Fed Signals Economic Contraction Won't Spur Rate Cut Amid Inflation Danger Federal Reserve policy makers signaled that an economic contraction in the first half won't be enough to spur further interest-rate cuts because of a rising threat from inflation.
Fed Officials Cut Growth Forecast for U.S. Economy to Range of 0.3%-1.2% Federal Reserve officials reduced their projections for economic growth this year by almost a full percentage point and raised their forecasts for inflation amid curtailed bank lending and a record rise in the prices for oil and other commodities.
Kroszner Repeats Call for Lenders to Modify Mortgages, Forgive Principal Federal Reserve Governor Randall Kroszner and the Fed's top community-affairs official repeated the central bank's call for lenders to consider forgiving portions of mortgages to help stem foreclosures.
Full Version: Financial Turmoil
Common Ground Common Sense > National & International News > Op-Ed Articles from the Mainstream Media
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SOVEREIGN WEALTH FUNDS
Prosperity and harmony
- or just greed
Investment by independent sovereign wealth funds of the huge gains flowing to oil-producing countries would promote prosperity and improve citizens' welfare for generations to come, usher in more democratic governance and promote regional harmony. The elites in these oil countries will of course condemn any such redistribution of wealth. - Hossein Askari
This concludes a two-part report.
Part 1: The forgotten issues
Prosperity and harmony
- or just greed
Investment by independent sovereign wealth funds of the huge gains flowing to oil-producing countries would promote prosperity and improve citizens' welfare for generations to come, usher in more democratic governance and promote regional harmony. The elites in these oil countries will of course condemn any such redistribution of wealth. - Hossein Askari
This concludes a two-part report.
Part 1: The forgotten issues
THE MOGAMBO GURU
Banking on incompetence and theft
German President Horst Kohler has it in a nutshell when he says international financial markets have developed into a monster that must be put back in its place. We could start with the US central bank, which has cut the value of the dollar by almost 40% in six years.
US choke point for WHO
Developing countries desperate to get their hands on cheaper drugs to help cut the global death toll from infectious diseases and other ills take on the United States in Geneva this week in their latest effort to ease patent regulations in their favor.
CREDIT BUBBLE BULLETIN
A red herring
The issue of how past and present US Federal Reserve chairmen Alan Greenspan and Ben Bernanke erred in their disregard of credit bubble dynamics has become little more than a red herring at a time when central bankers must start bringing some order to international finance. Any change they institute will arrive only after a post-bubble impetus that is bringing back a destabilizing speculation that goes well beyond commodities markets.
Doug Noland reviews the previous week's events each Monday. (May 19, '08)
Banking on incompetence and theft German President Horst Kohler has it in a nutshell when he says international financial markets have developed into a monster that must be put back in its place. We could start with the US central bank, which has cut the value of the dollar by almost 40% in six years.
US choke point for WHO
Developing countries desperate to get their hands on cheaper drugs to help cut the global death toll from infectious diseases and other ills take on the United States in Geneva this week in their latest effort to ease patent regulations in their favor.
CREDIT BUBBLE BULLETIN
A red herring
The issue of how past and present US Federal Reserve chairmen Alan Greenspan and Ben Bernanke erred in their disregard of credit bubble dynamics has become little more than a red herring at a time when central bankers must start bringing some order to international finance. Any change they institute will arrive only after a post-bubble impetus that is bringing back a destabilizing speculation that goes well beyond commodities markets.
Doug Noland reviews the previous week's events each Monday. (May 19, '08)
Wall Street's Racket Has Gone Too Far, and We're Going to Pay the Heavy PriceJames Howard Kunstler, Kunstler.com
Corporate Accountability and WorkPlace: There's a great wish for American finance to return to business-as-usual happy days of high profits, but there's just too much debt to swallow.
The Meltdown Lowdown
Dean Baker
May 22, 2008 | web only
This week in economic news: The Senate decides to help struggling homeowners by taking money from low-income renters, the Federal Reserve has realized the economy is in trouble, and The Washington Post and The New York Times attack farm subsidies for both raising and lowering food prices at the same time.
