisors within the Clinton administration, has written what, IMHO, is the most definitive piece that's been published to date on our current economic crisis appearing in the January '09 edition of Vanity Fair, entitled: "Capitalist Fools." In it, Stiglitz writes from a historical perspective of the five most important reasons as to why we're in the mess we're in, today.

Number four on Stiglitz' all-time hit list of reasons for our economy's epic failure is the inherently corrupt nature of the current bond ratings process. The pathetic reality is, and has been, that the financial services companies that hire the bond ratings firms (the leading firms in that group being Standard & Poor's, Moody's, and Fitch Ratings) to rate their products are the very institutions that are selling them.

Kind of akin to paying for the right to use the Good Housekeeping Seal, IMHO.

(It is somewhat common knowledge throughout the financial services industry, and it has been for years, that the entire ratings industry is nothing less than a pathetic joke.)

As Stiglitz put it in the Vanity Fair article:


Capitalist Fools

...Agencies such as Moody's and Standard & Poor's are paid by the very people they are supposed to grade. As a result, they've had every reason to give companies high ratings, in a financial version of what college professors know as grade inflation. The rating agencies, like the investment banks that were paying them, believed in financial alchemy--that F-rated toxic mortgages could be converted into products that were safe enough to be held by commercial banks and pension funds. We had seen this same failure of the rating agencies during the East Asia crisis of the 1990s: high ratings facilitated a rush of money into the region, and then a sudden reversal in the ratings brought devastation. But the financial overseers paid no attention...

So, when I read an article like this tonight:

"Fed Loans Guided by Raters Grading Subprime Debt AAA," it makes me sick.

Putting this in my own words, the very firms that helped get us into this mess are the exact same organizations that are providing the ratings guidance to Bernanke and Paulson as they make determinations with regard to what debt they're buying from these financial services firm with $1 trillion-plus of our hard-earned taxpayer dollars!

And, my reference to Paulson's and Bernanke's sanity is based upon that famous line by Albert Einstein: "The definition of insanity is repeating the same action and expecting a different result."


By Alison Fitzgerald

Dec. 18 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke is basing hundreds of billions in emergency lending on credit ratings from companies that gave AAA grades to toxic securities.

The Fed has purchased $308.5 billion in commercial paper and lent $631.8 billion under eight credit programs, most of which require appraisals of short-term debt and loan collateral by "major nationally recognized statistical ratings organizations." That, in effect, means Moody's Investors Service, Standard & Poor's and Fitch Ratings.

It is foolhardy to rely on the three New York-based companies, said Keith Allman, chief executive officer of Enstruct Corp., which trains investors in financial modeling and asset valuation. The major raters issued top marks to $3.2 trillion in subprime mortgage-backed securities at the root of the financial crisis.

"They're outsourcing the credit assessment to a group of people whose recent performance has been unbelievably bad," said Allman, the New York-based author of three books on structured finance and a former vice president in Citigroup Inc.'s securitized markets unit. "If their goal is to not take a loss on these assets, they should be hiring independent analysts."

Tags: bond ratings firms, depression, economic bailout, Federal Reserve Chairman Ben Bernanke, Fitch Ratings, Joseph Stiglitz, Moody's, Recession, Standard & Poor's, the Economy, Treasury Secretary Henry Paulson, Vanity Fair (all tags)

Comments

22 Comments

The economy?

Obama has shown himself to be against civil rights and you want to talk about the economy? Are you tonedeaf?

by KnoxVow 2008-12-18 08:07PM | 0 recs
Seriously....get help!

There's good medicine out there, too.

by bobswern 2008-12-18 08:12PM | 0 recs
lulz

Comment by KnowVox | 2008-12-17 17:55:58

Did everybody see how The One threw the GBLT community under the bus? It's safe to go back to MyDD and post there as well. I have been posting for 2 weeks now and have not been hide rated or banned. The place is dead and it woud be great to take it back to further our cause of exposing Obama as a fraud. The trolls and obots got tired of the place.

by Skaje 2008-12-18 11:47PM | 0 recs
Re: lulz

Good catch!  Where did you find it?

by GFORD 2008-12-19 07:02AM | 0 recs
Re: lulz

She posted that at NoKKKwarter. Bring it on! The more fools we have to slap around, the merrier.

by Sumo Vita 2008-12-20 02:14AM | 0 recs
It really must anger you...

...that Obama is so popular, that we beat you and beat you bad. I revel in your bitterness.

by iohs2008 2008-12-19 06:12AM | 0 recs
Yes, PLEASE continue the bile spewing.

DO keep the bitterness flowing, your digestive system burning, your blood pressure elevating. Let those toxic chemicals eat away at you from the inside.

DO keep tell yourself you're scoring one for your insanely hilarious Larry Johnson brigade in the process. DO continue to ignore the fact that your drooling idiocy has long-term lethal consequences for you, while being nothing more than a source of entertainment for us.

Party on, madame!

by Sumo Vita 2008-12-20 02:25AM | 0 recs
Re: The economy?

"Obama has shown himself to be against civil rights"

Rick Warren is giving a silly invocation. While that's upsetting perhaps, it's also not the end of the world. I'm more focused on his actions. For example, Bill White, president of the Intrepid Sea, Air and Space Museum in New York, is being considered to be the next secretary of the Navy. Mr. White is backed by congressional and former military leaders. Mr. White is also gay.

