Are Bond Rating Agencies the Most At Fault for the Great Housing Bubble/Crash?

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skeptic_IHB

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This is the best written, most accessible article on the Bond Rating Agencies I have seen. Although quite long, this is a must read for all the finance/economist wonks on the forums. The article makes a pretty good case that the Bond Rating Agencies are the most to blame for the Great Housing Bubble. Thoughts?



<a href="http://www.nytimes.com/2008/04/27/magazine/27Credit-t.html">http://www.nytimes.com/2008/04/27/magazine/27Credit-t.html</a>



<strong>Triple-A Failure </strong>



By ROGER LOWENSTEIN

Published: April 27, 2008

This article will appear in Sunday's New York Times Magazine.
 
<em>"The article makes a pretty good case that the Bond Rating Agencies are the most to blame for the Great Housing Bubble. Thoughts?"</em>


<p>

Sure the ratings agencies are culpable, but saying they are the most to blame is oversimplification. Although there are many culprits. the Federal reserve is obviously and unarguably the largest perpetrator of moral hazard and financial misery.
 
They are a major contributor to the Kellogs Credit Crunch we are seeing yes. The relationship between rating agencies and bond issuers is the same as corporations and auditing firms used to be. Remember Arthur Andersen? Same thing is happening now. Wall Street, the rating agencies and the insurers are all in cahoots together. Throw in former FED chief Alan Greenspan and you've got a complicit Federal reserve. Thanks to Greenspan, along with JP Morgan and some bright Brits from across the pond, the financial derivatives market (specifically the CDO and MBS) was created.
 
Concur with Awgee. There is plenty of blame to go around. What about the bond insurers? Maybe Moody's wouldn't have rated those deals AAA if MBIA hadn't insured them. And if MBIA insured them without understanding them, well... there is no counterparty to pay out when the deal collapses. The simple fact is, the underlying assumptions were wrong, the deals were too complicated for most (all) involved to understand, the bond insurers insured more than they could pay, the ratings agencies believed what they were told for a fee, and the underwriters sold the garbage on assumptions they likely knew were incorrect.



Did they enable the bubble by providing liquidity? Yes. But no one, and I mean <em>no one</em>, made anyone buy or sell home.
 
Many thanks for the analyses. I am certainly a finance novice -- my expertise (if you can call it that) lies elsewhere. It may well be a fruitless endeavor to attempt to identify the party <em>most</em> at fault for the Crash because multiple parties all along the mortgage to CDO-squared assembly line screwed up. Perhaps it is unfair to place too much fault on the Bond Rating Agencies because it seems like sophisticated investors already knew the ratings were rubbish. The article makes it seem like they long ago stopped acting as "gatekeepers."
 
Well the Bond Insurance companies are all but gone.

Their stocks are getting crushed today.



MBI off 33% to $ 8.80

ABK off 42% to $ 3.46



These were rock solid stocks that were almost $ 100.00 a share

a year ago.
 
Interesting, I was mildly tempted to short them but I figured the major action in shorting was all, the time to short was last summer. Not near delisting yet. AMBAC's hope now appears hinged on legal action against the investment banks, BS that sold them the bad paper. Legal Armageddon is about to start. If AMBAC prevails then their shares could skyrocket. Or they could BK before when things get worse. I'll be watching from the sidelines.
 
Beg to disagree, Greenspan was an enabler by keeping interest rates low and also failed to properly regulate the markets but he doesn't bear the most responsiblity. There was plenty of fraud and abuse in all players, buyers, agents, mortgage lenders, Wall Street, ratings agencies. There are so many pigs at the trough that it's hard to single out the one who was the worst.
 
[quote author="alan" date=1209013873]Beg to disagree, Greenspan was an enabler by keeping interest rates low and also failed to properly regulate the markets but he doesn't bear the most responsiblity. There was plenty of fraud and abuse in all players, buyers, agents, mortgage lenders, Wall Street, ratings agencies. There are so many pigs at the trough that it's hard to single out the one who was the worst.</blockquote>


Agreed. I guess what I mean is that none of the other fraud/excess, etc would have gotten to the point it did without being 'enabled' by the fed flooding the world with liquidity for too long.
 
[quote author="Joe33" date=1209014460][quote author="alan" date=1209013873]Beg to disagree, Greenspan was an enabler by keeping interest rates low and also failed to properly regulate the markets but he doesn't bear the most responsiblity. There was plenty of fraud and abuse in all players, buyers, agents, mortgage lenders, Wall Street, ratings agencies. There are so many pigs at the trough that it's hard to single out the one who was the worst.</blockquote>


Agreed. I guess what I mean is that none of the other fraud/excess, etc would have gotten to the point it did without being 'enabled' by the fed flooding the world with liquidity for too long.</blockquote>


Before you vindicate Greenspan, please read these two lengthy yet amazing articles. It will open your eyes to just how much influence Greenspan had on the derivatives, housing and credit bubbles. He was COMPLICIT in their creation and one of the masterminds behind it all.



<a href="http://www.financialsense.com/editorials/engdahl/2008/0123.html">Financial Tsunami part III</a>



<a href="http://www.financialsense.com/editorials/engdahl/2008/0208.html">Financial Tsunami Part IV</a>
 
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