Dean Baker
May 22, 2008 | web only
This week in economic news: The Senate decides to help struggling homeowners by taking money from low-income renters, the Federal Reserve has realized the economy is in trouble, and The Washington Post and The New York Times attack farm subsidies for both raising and lowering food prices at the same time.
U.S. Home Resales Drop, Inventories Rise to Record as Housing Woes Persist Sales of previously owned homes in the U.S. fell in April and the supply of unsold properties reached a record, signaling no let-up in the 27-month housing slump.
European Services, Manufacturing Growth Slowed on Oil, Euro Appreciation Europe's service and manufacturing industries expanded at the slowest pace in five years in May after oil prices surged, the euro appreciated to a record and banks became more reluctant to lend.
U.K. Economy Grows at the Weakest Pace Since 2005 as Construction Slumps The U.K. economy grew at the slowest pace since 2005 in the first quarter after higher credit costs hurt construction and business services slowed.
European Services, Manufacturing Growth Slowed on Oil, Euro Appreciation Europe's service and manufacturing industries expanded at the slowest pace in five years in May after oil prices surged, the euro appreciated to a record and banks became more reluctant to lend.
U.K. Economy Grows at the Weakest Pace Since 2005 as Construction Slumps The U.K. economy grew at the slowest pace since 2005 in the first quarter after higher credit costs hurt construction and business services slowed.
Paulson's Job-Growth Forecast May Come Up Short as Tax Rebate Effect Fades Treasury Secretary Henry Paulson's prediction that tax rebates will create half a million new jobs this year may come up short as the impact of the stimulus fades, according to a survey of economists.
Global Credit Crisis Will Persist, Blunting Inflation, UBS's Magnus Says The global credit crisis will persist until 2009, preventing faster inflation from getting out of control in major economies, said George Magnus, senior economic adviser at UBS AG's investment banking unit.
Home Resales in U.S. Fell in April to 4.89 Million Rate: Table of the Day Following is a summary of U.S. existing home sales from the National Association of Realtors.
Global Credit Crisis Will Persist, Blunting Inflation, UBS's Magnus Says The global credit crisis will persist until 2009, preventing faster inflation from getting out of control in major economies, said George Magnus, senior economic adviser at UBS AG's investment banking unit.
Home Resales in U.S. Fell in April to 4.89 Million Rate: Table of the Day Following is a summary of U.S. existing home sales from the National Association of Realtors.
Blame Wall Street for Oil at $135 a Barrel as Traders Cover Wrong-Way Bets Oil's rally to a record above $135 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange.
Secret JPMorgan Swaps Spur Criminal Probe as Default Stalks Alabama County As nighttime temperatures plunged in Birmingham, Alabama, last October, Dora Bonner had a choice: either pay the gas bill so she could heat the home she shares with four grandchildren, or send the Birmingham Water Works a $250 check for her water and sewer bill.
Secret JPMorgan Swaps Spur Criminal Probe as Default Stalks Alabama County As nighttime temperatures plunged in Birmingham, Alabama, last October, Dora Bonner had a choice: either pay the gas bill so she could heat the home she shares with four grandchildren, or send the Birmingham Water Works a $250 check for her water and sewer bill.
Oil Is Up Because the Dollar Is Down - David King, Wall Street Journal
Oil Producers Becoming Oil Consumers - R. Pagnamenta, Times of London
The Fed's Quiet Power Moves - Peter Coy, BusinessWeek
Inflation's Back on World Economic Scene - The Economist
Oil Producers Becoming Oil Consumers - R. Pagnamenta, Times of London
The Fed's Quiet Power Moves - Peter Coy, BusinessWeek
Inflation's Back on World Economic Scene - The Economist
A Run On Central Banks? - Steve Waldman, Interfluidity
Congress' Old Oil Habits Die Hard - James Picerno, Capital Spectator
Bond Market & Fed Funds, Together Again - Trader's Narrative
Congress' Old Oil Habits Die Hard - James Picerno, Capital Spectator
Bond Market & Fed Funds, Together Again - Trader's Narrative
After the Economic Slowdown - Rich Karlgaard, Forbes
Fed Concerns Reverberate on Wall Street - Michael Grynbaum, NY Times
The Fed and the Mortgage "Crisis" - William Isaac, Wall Street Journal
Taxes Matter, but Dollar Matters More - John Tamny, RealClearMarkets
Fed Concerns Reverberate on Wall Street - Michael Grynbaum, NY Times
The Fed and the Mortgage "Crisis" - William Isaac, Wall Street Journal
Taxes Matter, but Dollar Matters More - John Tamny, RealClearMarkets
Jim Rogers: Why the Dollar is Doomed
- Daily Telegraph
- Daily Telegraph
Watch Out Below: Credit Crisis Not Over - Robert Lenzner, Forbes
Home Prices Lowest in 17 Years time.com — U.S. home prices posted their sharpest first-quarter decline since the government began tracking the data 17 years ago. The Office of Federal Housing Enterprise Oversight said that home prices fell 3.1 percent in the first quarter compared with last year. The index also fell 1.7 percent from the fourth quarter of 2007 to the first quarter of 2008, the largest quarterly price drop on record.
