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"Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That's why it's
by Rod 18y ago
"Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That's why it's toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise."
I am (by no means) an expert on Structured Finance, but didn't these "toxic assets" have AAA credit ratings because Freddie Mac and Fannie Mae would absorb the default risk?! Would anyone care to comment on this?
This interview sounds terribly superficial, biased and sensationalist.
- rjurney 18y agoSuperficial? The interview is with the guy responsible for cleaning up the S&L crisis. It is neither superficial, biased or sensationalist. It sounds like you are of the opinion that any explanation of the crisis that doesn't name mortgages for minorities as the singular cause is not even worth discussing.
- byrneseyeview 18y agoI don't see any mention of "mortgages for minorities" in the comment, much less a statement that they are the "singular cause".
- rjurney 18y agoNo, you didn't see it in his comment. But it is the scapegoating behind the right-wing 'regulation alone caused the crisis by putting minorities in homes through Fannie/Freddie' meme he was spreading. He clearly didn't watch the interview. He dismissed it.
- byrneseyeview 18y agoOh! I see. I thought you were responding to something he'd actually said. But it sounds like you just made up something you wish he had said, and then slammed him for having been the kind of person you think would say this kind of thing. There's more than one 'right-wing' explanation for the crisis. So far, the folks who claim that it wasn't regulation-driven haven't explained why so much of the crisis happened in the most regulated and most subsidized sectors of the economy.
- JabavuAdams 18y ago> So far, the folks who claim that it wasn't regulation-driven haven't explained why so much of the crisis happened in the most regulated and most subsidized sectors of the economy. De-facto trumps de-jure. If your regulators aren't actually regulating, and are in fact aiding and abetting fraud, then it's irrelevant whether the industry is supposedly highly-regulated.
- byrneseyeview 18y agoWell, not, it's actually a really important point about regulation. Given a regulator who gets to decide how Goldman Sachs behaves, who has a bigger interest in the outcome -- Goldman, getting 100% of the privatized profits, or you and me, sharing 1/300 millionth of the socialized losses? The more powerful the regulator, the bigger the incentive for regulatory capture.
- Rod 18y agoI know that Black is an expert. But he was also there to sell his book. He didn't explain the mechanics of the problem, instead the interviewer kept stressing words like "fraud" as to dramatize the discussion. I am not putting Black's expertise in question, only the way the interview was carried out.
- rjurney 18y agoHe explained that the problem was not just one of lifting regulations, but that under the Bush administration and Clinton before him, the SEC and the Federal Reserve did not regulate. Like, whatsoever. When combined with the rise of enormous cash bonuses for executive in the last decade, the incentive for management was to knowingly tank their companies by creating enormous short term profits writing bad loans. That is what he means by fraud: they knew. Apparently I read too much into your comment, but I thought he was in-depth and informative. The interviewer kept making him explain and justify 'fraud' and other such terms because they're revelation. If you search on William Black, he has more technical explanations elsewhere.
- byrneseyeview 18y agoNo. He is referring to CDOs, which were packages of low-quality loans, which could have high-quality loans issued against them. For example, if you have ten $10 loans, and expect half to pay off with $11, and half to default leaving only $5, you could have a very high-rated loan entitled to the first $25 of payments on any of those loans. The problem in this case is that the underlying loans were deteriorating in quality, to the point that even very secure loans against them ended up doing badly.
- Rod 18y agoGot it. Thanks for the explanation.
- gojomo 18y agoBlack is an expert. I saw his Moyers interview, but here's an essay of his from December with more detail: http://www.cato-unbound.org/2008/12/04/william-k-black/adam-smith-was-right-about-corporate-ceo%E2%80%99s-incentives-absent-effective-regulation/ http://www.cato-unbound.org/2008/12/04/william-k-black/adam-... As I understand it, those securitized mortgages that Fannie/Freddie (and now the federal government) are guaranteeing aren't the marked-down/unpriceable 'toxic' assets; it's other collections of much-worse mortgages and credit derivatives.