The Wall Street Fix

Sunday, January 4, 2009

Michael Lewis (of Liar’s Poker fame) and David Einhorn (of shorting Lehman fame) have published an op-ed in today’s NY Times. It diagnoses and provides solutions to Wall Street’s problem(s).

The bottom line (emphasis added)?

Our financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.

The piece goes on the expose the well known cozy relationships between Wall Street, the credit rating agencies, and the SEC, and to criticize Treasury, the Fed, and Congress for poor ad hoc solutions driven by short-term market considerations and industry lobbying.

It ends with a series of “perfectly obvious” changes to be made to the financial system. These are a manifesto for action. Digest them and begin regurgitating to everyone. A movement must be built.

I hope Barack Obama is reading this piece. I’m forwarding the Chuck Schumer (not likely to be helpful) and Hillary’s replacement (it better not be Caroline Kennedy).

On Wall Street, the fix is in.

It’s time to fix the fix.

The Credit Rating Scam

Monday, December 8, 2008

The great Gretchen Morgenson of the New York Times had a nice overview of the scandalous (and illegal?) scam perpetrated by the credit ratings agencies during the housing boom.

The key section:

Consider a residential mortgage pool put together in summer 2006 by Goldman Sachs. Called GSAMP 2006-S5, it held $338 million of second mortgages to subprime, or riskier, borrowers.

The safest slice of the security held $165 million in loans. When it was issued on Aug. 17, 2006, Moody’s and S.& P. rated it triple-A. Just eight months later, Moody’s alerted investors that it might downgrade the top-rated tranche. Sure enough, it dropped the rating to Baa, the lowest investment-grade level, on Aug. 16, 2007.

Then, on Dec. 4, 2007, Moody’s downgraded the tranche to a “junk” rating. On April 15 of this year, Moody’s downgraded the tranche yet again; today, it no longer trades. The combination of downgrades and defaults hammered the securities.

The article, like others, is a damning critique of the profit first philosophy of the rating agencies entrusted with determining the financial soundness of multi-trillions of dollars of financial instruments.

These men have been before Congress already, and they are heading back. Rating financial instruments, like healthcare, is too important to be entrusted to the profit motivated marketplace. A laser-like focus on a quarterly bottom line is not a recipe for sound ratings.

It’s remarkable that it took this crisis to make that clear.