BILL SCHER
Explaining An Economy Under Stress Research director Eric Lotke, in an interview with Bill Scher on his Liberal Oasis radio show, uses the Campaign For America's Future report "The Stress Test" to show how Bush administration policies have harmed the economy. The Stress Test offers vital statistics on the effects of rising living costs and disappearing jobs, and Lotke puts the figures in context.
Explaining An Economy Under Stress Research director Eric Lotke, in an interview with Bill Scher on his Liberal Oasis radio show, uses the Campaign For America's Future report "The Stress Test" to show how Bush administration policies have harmed the economy. The Stress Test offers vital statistics on the effects of rising living costs and disappearing jobs, and Lotke puts the figures in context.
Report: Inflation Will Stoke Riots guardian.co.uk — Riots, protests and political unrest could multiply in the developing world as soaring inflation widens the gap between the "haves" and the "have nots", an investment bank predicted yesterday. Economists at Merrill Lynch view inflation as an "accident waiting to happen." As prices for food and commodities surge, the bank expects global inflation to rise from 3.5 percent to 4.9 percent this year. In emerging markets, the average rate is to be 7.3 percent.
MARK WINSTON GRIFFITH
Surviving the Lived Economy dmiblog.com — Economists are trying to decide if the U.S. is facing a recession. Despite what they ultimately conclude, people are experiencing the pain of today's "lived economy" — the actual, day-to-day struggles that working class people are enduring — an experience that has yet to be adequately addressed in deed by Washington politicians.
Surviving the Lived Economy dmiblog.com — Economists are trying to decide if the U.S. is facing a recession. Despite what they ultimately conclude, people are experiencing the pain of today's "lived economy" — the actual, day-to-day struggles that working class people are enduring — an experience that has yet to be adequately addressed in deed by Washington politicians.
CREDIT BUBBLE BULLETIN
A red herring
The issue of how past and present US Federal Reserve chairmen Alan Greenspan and Ben Bernanke erred in their disregard of credit bubble dynamics has become little more than a red herring at a time when central bankers must start bringing some order to international finance. Any change they institute will arrive only after a post-bubble impetus that is bringing back a destabilizing speculation that goes well beyond commodities markets.
A red herring
The issue of how past and present US Federal Reserve chairmen Alan Greenspan and Ben Bernanke erred in their disregard of credit bubble dynamics has become little more than a red herring at a time when central bankers must start bringing some order to international finance. Any change they institute will arrive only after a post-bubble impetus that is bringing back a destabilizing speculation that goes well beyond commodities markets.
