April 19, 2011

AP’s Condon Rips S&P’s Record, Ignores Fannie Mae’s, Freddie Mac’s Systematic Mortgage Securities Deceptions

As night follows day, the press is beginning to go after a business entity which had the nerve to do its job and call attention to Uncle Sam’s dire fiscal situation.

Standard and Poor’s is presumably not 100% populated with angels, but it didn’t deserve the gratuitous and ignorant shots fired at it this evening by the Associated Press’s Bernard Condon and an “expert” he quoted. In attempting to tar the firm, Condon acted as if the mortgage-lending mess was the creation of “banks” which marketed mortgage-backed securities and asleep at the switch ratings agencies. He didn’t once mention Fannie Mae or Freddie Mac, the fiasco’s Democratic crony-run uber-culprits, which for 15 years consistently deceived the markets about the quality of the already marginal loans underlying the securities they issued .

Here are selected paragraphs from Condon’s cracked creation, including a headline which gives away a resentment that the ratings agencies are still actually able to do what they were designed to do (bold is mine):

Even after missteps credit raters wield much power

News that Standard & Poor’s was cutting its outlook on U.S. debt rattled financial markets Monday.

Cooler heads might recall that this is the same agency, along with Moody’s Investors Service, that told investors that billions of dollars of securities tied to iffy home mortgages were safe bets – right before they collapsed and helped set off the biggest financial crisis since the 1930s.

“It’s a sad state of affairs when one of the agencies that blew up housing is telling the U.S. to get its fiscal (affairs) in order,” said money manager Michael Lewitt, who lashed out at high U.S. debt in his book “The Death of Capital.”

“They’re not wrong here, they’re late,” he said.

S&P spokesman Catherine Mathis said the agencies were “very good” at rating government debt, citing a recent International Monetary Fund report. It found that all the government debt that defaulted since 1975 had received a rating of “non-investment grade,” or what’s called “junk,” at least a year earlier.

The upshot: In deciding who gets to borrow, how much and how cheaply, S&P, Moody’s and Fitch Ratings, another big rater, wield enormous power.

After the housing crash, some critics dismissed ratings agencies as useless. But they still move markets. S&P’s opinion on Monday helped push down the Standard & Poor’s 500 index 1.1 percent. Treasury prices initially fell on the news, but later recovered. The yield on the 10-year note fell to 3.38 percent from 3.41 percent late Friday.

… Critics say raters are likely to err on the side of optimism when reviewing bonds because they are paid by companies selling bonds, not by those who buy them as was the case in the 1970s. According to a report published last week by the Senate Permanent Subcommittee on Investigations, raters delayed slashing their ratings on disastrous mortgage securities for fear of angering the banks that were marketing them. One of the authors, Sen. Carl Levin, D-Mich., has said that this model is akin to allowing one of the parties in a court case to pay the salary of the judge.

S&P’s Mathis said getting issuers to pay, not customers, is best because it allows ratings to then be distributed to all investors for free, resulting in more “transparent” markets.

The failure to mention Fan and Fred in discussing the mortgage-lending mess is like covering the state of the personal computer industry without bringing up HP or Dell.

Fan and Fred caused the financial crisis in two key ways. The first is fairly well understood by many; the second has, in my opinion, been deliberately ignored by the establishment business press because it clearly identifies the two government-sponsored enterprises and the Democratic Party apparatchiks who ran them as creators of the crisis they insist on laying at the feet of “Wall Street.”

First, Fan and Fred deliberately lowered the credit-score approval thresholds for conventional and subprime loans it would agree to purchase from originating lenders, thereby taking on a gravely dangerous level of risk. The follow graphic overlays the two entities’ key decisions — to move the conventional loan threshold from about 670 to 630 and the subprime threshold from about 630 to 590 — on a contemporaneous chart showing the likelihood of consumers going 90 days delinquent on debt for various score ranges (Fair Isaac, or FICO, is the largest provider of credit-scoring software):

FICOdelinquencyChances2008

Once Fan and Fred took these actions, banks had to follow suit or get marginalized out of the mortgage-lending business.

Second,  the two government-sponsored enterprises routinely deceived the ratings agencies and thus the securities markets about the underlying quality of the mortgages backing their securities. Specifically, a December 2009 Wall Street Journal article by Peter J. Wallison relayed the following shocking finding:

“… Edward Pinto, a former chief credit officer for Fannie Mae and a housing expert, has found that from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A.”

As I wrote in January 2010 (bolds are mine):

It’s bad enough that Fan and Fred lowered the loan approval thresholds. Pinto’s point is that for 15 years, they doubled down by “routinely” misclassifying approved loans, effectively telling the capital markets and the public that these loans weren’t as risky as they really were. Because of this, securities backed by these mortgages carried lower interest rates than they would have if the risks had been properly disclosed. Some of the offerings should probably never have been issued, or should have been given junk-bond pricing. Further, misrepresented loans Fan and Fred kept on their books enabled the two entities to continually make false claims of financial health.

Memo to Bernard Condon: The blame for this far more important second factor cannot possibly be laid at the feet of Standard and Poor’s, Moody’s, or the other ratings agencies.

PS to Mr. Condon: It’s also not S&P’s fault that the current administration, with the help of the Democrat-controlled Congress in 2009 and 2010, ran up the national debt to its current level of over $14 trillion. If you’re looking for “missteps,” please start there.

Cross-posted at NewsBusters.org.

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1 Comment

  1. [...] I addressed the finger-pointing on mortgage-backed securities in a previous post (at NewsBusters; at BizzyBlog). [...]

    Pingback by BizzyBlog — April 28, 2011 @ 8:29 am

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