And the argument can made that by selecting Warren, there has been a rather open airing of Warren's views on abortion and gay rights. It hasn't exactly been favourable. I might suggest that Warren has lost more than he's gained by being selected.

by Charles Lemos 2008-12-20 04:24PM | 0 recs
Tips because this is NOT snark! n/t

by bobswern 2008-12-18 08:08PM | 0 recs
while that's true.

the list of "no shorting these companies" strongly suggests that the Fed has better tools for rating which companies are in trouble.

But hell, the fed's panicking. 0 % interest rate! Free money!

by RisingTide 2008-12-19 04:08AM | 0 recs
Breaking news on our broken economy.

I think when you're Bush and Paulson and you want the help of people who won't tell you to throw out everything you've been doing and start from first principles, you're drawing from a pretty limited pool.

Also, "economic advisor to Bush 43" probably ranks up there with "Professional Clown" as a resume killer.

Anyway, rec'ed for the great article.

by Jess81 2008-12-18 08:17PM | 0 recs
What's the difference?

Also, "economic advisor to Bush 43" probably ranks up there with "Professional Clown" as a resume killer.

:-P

by potus2020 2008-12-19 02:55AM | 0 recs
Re: Breaking news on our broken economy. Is this s

I thought you were better than this bobswern.

by KnoxVow 2008-12-18 08:37PM | 0 recs
Re: Breaking news on our broken economy. Is this s

Why do you want to divert attention from the issue at hand? Not talking about it doesn't make it go away. You would follow Obama right off a cliff. Just another lemming. Continue to ignore gay rights.

by KnoxVow 2008-12-18 08:40PM | 0 recs
Re: Breaking news on our broken economy. Is this s

The issue at hand?  Tell the hundreds of thousands of Americans who are out of work, or the millions whose retirement plans are now in the tank, or the millions who were using invested money to pay for their kids' college, that the economy isn't the issue at hand.

Unlike the Warren choice - which I strongly disagree with - the things going on in the economy right now actually have an impact on policy.

But of course, the economy isn't something a PUMA like yourself would be interested in highlighting, because it doesn't have nearly as high a chance of your being able to spread your racist hate of President-Elect Obama.  Go back to the racist cesspools from which you came, and leave the intelligent conversation to adults.

by mistersite 2008-12-19 06:50AM | 0 recs
Our sudden new "champion" of Gay Rights

KnowVox's latest attempt at sheep's clothing.

Likely purchased on sale at Walmart, given that bigotry can't be clothed in much more than white sheets.

by Sumo Vita 2008-12-20 02:33AM | 0 recs
This was so very encouraging reading in the

Houston Chronicle yesterday:

www.chron.com/desp/story.mpl/headline/na tion/6170428.html

"Among those whose opinions Obama sought were Lawrence B. Lindsey, a top economic adviser to President George W. Bush during his first term, and Harvard professor Martin Feldstein, an informal adviser to John McCain and the chairman of the Council of Economic Advisers under President Ronald Reagan.

Feldstein recommended a $400 billion investment in one year, Obama aides said, and Lindsey said the package should be in the range of $800 billion to $1 trillion. The aides revealed the discussions on condition of anonymity because no decisions had been reached.

"I do recommend $400 billion in year one and expect a similar amount in year two," Feldstein said in an e-mail. "The right amount depends on how it is used."

Obama aides also pointed to recommendations by Mark Zandi, the lead economist at Moody's Economy.com and an informal McCain adviser who has been proposing a $600 billion plan."

Just great, he sought getting advised/influenced by the same parties who feted Bush & tired republicans' economic policies! Some CHANGE to believe in! Someone should remind him that he was elected as a DEMOCRAT!

by suzieg 2008-12-18 09:36PM | 0 recs
this post is about rating agencies

do you have anything to contribute on that topic, or are you just here to play the idiot?

by JJE 2008-12-18 11:21PM | 0 recs
Nice diary, Bob.

REC'd. You've helped me understand the financial crisis as much (or more) than anyone in Left Blogistan.

Much appreciated.

by fogiv 2008-12-18 10:42PM | 0 recs
Re: Nice diary, Bob.
Thank you as always Bob. REC  I couldn't agree with forgiv more.
You have taught us a lot.
by canadian 2008-12-19 01:56AM | 0 recs
Second that, Bob.

Keep those diaries coming.

by Sumo Vita 2008-12-20 02:34AM | 0 recs
Re: Breaking news on our broken economy.

Thanks, Bob, you put this in language I can almost understand.
I have some money in the market through retirement accounts, so I try to educate myself, but it's like some people are talking in a foreign language (have you ever seen Bonddad's diaries at DK? Yikes).
I received an e-mail today talking about Oppenhemier (sp) funds:

By the end of March, the Core portfolio carried around $400 million in securities exceeding its (then) $2.2 billion in net assets via transactions that were effectively akin to margin borrowing. It also had roughly $800 million in long exposure to corporate credit via default swaps--including  American International Group (AIG), Lehman Brothers,  Wachovia (WB), Washington Mutual, and Bear Stearns--and around $600 million in total return swap exposure to a volatile slice of Barclays' AAA rated CMBS index, all of which by normal reporting convention were not included on the fund's balance sheet and thus not in its net assets. By the end of September, just before the Treasury Department's Troubled Asset Relief Program proposal and right around the time the market sailed off into uncharted mania, Core Bond's credit exposure to those various markets totaled more than 180% of net assets on a dollar basis. In other words, for every dollar of shareholder capital in the fund, it was exposed to the credit-driven movement of more than $1.80 worth of securities.

What kind of crazy shit is that to do with other people's money? It's outrageous.

by skohayes 2008-12-19 02:02PM | 0 recs

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