Merrill-Lynch sees U.S. giving nod for Gulf currency change In a report entitled "U.S. Green Light for the GCC", the U.S. investment bank said the United Arab Emirates and Qatar will probably move to a currency basket in the next few months, with their respective currencies appreciating 5% before the end of the year. Investors piled into Gulf currencies from Sept on speculation some of the states in the world's biggest oil-exporting region
THE BEAR'S LAIR
Invasion: Time to do something about oil
The US government will eventually have to respond to the recent fast increase in the oil price, which with similar gains in other commodities is both inflationary and recession-producing. A steep interest rate increase, the correct answer, won't happen. Invading another oil-producing country, and getting it right, is another option. - Martin Hutchinson (May 27, '08)
Invasion: Time to do something about oil
The US government will eventually have to respond to the recent fast increase in the oil price, which with similar gains in other commodities is both inflationary and recession-producing. A steep interest rate increase, the correct answer, won't happen. Invading another oil-producing country, and getting it right, is another option. - Martin Hutchinson (May 27, '08)
Self-inflicted US misery
Americans, increasingly miserable and faced with rising inflation and unemployment, have, contrary to the adage, little company in their unhappiness. Other economies are barely slowing or are rattling along at high speed. The US, having sold the ability to control its own economic destiny, may finally realize how self-inflicted its misery is.- Julian Delasantellis
Americans, increasingly miserable and faced with rising inflation and unemployment, have, contrary to the adage, little company in their unhappiness. Other economies are barely slowing or are rattling along at high speed. The US, having sold the ability to control its own economic destiny, may finally realize how self-inflicted its misery is.- Julian Delasantellis
Applauding the ridiculous For 25 years, the US Federal Reserve has kept inflation at an average of 3.2% a year and some people out there think the Fed deserves applause for that? You will go a long, long time before you hear something so ridiculous!
Dallas Fed Economist Says Loan Auctions Reduce Borrowing Costs for Banks A Federal Reserve economist said the central bank's auctions of cash loans to commercial banks have had a ``strong effect'' on reducing their borrowing costs, while new lending programs for securities firms may be less potent.
Fed Researchers Say Rate Cuts Risk `Unhinging' Expectations for Inflation The Federal Reserve's interest-rate reductions risk ``unhinging'' long-term market expectations for monetary policy and inflation, according to researchers at the Fed's district bank in Minneapolis.
Fed Signals Economic Contraction Won't Spur Rate Cut Amid Inflation Danger Federal Reserve policy makers signaled that an economic contraction in the first half won't be enough to spur further interest-rate cuts because of a rising threat from inflation.
Fed Researchers Say Rate Cuts Risk `Unhinging' Expectations for Inflation The Federal Reserve's interest-rate reductions risk ``unhinging'' long-term market expectations for monetary policy and inflation, according to researchers at the Fed's district bank in Minneapolis.
Fed Signals Economic Contraction Won't Spur Rate Cut Amid Inflation Danger Federal Reserve policy makers signaled that an economic contraction in the first half won't be enough to spur further interest-rate cuts because of a rising threat from inflation.
5/27/2008
Buffett Sees USA in Recession
- USA Today 5/27/2008
Recession Still Likely in US, Says Greenspan
- Financial Times 5/27/2008
Regulator Probes US Credit Rating Agencies
- Sydney Morning Herald 5/27/2008
US Home Prices Drop at Sharpest Rate in 20 Years
- Pittsburgh Post-Gazette 5/27/2008
DFW Homebuilders Feel Sting of Housing Slump
- Dallas Morning News 5/27/2008
Kept Busy By Maintaining Abandoned Homes
- New York Times 5/27/2008
U.S. Housing Crisis Takes a Toll on the Auto Industry
- International Herald Tribune 5/27/2008
Soaring Fuel Prices Take a Toll on Truckers
- New York Times 5/27/2008
Rising Prices Hit Home For Food Stamp Recipients
- Washington Post 5/27/2008
Food Banks Squeezed by Prices, Demand
- Seattle Times 5/27/2008
Grain Prices Grow, But So Do Risks
- Chicago Tribune
Buffett Sees USA in Recession
- USA Today 5/27/2008
Recession Still Likely in US, Says Greenspan
- Financial Times 5/27/2008
Regulator Probes US Credit Rating Agencies
- Sydney Morning Herald 5/27/2008
US Home Prices Drop at Sharpest Rate in 20 Years
- Pittsburgh Post-Gazette 5/27/2008
DFW Homebuilders Feel Sting of Housing Slump
- Dallas Morning News 5/27/2008
Kept Busy By Maintaining Abandoned Homes
- New York Times 5/27/2008
U.S. Housing Crisis Takes a Toll on the Auto Industry
- International Herald Tribune 5/27/2008
Soaring Fuel Prices Take a Toll on Truckers
- New York Times 5/27/2008
Rising Prices Hit Home For Food Stamp Recipients
- Washington Post 5/27/2008
Food Banks Squeezed by Prices, Demand
- Seattle Times 5/27/2008
Grain Prices Grow, But So Do Risks
- Chicago Tribune
It’s Not an Oil Crisis, It’s a Dollar Crisis.Friday, May 23, 2008
It is unfortunate that the Supreme Court, in its ruling this week that U.S. currency is unfair to the blind, did not make the next logical step and declare it unfair to everyone who buys gasoline.
