Article
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Date
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Why it is a must read
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| Donald Luskin: The 2013 Fiscal Cliff Could Crush Stocks |
May 7, 2012 |
Here's more evidence that we've got our heads buried very far in the sand. The author describes how, at the end of the year, because we've kicked the can down the road on making tough decisions, many taxes are going to skyrocket. This will cause a big drop in the value of stocks. For us to assume that this won't happen because Congress will get its act together long enough to kick the can further down the road is not very smart. More likely, the highly polarized parties will want to score political points with these issues, holding the economy and the markets hostage as we nervously wait to see how these issues are resolved.
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| 'Tainted,' but Still Serving on Corporate Boards |
April 23, 2012 |
This article describes how CEO's who ran their banks and financial institutions into the ground (by taking irresponsible risks which fueled the credit bubble and crisis) are still enjoying the privileges of being in the upper echelon of corporate America. How can this be if they were fired from their former firms? They serve as members of one or more of the Board of Directors of other publicly-held corporations. Apparently, epic failure makes these gentlemen the best candidates to advise other corporations how to run.
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| Draghi's Unlimited Loans Are No Panacea |
February 28, 2012 |
Today Mario Draghi, head of the European Central Bank (ECB), announced he will reach into his hat for the second time in 70 days and pull out more freshly made-up money to loan to any European bank that wants it. The rate will be an insanely low 1% per year and the money can be borrowed for up to three years. It's like some kind of dream for the banks. Oh, and they can borrow an unlimited amount of money at this rate. Rest assured that in three years, if the banks wish, the loans will be extended for as long as needed.
The central banks (the ECB and the US' own Federal Reserve Bank) continue to take extraordinary measures to keep banks and economies propped up. If you are an investor who is trying to assess how the enormous debts of various countries will play out in the markets, you should forget about the idea. Knowledge of markets doesn't matter because governments won't let them function if they fear markets will react negatively. They change the rules on the fly to ensure the outcome they want.
What's the big deal, you ask? Well, all the easy money sloshing around may one day cause significant inflation. It also means that those who have made poor decisions, such as the banks that loaned money to poorly-run governments, will not pay a price for their bad decisions. This sends a terrible signal to banks that there's no reason to worry about being reckless because a bailout is just a phone call away.
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| Debt talks falter, Greeks warn of disaster |
Jan
15
2012 |
As the European credit crisis continues, governments continue to scramble for solutions. Greece, the country in whom investors have the least confidence, has been at the forefront. This article describes how the goverment of Greece is negotiating with investors who were unwise enough to buy its bonds (ie: loan it money) in the first place. Greece wants these investors to accept a "50% haircut", meaning that for every dollar Greece owes them, they agree that Greece will only owe them $.50 now. It's so bad that Greece can't even agree to pay its lenders the $.50 in cash so they can walk away with something.
As if that's not bad enough, Greece also wants these investors to agree that on the $.50 of debt that would be left, a low interest rate of 4% will apply. It's like a double slap in the face to these investors.
Why is this such as big deal? On March 20, 14.5 billion Euros of Greek borrowing is owed back to lenders. It doesn't have the money to pay, so it must ... borrow the money from someone else. Before it can do that, it must create the impression that it is getting its house in order.
Finally, all the while these critical developments are unfolding, markets are shrugging their shoulders. They are ignoring the chance that failure to work something out could lead to a full-scale European debt meltdown.
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| Corzine's MF Global collapses under euro zone bets |
Oct 31 2011 |
A big lesson of the economic and credit crisis is that when banks and other investment firms use leverage, bad things happen. Now, four years after the crisis began and the lessons were learned and the reform legislation was passed, we have securities broker MF Global going backrupt for ... using too much leverage.
Leverage is the investment of borrowed money. The more that's borrowed and invested, the greater the risk. It has been estimated that MF Global borrowed and invested $40 for each $1 of its own.
Let's use MF's 40 to 1 scale to illustrate how this works. You work hard for several summers and save $10,000. You know that growing it into a substantial sum will take a long, long time. So, you borrow $400,000 and invest it alongside your $10,000, buying a total of $410,000 of a stock that trades for $41 per share. The stock drops just a little, to $40 per share. You have just been completely wiped out. How? The total value of your investment went from $410,000 to $400,000. That's the exact amount of the loan. All of your $10,000 is gone, just like that. in MF's case the value of the investment dropped below the value of the loan and it was left owning lots of money.
