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> 2. "making loans that had no good faith data behind them", once translated into concrete legal terms, turns out not to be a crime. Aren't we really talking a

> 2. "making loans that had no good faith data behind them", once translated into concrete legal terms, turns out not to be a crime. Aren't we really talking about junk rated mortgage back securities being packaged and sold as AAA? If so, how is that not straight up fraud?

spyspy 10y ago
Because the entity that is selling it is not the same as the one rating it.
rahimnathwani 10y ago
Bankers don't mark bonds as AAA. The ratings agencies do.
Rylinks 10y ago
I have heard a story that goes like this: -Rating agencies set criteria for marking things BB, BBB, etc. -Banks noticed that those criteria did not perfectly correlate with credit risk and created products that optimized for ratings rather than low risk. -People bought these products based on the rating, and then got blown up. You should take this with several grams of salt; I don't know if it's actually true.
- jolux 10y ago
  The ratings agencies also have a direct conflict of interest in how they rate securities because the bank will go to their competitor if they don't get the rating they want.
  - sievebrain 10y ago
    "their competitor" looks like a typo but is correct. US financial regulation grants a duopoly to the two big ratings agencies: despite their utter failure in 2008 and despite the low barriers to entry, no new competitors have emerged to challenge them because of that.
forgetsusername 10y ago
Because the rating is not a guarantee. You are allowed to be wrong. Due dilligence is your responsibility.
forgetsusername 10y ago
Because the rating is not a guarantee. You are allowed to be wrong. Due dilligence is your responsibility.
rayiner 10y ago
You can go to Whole Foods and every product will have some meaningless "All Natural" or "Asbestos Free" certification. That's not fraudulent.
- yolesaber 10y ago
  It's more like a package that says "Peanut free!" and then is actually comprised entirely of peanuts
- dredmorbius 10y ago
  Labeling which creates a reasonable impression of some meaning, which doesn't actually mean what that impression suggests, strikes me as quite problematic. There are different classes of lies -- comission yes, but also of omission and distraction. It's common to see poultry labeled in the US as "No Antibiotics. No Hormones". The implication is that the brand (or producer or processor) is making some specific claim. The truth is that USDA regulations forbid the use of antibiotics or hormones in poultry. My view is that the labeling, if it omits clarification that this is by government regulation, is misleading. Another element of commercial practices in the United States is that there is no preemptory screening for validity of business claims. All sorts and manner of fraudulent activity occurs. Only in very select cases are the perps called to account for it. Claims regarding freedom from some possible contaminant or allergen may not be particularly meaningful, but they aren't, if true, fraudulent. There's a fair case to be made for standardising both the claims and their presentation -- e.g., a standard "allergens and exposure" labeling, much as existing nutritional labels communicate macro and micronutrients and ingredents. That wasn't always the case. Some of the history: http://www.fda.gov/AboutFDA/WhatWeDo/History/Overviews/ucm056044.htm http://www.fda.gov/AboutFDA/WhatWeDo/History/Overviews/ucm05... ... though I seem to recall that more complete ingredients-and-nutritional labels appeared in the 1970s.
Lazare 10y ago
> Aren't we really talking about junk rated mortgage back securities being packaged and sold as AAA? Yes. But I suspect you don't understand precisely what that means: First: A large number of mortgages were made, grouped into pools, and sliced into "tranches", where losses were assigned to the most junior tranches first, and the most senior tranches last. Thus, a junior tranche might stop paying out if 5% of the loans in the pool were defaulted on, while a very senior tranche might only stop paying out if 80% of the loans in the pool went bad. (Or whatever; numbers for example only.) Second: These tranches were submitted to ratings agencies, who constructed models where they said "well, the chance of 5% of the loans defaulting is X%, the chance of 20% is Y%, the chance of 60% default is Z%...", then based on this model they assigned ratings to the tranches, reflecting the models estimation of their likelyhood of paying out, which is the entire job of a ratings agency. Third: Tranches rated AAA were sold as AAA securities, because they were. The model said that Random Senior Tranche was 99.5% likely not to default, which is enough for a AAA rating from whomever was giving the ratings, so that's what it got. We've later come to question some of the models used, and in particular, it's been suggested that the ratings agencies incorrectly assumed default risk was less correlated than it was, and systematically undervalued the chance of a "black swan" event. But that's hindsight. > If so, how is that not straight up fraud? How is it even sort of fraud? Or if it is fraud, who do you think committed it, and what should they have done differently to avoid it?
- YZF 10y ago
  What about robo-signers? ( https://en.wikipedia.org/wiki/2010_United_States_foreclosure_crisis#Robo-signing_controversy https://en.wikipedia.org/wiki/2010_United_States_foreclosure... ) EDIT: Also the scenario described could still be fraud. The rating agencies could have been defrauded and if people sold those while not really believing they were of the rated quality IMO it's still fraud. If someone did this for their personal benefit while the company they were running took a loss then they would also be defrauding share holders. So it's a lot more complicated than simply saying the instruments were AAA rated by the rating agency and they were simply sold like any other AAA rated instrument. It could have all been innocent but it certainly smells and warrants investigating.

spyspy 10y ago

Because the entity that is selling it is not the same as the one rating it.

rahimnathwani 10y ago

Bankers don't mark bonds as AAA. The ratings agencies do.