Housing Crisis Stalls Auto Industry nytimes.com — The auto industry is getting sideswiped by the housing crisis. Auto lenders and banks are closing their wallets, preventing hundreds of thousands of consumers from obtaining the financing for a car. 
Foreclosures Trouble Communities nytimes.com — Local and state governments have become concerned about the upkeep of foreclosed homes, which can drag down real estate values in neighborhoods and provide havens for drug users and gangs. Over the last year, localities have stepped up code enforcement by levying fines on mortgage companies for the degradation of homes they are repossessing.
Gas Prices Slow Holiday Travel mcclatchydc.com — Surging fuel prices, reaching new records almost daily, are forcing many to rethink summer travel plans. A new Zogby poll of 8,600 adults found that one-third planned no vacation at all this summer, and 28 percent said they would spend less. Another survey found that the number of people expecting to travel by fall had dipped to a 30-year low.
Foreclosures Trouble Communities nytimes.com — Local and state governments have become concerned about the upkeep of foreclosed homes, which can drag down real estate values in neighborhoods and provide havens for drug users and gangs. Over the last year, localities have stepped up code enforcement by levying fines on mortgage companies for the degradation of homes they are repossessing.
Gas Prices Slow Holiday Travel mcclatchydc.com — Surging fuel prices, reaching new records almost daily, are forcing many to rethink summer travel plans. A new Zogby poll of 8,600 adults found that one-third planned no vacation at all this summer, and 28 percent said they would spend less. Another survey found that the number of people expecting to travel by fall had dipped to a 30-year low.
JEAN-MICHEL BEZAT
Oil: Power Has Changed Sides truthout.org — In the beginning of the 1970s, no one imagined that one day an American president would be reduced to begging the king of Saudi Arabia for an increase in the Organization of Petroleum Exporting Countries' production to bring down prices. Yet the West has reached that point.
Oil: Power Has Changed Sides truthout.org — In the beginning of the 1970s, no one imagined that one day an American president would be reduced to begging the king of Saudi Arabia for an increase in the Organization of Petroleum Exporting Countries' production to bring down prices. Yet the West has reached that point.
U.S. Consumer Confidence Falls as Home-Price Drop Shows No Sign of Abating Confidence among American consumers fell in May to the lowest level since 1992 as the two-year housing slump showed no sign of bottoming.
Lehman, Goldman Sachs, Morgan Estimates Cut by Bank of America, Bernstein Lehman Brothers Holdings Inc., Morgan Stanley and Goldman Sachs Group Inc. had their second-quarter profit estimates cut by Bank of America Corp. and Sanford C. Bernstein analysts on the risk of further asset writedowns.
GM Declines to Lowest in 26 Years as Citigroup Cuts Rating on Energy Costs General Motors Corp. fell to the lowest since 1982 after Citigroup Inc. cut its rating on the world's largest automaker to ``hold'' from ``buy,'' citing ``cash-burn risks'' as raw-materials costs rise.
Oil Falls More Than $3 a Barrel as Record Energy Prices Limit U.S. Demand Crude oil fell more than $3 a barrel in New York, the biggest decline since April, on signs that U.S. fuel consumption is dropping because of a slowing economy and record energy prices.
Corn Signals Biggest Beef Price Surge Since '03 as Cattle Supplies Dwindle Enjoy your next steak, because prices from Shanghai to San Francisco are only going up.
Cheapest European Stocks Since '02 to U.S. Getting Cheaper as Profit Dims European stocks are the cheapest in at least six years versus U.S. equities, and may only get cheaper as the majority of companies in the region miss earnings estimates.
Lehman, Goldman Sachs, Morgan Estimates Cut by Bank of America, Bernstein Lehman Brothers Holdings Inc., Morgan Stanley and Goldman Sachs Group Inc. had their second-quarter profit estimates cut by Bank of America Corp. and Sanford C. Bernstein analysts on the risk of further asset writedowns.