Thankfully, in the real world we as individual investors are only allowed to borrow $1 for each $1 of our own we invest. How could MF Global be allowed "leverage itself up" 40 to 1 after all we've learned from the crisis?
Bonus: This is also an example of a world-class fall from grace of former Goldman Sachs CEO and New Jersey governor, John Corzine. He took over as CEO of the 200 year old MF Global last year and ran it into the ground in just 17 months.
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| Credit-Card Issuers Circling Subprime Borrowers Again |
Oct 11
2011 |
A "subprime" borrower is one without a steady of record of paying his or her bills. A major contributor to the housing and credit crisis of 2008 was that too many unworthy borrowers were loaned enormous sums of money. Not surprisingly, many of the borrowers stopped paying, the banks suffered losses in the tens of billions, and the government had to bail them out.
Burned by these loans, the banks for the last few years had avoided lending to these borrowers. But now they're going right back in the pool. In the first six months of 2011, banks issued 5.4 million new credit cards to subprime borrowers, a 64% increase from a year earlier! While the banks says they're approaching subprime lending slowly and with caution, is that these things always begin?
Bonus article (April 10, 2012): Lenders Again Dealing Credit to Risky Clients
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| Fannie Mae Knew Early of Abuses, Report Says |
Oct 3
2011 |
One of the missions of Investeens is provide young people much-needed perspective. One of the viewpoints we suggest is that if you have faith in the government to protect you or to do the right thing, you may be stunned to find out that just when you need the government, it's not there for you.
This article is another which shows how incredibly incompetent and/or neglectful the government can be. When evidence of massive document fraud is put right under its nose, Fannie Mae did... nothing. Mind you, the entities committing these serious crimes were law firms. Imagine, law firms, which know the law intimately, boldly ignore it and commit fraud after fraud.
This article also suggests something just as troubling: the chances of you as an individual receiving treatment similar to large, politically-connected organizations is between slim and none. Try committing document fraud by forging documents and explaining your transgression to a judge and see what happens.
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| BofA, JPMorgan Among 17 Banks Sued by U.S. for $196 Billion |
Sep
3
2011 |
The housing boom of the middle 2000's, was powered by Fannie Mae and Freddie Mac, two government-sponsored agencies (ie: they are backed by the government) that purchased mortgages that banks made. Basically, banks made loans so people could buy homes. Fannie and Freddie bought these loans for more than the amount loaned out. This gave the banks a profit and just as importantly, gave the banks cash again so they could make more home loans. FYI, Fannie and Freddie would recover their investments over the course of years as borrowers made their monthly payments.
While it's been well chronicled that banks sometimes sold mortgages to Fannie and Freddie that were made to borrowers who shouldn't have been given loans, this lawsuit shows the massive size and scope of the alleged wrongdoing by the banks. We're talking 17 of the biggest banks and claims totalling almost $200 billion. It is truly staggering.
It seems that the banks are finally be called for account for their bad behavior, something that's all too common. Don't believe it? Take a look at some of news about just JPMorgan over the last few months:
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| Ex-Directors of Failed Firms Have Little to Fear |
Aug
2
2011 |
The corporation is a strange being. It is often owned by individual shareholders who can only afford to purchase a relatively small percentage of the corporation's shares. Together, the shareholders vote for members of the corporation's Board of Directors. It the Board that is supposed hire and fire the executives and generally oversee the direction of the corporation.
There have been several epic corporate failures in the last decade. One was Enron, a corporation that perpetrated such extensive fraud that its executives went to jail. Another was Lehman Brothers, a legendary investment bank that had to declare bankruptcy during the crisis.
As this article shows, the members of the Boards of these and other corporations that imploded have done just fine for themselves years later. This means that there's absolutely no stigma associated with having served on the Board of a corporation that went under. We're familiar with the idea of being rewarded for success. With these Board members continuing to hold important positions in corporate America, we learn that for some people, there's reward for failure.