Rylinks 10y ago

I have heard a story that goes like this: -Rating agencies set criteria for marking things BB, BBB, etc. -Banks noticed that those criteria did not perfectly correlate with credit risk and created products that optimized for ratings rather than low risk. -People bought these products based on the rating, and then got blown up. You should take this with several grams of salt; I don't know if it's actually true.

jolux 10y ago
The ratings agencies also have a direct conflict of interest in how they rate securities because the bank will go to their competitor if they don't get the rating they want.
- sievebrain 10y ago
  "their competitor" looks like a typo but is correct. US financial regulation grants a duopoly to the two big ratings agencies: despite their utter failure in 2008 and despite the low barriers to entry, no new competitors have emerged to challenge them because of that.

forgetsusername 10y ago

Because the rating is not a guarantee. You are allowed to be wrong. Due dilligence is your responsibility.

forgetsusername 10y ago

Because the rating is not a guarantee. You are allowed to be wrong. Due dilligence is your responsibility.

rayiner 10y ago

You can go to Whole Foods and every product will have some meaningless "All Natural" or "Asbestos Free" certification. That's not fraudulent.

yolesaber 10y ago
It's more like a package that says "Peanut free!" and then is actually comprised entirely of peanuts
dredmorbius 10y ago
Labeling which creates a reasonable impression of some meaning, which doesn't actually mean what that impression suggests, strikes me as quite problematic. There are different classes of lies -- comission yes, but also of omission and distraction. It's common to see poultry labeled in the US as "No Antibiotics. No Hormones". The implication is that the brand (or producer or processor) is making some specific claim. The truth is that USDA regulations forbid the use of antibiotics or hormones in poultry. My view is that the labeling, if it omits clarification that this is by government regulation, is misleading. Another element of commercial practices in the United States is that there is no preemptory screening for validity of business claims. All sorts and manner of fraudulent activity occurs. Only in very select cases are the perps called to account for it. Claims regarding freedom from some possible contaminant or allergen may not be particularly meaningful, but they aren't, if true, fraudulent. There's a fair case to be made for standardising both the claims and their presentation -- e.g., a standard "allergens and exposure" labeling, much as existing nutritional labels communicate macro and micronutrients and ingredents. That wasn't always the case. Some of the history: http://www.fda.gov/AboutFDA/WhatWeDo/History/Overviews/ucm056044.htm http://www.fda.gov/AboutFDA/WhatWeDo/History/Overviews/ucm05... ... though I seem to recall that more complete ingredients-and-nutritional labels appeared in the 1970s.

Lazare 10y ago

> Aren't we really talking about junk rated mortgage back securities being packaged and sold as AAA? Yes. But I suspect you don't understand precisely what that means: First: A large number of mortgages were made, grouped into pools, and sliced into "tranches", where losses were assigned to the most junior tranches first, and the most senior tranches last. Thus, a junior tranche might stop paying out if 5% of the loans in the pool were defaulted on, while a very senior tranche might only stop paying out if 80% of the loans in the pool went bad. (Or whatever; numbers for example only.) Second: These tranches were submitted to ratings agencies, who constructed models where they said "well, the chance of 5% of the loans defaulting is X%, the chance of 20% is Y%, the chance of 60% default is Z%...", then based on this model they assigned ratings to the tranches, reflecting the models estimation of their likelyhood of paying out, which is the entire job of a ratings agency. Third: Tranches rated AAA were sold as AAA securities, because they were. The model said that Random Senior Tranche was 99.5% likely not to default, which is enough for a AAA rating from whomever was giving the ratings, so that's what it got. We've later come to question some of the models used, and in particular, it's been suggested that the ratings agencies incorrectly assumed default risk was less correlated than it was, and systematically undervalued the chance of a "black swan" event. But that's hindsight. > If so, how is that not straight up fraud? How is it even sort of fraud? Or if it is fraud, who do you think committed it, and what should they have done differently to avoid it?

YZF 10y ago
What about robo-signers? ( https://en.wikipedia.org/wiki/2010_United_States_foreclosure_crisis#Robo-signing_controversy https://en.wikipedia.org/wiki/2010_United_States_foreclosure... ) EDIT: Also the scenario described could still be fraud. The rating agencies could have been defrauded and if people sold those while not really believing they were of the rated quality IMO it's still fraud. If someone did this for their personal benefit while the company they were running took a loss then they would also be defrauding share holders. So it's a lot more complicated than simply saying the instruments were AAA rated by the rating agency and they were simply sold like any other AAA rated instrument. It could have all been innocent but it certainly smells and warrants investigating.