GM Declines to Lowest in 26 Years as Citigroup Cuts Rating on Energy Costs General Motors Corp. fell to the lowest since 1982 after Citigroup Inc. cut its rating on the world's largest automaker to ``hold'' from ``buy,'' citing ``cash-burn risks'' as raw-materials costs rise.
Oil Falls More Than $3 a Barrel as Record Energy Prices Limit U.S. Demand Crude oil fell more than $3 a barrel in New York, the biggest decline since April, on signs that U.S. fuel consumption is dropping because of a slowing economy and record energy prices.
Corn Signals Biggest Beef Price Surge Since '03 as Cattle Supplies Dwindle Enjoy your next steak, because prices from Shanghai to San Francisco are only going up.
Cheapest European Stocks Since '02 to U.S. Getting Cheaper as Profit Dims European stocks are the cheapest in at least six years versus U.S. equities, and may only get cheaper as the majority of companies in the region miss earnings estimates.
US-made oil disaster has mileage
Numerous factors, from speculation to poor infrastructure, are at play in the recent strong gains in the price of oil. Yet behind many is the hand and policies of the United States. A change in Washington's behavior would resolve more than just the price issue. - Hossein Askari and Noureddine Krichene
WTO's formula for failure
Attempts to reach a comprehensive new global trade agreement continue their lamentable history of non-progress. Nor is success likely unless the industrialized nations take greater account of the growing interests of China, India and other fast-developing nations. - Raja M
Numerous factors, from speculation to poor infrastructure, are at play in the recent strong gains in the price of oil. Yet behind many is the hand and policies of the United States. A change in Washington's behavior would resolve more than just the price issue. - Hossein Askari and Noureddine Krichene
WTO's formula for failure
Attempts to reach a comprehensive new global trade agreement continue their lamentable history of non-progress. Nor is success likely unless the industrialized nations take greater account of the growing interests of China, India and other fast-developing nations. - Raja M
The Financial Sector Roadblockby Doug FabianSo, what caused the sharp retreat in equities last week? As I've pointed out so many times during the past year, the culprit that keeps plaguing the overall market is the pernicious slide in financials. To see just how uncomfortable the slide in financials has been, take a peek at the chart below of the Financials Select Sector SPDR (XLF)...
Sell in May And Go Away? by Nicholas A. VardyWith the unofficial advent of the summer of 2008 this past Memorial Day weekend, you may be wondering whether the market rally is set to continue or whether it's time to "Sell in May and go away?" It turns out that this old traders' saw has more than a grain of truth. Since 1950, the Dow has risen 0.3% on average in the May-to-October period.
Slippin' and Slidin' On an Oil Slickby Doug FabianStocks have fallen back below their long-term, 200-day moving averages following a heavy, two-day sell off caused in large part by one thing: surging oil prices...
Sell in May And Go Away? by Nicholas A. VardyWith the unofficial advent of the summer of 2008 this past Memorial Day weekend, you may be wondering whether the market rally is set to continue or whether it's time to "Sell in May and go away?" It turns out that this old traders' saw has more than a grain of truth. Since 1950, the Dow has risen 0.3% on average in the May-to-October period.
Slippin' and Slidin' On an Oil Slickby Doug FabianStocks have fallen back below their long-term, 200-day moving averages following a heavy, two-day sell off caused in large part by one thing: surging oil prices...
DAVID CORN
Foreclosure Phil motherjones.com — Years before Phil Gramm was a McCain campaign adviser and a lobbyist for a Swiss bank at the center of the housing credit crisis, he pulled a sly maneuver in the Senate that helped create today's subprime meltdown.
Foreclosure Phil motherjones.com — Years before Phil Gramm was a McCain campaign adviser and a lobbyist for a Swiss bank at the center of the housing credit crisis, he pulled a sly maneuver in the Senate that helped create today's subprime meltdown.
Paulson Appeals to Oil Producers hosted.ap.org — Treasury Secretary Henry Paulson will tell officials of Saudi Arabia — who recently rebuffed the president's request to increase oil production — and other Middle East oil producing nations that soaring oil prices are putting a "significant burden" on the global economy, a senior Treasury official. David McCormick, Treasury's undersecretary for international affairs, said that Paulson in an upcoming trip will be promoting increased foreign investment in oil production as a way of boosting supplies.