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| Revolving Door at S.E.C. Is Hurdle to Crisis Cleanup |
Aug
1
2011 |
The SEC (short for Securities & Exchange Commission) is the government's primary Wall Street watchdog. It turns out that the SEC gets many of its employees from ... Wall Street. See, Wall Street creates such (unnecessarily) complex financial investments that not just anyone can understand them and the risks they present. Hmmm. Where can we find people who understand them enough to attempt to regulate them? Wall Street.
Why would a successful Wall Street banker take a massive pay cut to work for the government? Well, if you don't want to run afoul of the SEC as you advance on Wall Street, why not get on the inside for a while and see how the SEC works? You'll stay just long enough, one to three years as the article states, to figure it all out before returning to Wall Street (with an enhanced resume, of course).
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| FHA May Be Next in Line for Bailout: Delisle and Papagianis |
Jul
25
2011 |
If you've delved into the U.S. economy and the role of the various players in the crisis, you have undoubtedly come across Fannie Mae and Freddie Mac. These two semi-governmental corporations helped turn the housing bubble into a disaster by buying or guaranteeing trillions of dollars of mortgages made by banks to homebuyers.
Their very pledge to buy up mortgages at a profit from the banks meant that banks eventually stopped caring about who they loaned money to. At the time of this writing, Fannie and Freddie have been taken over by the government and they've needed about $160 billion of taxpayer money to keep from going under.
Now comes an article about how a third entity, a full-fledged government agency called the FHA, is guaranteeing more and more mortgages. Its creative accounting is allowing it to show profits while it is really incurring losses. And guess who is going to pay when the losses exceed the capital the FHA has? You guessed, the U.S. taxpayer.
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| Fast Traders, in Spotlight, Battle Rules |
Jul
17
2011 |
High Frequency Trading (HFT) is something that evolved over the last decade as computers became more and more advanced. HFT firms have super powerful and fast computers that can buy and sell massive numbers of shares in split seconds. They do this to exploit tiny differences in prices that can be as little as a fraction of a penny per share. How significant has HFT become? Some reports say it accounts for up to 70% of all shares traded! Each day in the markets, billions of shares change hands, and we can thank HFT for most of it.
To battle accusations that they do nothing more than high-tech leaching on the system, HFT firms are forming a trade association, donating to politicians, hiring lobbyists and promoting what they believe to be the benefits they bring to the financial system.
Only, these firms provide no real value to the markets, instead making them unstable and potentially overwhelming the exchanges' ability to carry out their massive trades. Consider that the markets were performing just fine before HFT was developed. The SEC has the power to prevent this dangerous activity and has been looking at it closely since 2009. However, just like in many prior instances, we see a government agency dragging its feet and giving itself cover by putting in place measures that don't solve the problem.
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| How bad is it? Pawn shops, payday lenders are hot |
Jul
10
2011 |
Economies go through cycles of economic expansion and contraction (ie: recession). Usually, the expansions last longer than the contractions. While the academics say that we got out of recession in June of 2009, a full two years later the economy is struggling with tens of millions of people unemployed or underemployed.
What types of businesses thrive in this enviroment? Basically, bottom feeders, including pawn shops and payday lenders. In the article Types of Companies on the Investeens site, we named them as "anti-cyclicals" because they do well when the economy does badly! There are now public corporations running these businesses, meaning that you can invest in them. Essentially, you can profit from peoples' continued misery. Is this right? Moral? Ethical? Or, is this simply about following opportunity where it leads you?
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| Man Robs Bank to Get Medical Care in Jail |
Jun
21
2011 |
It's been said that a person won't starve to death in jail. In fact, prisoners receive "three hots (hot meals) and a cot". Add medical and dental care to this list of entitlements. After all, we're not to let our prisoners die or suffer from treatable ailments.
This article may be a great argument for why we need nationalized health care. It should also serve as an example of the concept of unintended consequences. By providing as many basic services to prisoners as we do, people who are falling through society's cracks might see jail as a reasonable option. Of course, the cost of providing services to prisoners falls on the taxpaying public. By reading this article, we can see that the man who committed the crime planned it with a lot of thought. It will be interesting to see if other people follow the same path.
