Nobody in his right mind is actually shouting “Mr. Obama, tear down that Wall Street!” Still, there are lessons to be learned, methods to be adopted. First, a lesson, from Sonic Charmer:
Suppose you bought into a Ponzi scheme this year, and got $100k back, and were able to support yourself this year on that amount. Not only that but you made a bunch of purchases and plans premised on the idea that $100k would keep flowing to you yearly from Ponzi schemes. But then the next year rolls around and the Ponzi scheme stops paying, and you’re unable to find a new one that pays that $100k.
Do you have a grievance against the Ponzi arrangers for “causing a crisis”? Do you have the right to be self-righteously angry with them for your financial hardships?
Hardly. You made out like a bandit. You got $100k passed to you from Ponzi suckers further down the chain. Among these suckers were IKB and ACA Capital, the investors in Abacus 2007-AC1, who handed over $1 billion for nothing. They were at the bottom of a giant pyramid. If you’re a homeowner who
borrowed“bought” a nice house you couldn’t really afford, you were in the middle, not the bottom, of a Ponzi scheme. You have no grievance against anyone. If anything, people have a grievance against you.
The rating firms’ old school culture of honesty carried them along fairly well, but eventually it broke down under the lucrativeness and complexity of Housing Bubble mortgage-related instruments. Lots of street level petty fraud was going on between borrowers and mortgage brokers, but nobody the clients, the feds, the media, the GOP, the Democrats wanted to hear that “underserved” borrowers weren’t going to be able to pay back their mortgages. So, instead of doing things like hiring private detectives to check for fraud, the ratings agencies just rubber stamped the crud concocted by the people paying their bills.
Here’s a simple suggestion for fixing the ratings firms: barter. Only allow them to be compensated by the sellers of financial instruments in those exact financial instruments they rated.
Would this eliminate sub-junk “assets”? Maybe, maybe not. But there’s a lot to be said for putting one’s money where one’s mouth is.