U.S. Economy: The Worst is Yet to ComeMark Weisbrot, Huffington Post
Corporate Accountability and WorkPlace: Nobody can predict exactly where the bottom will be, but it's clear that we're not even close to hitting it.
April 27, 2008
Triple-A Failure
By ROGER LOWENSTEIN
The Ratings Game
http://www.nytimes.com/2008/04/27/magazine...agewanted=print
In 1996, Thomas Friedman, the New York Times columnist, remarked on “The NewsHour With Jim Lehrer” that there were two superpowers in the world — the United States and Moody’s bond-rating service — and it was sometimes unclear which was more powerful. Moody’s was then a private company that rated corporate bonds, but it was, already, spreading its wings into the exotic business of rating securities backed by pools of residential mortgages.
Obscure and dry-seeming as it was, this business offered a certain magic. The magic consisted of turning risky mortgages into investments that would be suitable for investors who would know nothing about the underlying loans. To get why this is impressive, you have to think about all that determines whether a mortgage is safe. Who owns the property? What is his or her income? Bundle hundreds of mortgages into a single security and the questions multiply; no investor could begin to answer them. But suppose the security had a rating. If it were rated triple-A by a firm like Moody’s, then the investor could forget about the underlying mortgages. He wouldn’t need to know what properties were in the pool, only that the pool was triple-A — it was just as safe, in theory, as other triple-A securities.
Over the last decade, Moody’s and its two principal competitors, Standard & Poor’s and Fitch, played this game to perfection — putting what amounted to gold seals on mortgage securities that investors swept up with increasing élan. For the rating agencies, this business was extremely lucrative. Their profits surged, Moody’s in particular: it went public, saw its stock increase sixfold and its earnings grow by 900 percent.
By providing the mortgage industry with an entree to Wall Street, the agencies also transformed what had been among the sleepiest corners of finance. No longer did mortgage banks have to wait 10 or 20 or 30 years to get their money back from homeowners. Now they sold their loans into securitized pools and — their capital thus replenished — wrote new loans at a much quicker pace.
Mortgage volume surged; in 2006, it topped $2.5 trillion. Also, many more mortgages were issued to risky subprime borrowers. Almost all of those subprime loans ended up in securitized pools; indeed, the reason banks were willing to issue so many risky loans is that they could fob them off on Wall Street.
But who was evaluating these securities? Who was passing judgment on the quality of the mortgages, on the equity behind them and on myriad other investment considerations? Certainly not the investors. They relied on a credit rating.
Thus the agencies became the de facto watchdog over the mortgage industry. In a practical sense, it was Moody’s and Standard & Poor’s that set the credit standards that determined which loans Wall Street could repackage and, ultimately, which borrowers would qualify. Effectively, they did the job that was expected of banks and government regulators. And today, they are a central culprit in the mortgage bust, in which the total loss has been projected at $250 billion and possibly much more.
In the wake of the housing collapse, Congress is exploring why the industry failed and whether it should be revamped (hearings in the Senate Banking Committee were expected to begin April 22). Two key questions are whether the credit agencies — which benefit from a unique series of government charters — enjoy too much official protection and whether their judgment was tainted. Presumably to forestall criticism and possible legislation, Moody’s and S.&P. have announced reforms. But they reject the notion that they should have been more vigilant. Instead, they lay the blame on the mortgage holders who turned out to be deadbeats, many of whom lied to obtain their loans.
Arthur Levitt, the former chairman of the Securities and Exchange Commission, charges that “the credit-rating agencies suffer from a conflict of interest — perceived and apparent — that may have distorted their judgment, especially when it came to complex structured financial products.” Frank Partnoy, a professor at the University of San Diego School of Law who has written extensively about the credit-rating industry, says that the conflict is a serious problem. Thanks to the industry’s close relationship with the banks whose securities it rates, Partnoy says, the agencies have behaved less like gatekeepers than gate openers. Last year, Moody’s had to downgrade more than 5,000 mortgage securities — a tacit acknowledgment that the mortgage bubble was abetted by its overly generous ratings. Mortgage securities rated by Standard & Poor’s and Fitch have suffered a similar wave of downgrades.