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| Too Big to Fail, or Too Trifling for Oversight? |
Jun
11
2011 |
The Dodd-Frank financial reform bill that was passed to address causes of the crisis has come under a lot of criticism. It adds more layers of bureaucracy, such as a "systemic risk regulator". It also adds new designations such as "systemically important", which means that if a financial firm is so big its failure would lead to widespread panic, then it is "systemically important".
If a financial firm is designated by the government as systemically important, then it must comply with more restrictive rules. For example, it would be required to keep more cash on hand. This would limit how much it can put at risk and therefore how much it could potentially earn. Who wants that? This article describes how massive financial firms are descending on Washington in the hope that they can convince the regulators that they are, in fact, just inconsequential weaklings whose failure wouldn't cause a hiccup!
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| 'Made in the U.S.A.' may be staging comeback |
May
5
2011
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A ray of hope? With China's currency and wages going up, it is becoming less attractive for U.S. corporations to manufacture their goods there. Boston Consulting Group says that 2015 is the year it will become a toss-up (taking all factors into consideration) between producing in the U.S. or in China.
Lest you think it will be easy, the average wage of U.S. worker, at $22 per hour, is 10 times that of a Chinese worker. Offsetting that savings is the need to bridge the language, currency, and distance issues. And, there's always the possibility that as China becomes less attractive, corporations will move further down the food chain, manufacturing their goods in even lower-cost countries like Vietnam and Cambodia.
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| Next Up: A crackdown on outside-expert firms |
May
13
2011 |
Can Wall Street get any more absurd? Enter the "expert network" firm, a new industry that basically charges hedge funds and other investment companies to put them in touch with "consultants" familiar with certain publicly-traded corporations who can apparently provide inside information about them.
Inside information is information that is not yet available to the investing public. By buying stock (if the information about to come out is good) or selling stock (if the information is bad), hedge funds can make enormous profits. If you haven't figured it out yet, this is called insider trading and it is illegal. Yet, expert network firms try to make this process appear legitimate by charging money to hook up investment firms that want an "information advantage" with people acquired it through... "aggressive market research".
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| The great government first sale is on |
May
13
2011 |
This article provides more light on the extraordinary depth and breadth of the sale of government properties and the contracting out of government services (called "privatizing") happening right now. As governments go broke but corporations earn record profits, it leaves them holding all the cards.
As corporations take over more and more functions always assumed to be within the realm of government, such as running prisons and power plants, we constantly have to consider the appropriate role of government in society.
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| America's Middle Class Crisis: The Sobering Facts |
May
6
2011
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What we've been warning about for some time is rapidly happening: the middle class is disappearing. This article and video say it well, so click the link! |
| The Real Housewives of Wall Street |
Apr
28
2011 |
That we have to turn to Rolling Stone for true investigative journalism is a sad story in and of itself. In any event, we should be thankful to the publication and reporter Matt Taibbi for his work. In this hard-to-believe tale, the Federal Reserve, in order to keep the credit markets from "locking up", doled out dollars by the trillions to people, corporations and countries you simply won't believe.
Please note that there is some profanity and adult references in this article so it can have the requisite street cred Rolling Stone readers demand.
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| Reliance on Uncle Sam hits a record |
April
26
2011 |
Despite the economic recovery approaching two years under way, citizens are relying more than ever on the government to pay them money. It is not just Social Security and Medicare, but unemployment benefits and food stamps, that have grown in size. When the Baby Boomers begin retiring in large numbers, the amount of payments is likely to continue its uphill climb.
This situation makes the task of reducing the federal budget deficit increasingly unlikely.
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| IMF Bombshell: Age of America Nears End |
Apr
26
2011
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For as long as anyone can remember, the U.S. has been the leading nation on Earth. It has lead economically, politically and militarily.
A changing of the guard is going to happen much sooner than most people realize and the implications will be enormous.
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| Of the 1%, By the 1%, For the 1% |
May
2011
issue of Vanity Fair
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This article, by economist Joseph Stiglitz, shows how over the last 25 years, the rich have gotten richer, much richer. Twenty-five years ago, the top 1% of earners accounted for 12% of the national income. Now, it earns 25% of the national income.
As if average Americans don't have enough to worry about with the corporations sending jobs overseas, they have to deal with a privileged class which lobbies Washington to ensure that the ways it earns money is subject to low taxes.
