Nom de Plumber is a Nom de Plume
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http://www.bloomberg.com/news/2013-02-12/obama-s-p-case-started-when-toxic-debt-masqueraded-as-aaa.html
Fannie and Freddie suffered crippling default losses on reportedly top-quality, safe mortgages which the rating agencies never even rated. Compare versus the similarly harsh default losses for private-label mortgage securities, which the rating agencies had often graded “AAA”.
Perhaps, this side-by-side sniff test reveals that the driver was not liberal credit ratings, but residential mortgages granted loosely in order to finance unaffordable (often speculative) homes.
If the rating agencies were so flawed, then why have “AAA” securitizations of commercial property loans, subprime consumer auto loans, credit cards, equipment leases, and even corporate “junk” debt had fewdowngrades or default losses? Again, the problem seems not rating agencies or even securitization technology itself, but exposure to aggressively underwritten home mortgages.
Thank you.
The ratings agencies rated plenty of deals with agency loans – the street paid through FNMA execution on ALT A and A- for years.
The rating agencies had two models that were tested in the crash. One, the standard RMBS, actually worked as expected. The senior tranches generally came through with minimal losses, though the junior layers were wiped out. The second, the CDO, supposing that a bond 100% made up of toxic waste RMBS tranches, or even other CDOs, was a disastrous mistake.
Yet it was the CDOs that let sub-prime grow as large as it did. Before the CDO, the junior tranches had to be sold one by one to sophisticated investors who were very selective and demanding, balancing the risk against high rates. Once the toxic waste was turned into AAA, funds were available from unsophisticated investors buying the rating.
The supply of easy money created the demand for loose lending. Wall Street wanted sub-prime loans and did not know or care about lending standards. The investment banks were so desperate for loans they started buying mortgage companies.
Lax lending comes about because someone with money says “I am willing to lend on these loose terms in return for a higher rate.” and everyone else waits to see if they make or lose money on the bet. Once the pioneer is seen to be making money, everyone else piles in.
So the rating agencies were the critical failure point. If the CDO had never been invented we would not have had a financial crisis. It was the $300-$400 billion in CDO losses, amplified by mark-to-market accounting, that started the panic and took the rest of the financial world down with it.
The boom would have come to an end- they always do. But it would have been very different if the downturn started in commercial real estate rather than residential.