As what's left of middle class wealth shifts to the upper and lower classes (through benefits the government pays to the poor), the American Dream becomes harder to achieve.
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| PIMCO Now Betting Against U.S. Government Debt |
Apr
11
2011 |
It has come to this. It would be one thing if the largest and most respected bond fund in the world, Pacific Investment Management Company (PIMCO), sold its holding of long-term U.S. Government debt if it thought there was too great a risk of them falling in value.
Its entirely another thing for it to actively bet against the debt, profiting if indeed it falls in value. In the past, PIMCO founder Bill Gross has been clear that he is concerned about the debt and deficits the U.S. has, and how lending the U.S. government one's money is riskier than ever. Now, he's putting his money where his mouth is!
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| Fed's Low Interest Rates Crack Retirees' Nest Eggs |
Apr
4
2011 |
This article talks about how the retirees who did the right thing by making safe investments and were fortunate enough to side-step the market meltdown are still being victimized.
How? To try to boost economic activity, the Federal Reserve dropped interest rates as low as possible and has kept them low for so long that retirees earn a pittance in interest on their lifetime of savings. It's this annual interest that in normal times with normal rates they might have a chance to live off of, but today isn't nearly enough for too many seniors.
The Fed's policy hurts all savers who want place their money someplace safe and receive a reasonable rate of return on it.
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| US Cost of Living Hits Record, Passing Pre-Crisis High |
Mar 17
2011 |
The cost of living is the highest its ever been, driven principally by skyrocketing food and energy costs. However, the Federal Reserve Bank (the "Fed"), among whose responsibilities is to ensure that prices are stable, prefers to ignore what's really happening to the average Joe and Jane. How can it do this?
Simple, just claim that food and energy prices are "volatile", that they bounce around, and that including them in the monthly inflation data would make for a lot of confusion! In some regards, the Fed is right. Sometimes the food and energy prices go up a little and sometimes they go up a lot!.Clearly, they are going up. To exclude them is to purposely understate the true inflation rate.
The Federal Reserve does this because the social security and food stamp payments the Federal Goverment makes are "indexed" to inflation. That is, the payments grow by the amount of the inflation to ensure recipients can continue to buy the same amount of goods and services as they could when prices were lower. The problem is that the U.S. Government is in bad financial shape and can't afford to make ever-increasing payments. So, by understating inflation, it saves money.
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| Officials Disagree on Penalties for Mortgage Mess |
Mar
2
2011 |
Many banks, in their haste to foreclose on overdue homeowners, broke the law with each foreclosure. They had an employee sign a document swearing that he or she was familiar with the case and that all of the necessary paperwork was in order. This includes the documents showing the bank actually owns the mortgage and has the right to foreclose. Often, the mortgage had been sold and bounced around so many times that no one had any idea where the original mortgage document was. No matter. Sign and sign again did the employees, sometimes hundreds of times a day.
Now that the banks have been caught, the politicians are trying to figure out how to punish them. Some want to make them ante up $20 billion and use it for mortgage reduction programs. Anyone whose mortgage (ie: the amount of the loan) is reduced is getting a gift. Of course the banks' crimes have nothing to do with mortgage modifications, but, well, who cares? Politicians learn to never waste a good opportunity!
The best part is that there is general agreement that no banks or bank employees will be charged criminally. Not-so-funny thing is that the crime committed over and over was fraud, which is very serious. Unless, of course, its committed by a bank.
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| Accidental Death Becomes Suicide When Insurers Dodge Payouts |
Mar
1
2011 |
So you think that the banks are the only businesses operating without conscience (or competence, depending on how you look at it)? Check out this eye-opening article about the lengths insurance companies will go to avoid paying out legitimate accidental death claims.
This article is important because it is shows how in some industries, delaying and declining and generally refusing to live up to company's obligations are not accidental. They are part of the company's strategy for maximizing its profits. You have to read the article to really get a sense of the depths to which some companies will go. How their employees and policymakers get up every day and look themselves in the mirror is a mystery.
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| The youth unemployment bomb |
Feb
2
2011 |
This cover story in BusinessWeek describes how youth unemployment is a serious problem throughout the world. Unemployed or underemployed youth have been given a name in each country. In the U.S., they're called "boomerang" kids because after college they come back home to live after being unable to find a job.
As the article puts it, this is a sad story about society's inability "to harness the energy, intelligence, and enthusiasm of the next generation."
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| Home-Price Drop Leaves 27% of U.S. Owners Underwater on Loans, Zillow Says |
Feb
8
2011 |
The recession supposedly ended mid-year 2009. This article, appearing more than a year and a half later, begs to differ. Home values continue to fall, some down below the amount owed on the homes. This puts them "underwater", likely leading to more future foreclosures than the 1 million+ homes foreclosed in 2010.
In a strange rationalization, Zillow's expert believes that there's a bright side to falling values in that the more they fall, the closer they are to hitting bottom! In reality, falling values can continue a damaging self-reinforcing cycle. The more home values fall, the more people will walk away from them. More abandoned homes put on the market by the banks that repossessed them means more supply. This, combined with the banks' more than usual eagerness to dump them, will send home prices lower.
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| SEC warns budget threats give swindlers upper hand |
Feb
4
2011 |
The Dodd-Frank financial reform bill passed in 2010. It gives government regulators such as the SEC new responsibilities. To carry them out effectively requires money. With the Republicans having taken over control of the House of Representatives in the November 2010 election, they are threatening to use the "power of the purse strings" to stop the SEC from carrying out the Dodd-Frank reforms they don't agree with.
Inexplicably, they want to reverse new restrictions on the risky and dangerous practices that helped caused the financial meltdown. Should Congress purposely leave the SEC underfunded and outmanned, this will say a lot about the interests that control our elected officials.
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Jan
31 2011
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In a global economy, profit-seeking corporations are going to place their manufacturing in the lowest-cost country. The cost of doing business in the U.S. is still much higher than in developing countries like China and Vietnam so more corporations manufacture there and not here.
As long as the U.S. doesn't charge import tariffs (taxes on goods coming into the country) to bring their prices up to what American-made goods sell for (which itself could cause a trade war), a painful adjustment will inevitably take place.
The adjustment is that the incomes of workers in other countries (and thereby the cost of making goods) will gradually rise while the incomes of Americans will fall. This article documents how this is occurring. Lower-paying jobs replacing higher-paying jobs is evidence that the American middle class is disappearing.
Bonus articles
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Jan
26 2011
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Just a day after the President's State of the Union speech and Republican Congressman Paul Ryan's response which focused almost solely on the need to reign in runaway government comes this article highlighting yet another record deficit. The article reports that the 2011 cost of extending the Bush tax rates, unemployment insurance and other tax breaks will be $400 billion (out of the total of $1.5 trillion deficit) this year. We are borrowing from the future so our citizens can spend money now to support the economy, then cheering the recovery!
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Jan
08
2011
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This is an incredibly sobering look at the state of the legal profession. In our challenging economic environment (which is likely to continue for many years), it is critical that our students make decisions about their education and career choices with their eyes wide open.
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Jan
07
2011
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Our big banks seemed to operate with impunity. First, they take enormous, irresponsible risks on mortgages and in the process bring the financial system to its knees. Now, with many homeowners not making their payments, they ignore the laws which require that they prove they are the actual owners of the mortgages who have the legal right to foreclose. It is heartening to know that the courts are holding, in the original case and on appeal, that banks, just like everyone else, must follow the rule of law.
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Dec
23
2010
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Over the last two decades, transaction costs have come down so much (all the leading "self-directed" brokers offer trades for about $10 or less), that it's practically painless to sell a stock (assuming there aren't big profits to worry about). This has contributed to increased volatility in the markets because it's easy to just dump one's position than risk a big drop in a stock or the market. Many people thinking this way actually causes the big drops.
With this article, we see that special computer programs can quickly analyze and act on the news, thus being among the first to be in or out of the market of a stock, depending on what the news indicates. One has to wonder with all this programmed trading whether our markets are still suitable for investors or whether they more appropriate for gamblers.
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| The new young investor: Shunning stocks |
Dec
23
2010
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Young investors, let's say those age 35 or less, have really taken it on the chin. They've been burned twice in the last decade. First was the Internet bubble. Then eight years later came the credit crisis. They also have to face the poor job market and deflating housing market. It's no wonder that they are reluctant to risk losing their hard-earned money.
Curiously, estimates for what stocks and bonds have made each year over the long term are all over the lot. This article claims that stocks have made 7% and bonds just 1%. Others cite some very different figures.
Finally, it's interesting that the experts agree that it's "time in the market" and not "timing the market" that will result in the best results for these young investors decades from now. That's always been the case, but the U.S.' unprecedented financial bind makes one wonder if its still true.
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| Credit Ratings Can't Claim Free Speech in Law Giving New Risks |
Dec
08
2010
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One of the most stunning aspects of the credit crisis is how the credit rating agencies rated the creditworthiness of borrowers so inaccurately. They're being sued now by lenders who relied on those erroneous ratings, and using every excuse in the book to not take responsibility for their actions.
A creative defense is that they have free speech rights. Let's say they are paid millions of dollars to rate the likelihood that a pile of billions of dollars in mortgages will be paid back by the various borrowers. Let's also say these borrowers have bad track records, the risk of non-payment is high, and that the credit rating agencies rate them A anyway instead of the C they deserve.
Lenders, relying on the A rating, buy the mortgages. When the borrowers later default (ie, don't pay) with alarming frequency, the lenders sue these agencies over the obviously wrong ratings they gave the mortgages. The agencies' defense is that it is within their rights to say the letter "A". After all, this is America! They're not yelling "Fire" in a crowded theater nor advocating overthrow of the government! They're just exercising their Constitutional right to say a single letter. What's the big deal?
The new Dodd-Frank law prevents them from using this defense, but does this apply to previously rated debt?
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| Retirement on hold: American workers $6 trillion short |
Sept
15
2010
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This is another sobering article showing how Americans have no clue how they will support themselves in retirement.
Our "consumption" economy had many living up to and beyond their means. By not making meaningful sacrifices they accumulated little or no wealth, even during the good times. Now that aftermath of the financial crisis is upon us, building wealth is that much harder.
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| Looking for work? Unemployed need not apply |
June
16
2010
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In a cruel development, more companies, in order to reduce the big pile of resumes that arrive after a job opening is announced, are tossing those of applicants currently unemployed! It makes being unemployed a reinforcing cycle and is just stunning in its implications.
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| Debt Raters Avoid Overhaul in Crisis |
Dec
8
2009 |
"Raters" in the article title refers to the three credit rating agencies whose mistakes in rating so much debt so highly contributed significantly to the economic crisis. The way they do business is one giant conflict of interest. This is because a corporation or government that wants to borrow money has to pay one or more of these raters to examine its fitness and give it give the new borrowing a rating (that tells potential lenders the likelihood it will pay the money back).
For some strange reason, as the number of debt offerings that were given AAA (ie: the highest) ratings skyrocketed in the years leading up the crisis, so did the profits of these agencies. Could there be a connection between the amount the borrowers pay to them and the ratings the agencies give?
Despite the unsavory relationship that has borrowers paying these agencies for ratings, it will apparently continue as is. Back to business as usual!
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| Dissecting the ACA Downgrade |
April
3
2008 |
ACA is a bond insurer. When a company borrows money from a lender that it cannot pay back, if the lender bought insurance from ACA, it turn to ACA and collect the money it lent!
Because it insures borrowers, ACA is in a risky business. As mortgages (which are loans) began going bad in 2007 as the housing bubble was bursting, the potential dollars owed out by ACA to lenders who'd bought insurance from it grew and grew. And yet, the credit-rating agency S&P maintained its A rating on the company.
Everybody, and we mean, everybody, knew ACA was headed for disaster. How can we say this? The price of ACA's stock had lost 95% of its value, trading at just $.50 per share! This means that the universe of potentially millions of investors had read and analyzed the state of the economy, the housing market, and ACA's business and their collective best estimate for the value of the stock was worth $.50.
Then, on December 19, 2007, S&P realized how absurd its A rating was for a company that was likely going under. It changed its rating from A to CCC, a dramatic drop. Then, it tried to explain away why it sat on the sidelines for so long. Read the article and see if you find anything close to an apology from S&P for missing the boat so badly.
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