Presto! How 2,393 Subprime Loans Become a High-Grade Investment
The business of assigning a rating to a mortgage security is a complicated affair, and Moody’s recently was willing to walk me through an actual mortgage-backed security step by step. I was led down a carpeted hallway to a well-appointed conference room to meet with three specialists in mortgage-backed paper. Moody’s was fair-minded in choosing an example; the case they showed me, which they masked with the name “Subprime XYZ,” was a pool of 2,393 mortgages with a total face value of $430 million.
Subprime XYZ typified the exuberance of the age. All the mortgages in the pool were subprime — that is, they had been extended to borrowers with checkered credit histories. In an earlier era, such people would have been restricted from borrowing more than 75 percent or so of the value of their homes, but during the great bubble, no such limits applied.
Moody’s did not have access to the individual loan files, much less did it communicate with the borrowers or try to verify the information they provided in their loan applications. “We aren’t loan officers,” Claire Robinson, a 20-year veteran who is in charge of asset-backed finance for Moody’s, told me. “Our expertise is as statisticians on an aggregate basis. We want to know, of 1,000 individuals, based on historical performance, what percent will pay their loans?”
The loans in Subprime XYZ were issued in early spring 2006 — what would turn out to be the peak of the boom. They were originated by a West Coast company that Moody’s identified as a “nonbank lender.” Traditionally, people have gotten their mortgages from banks, but in recent years, new types of lenders peddling sexier products grabbed an increasing share of the market. This particular lender took the loans it made to a New York investment bank; the bank designed an investment vehicle and brought the package to Moody’s.
Moody’s assigned an analyst to evaluate the package, subject to review by a committee. The investment bank provided an enormous spreadsheet chock with data on the borrowers’ credit histories and much else that might, at very least, have given Moody’s pause. Three-quarters of the borrowers had adjustable-rate mortgages, or ARMs — “teaser” loans on which the interest rate could be raised in short order. Since subprime borrowers cannot afford higher rates, they would need to refinance soon. This is a classic sign of a bubble — lending on the belief, or the hope, that new money will bail out the old.
Moody’s learned that almost half of these borrowers — 43 percent — did not provide written verification of their incomes. The data also showed that 12 percent of the mortgages were for properties in Southern California, including a half-percent in a single ZIP code, in Riverside. That suggested a risky degree of concentration.
On the plus side, Moody’s noted, 94 percent of those borrowers with adjustable-rate loans said their mortgages were for primary residences. “That was a comfort feeling,” Robinson said. Historically, people have been slow to abandon their primary homes. When you get into a crunch, she added, “You’ll give up your ski chalet first.”
Another factor giving Moody’s comfort was that all of the ARM loans in the pool were first mortgages (as distinct from, say, home-equity loans). Nearly half of the borrowers, however, took out a simultaneous second loan. Most often, their two loans added up to all of their property’s presumed resale value, which meant the borrowers had not a cent of equity.
In the frenetic, deal-happy climate of 2006, the Moody’s analyst had only a single day to process the credit data from the bank. The analyst wasn’t evaluating the mortgages but, rather, the bonds issued by the investment vehicle created to house them. A so-called special-purpose vehicle — a ghost corporation with no people or furniture and no assets either until the deal was struck — would purchase the mortgages. Thereafter, monthly payments from the homeowners would go to the S.P.V. The S.P.V. would finance itself by selling bonds. The question for Moody’s was whether the inflow of mortgage checks would cover the outgoing payments to bondholders. From the investment bank’s point of view, the key to the deal was obtaining a triple-A rating — without which the deal wouldn’t be profitable. That a vehicle backed by subprime mortgages could borrow at triple-A rates seems like a trick of finance. “People say, ‘How can you create triple-A out of B-rated paper?’ ” notes Arturo Cifuentes, a former Moody’s credit analyst who now designs credit instruments. It may seem like a scam, but it’s not.
The secret sauce is that the S.P.V. would float 12 classes of bonds, from triple-A to a lowly Ba1. The highest-rated bonds would have first priority on the cash received from mortgage holders until they were fully paid, then the next tier of bonds, then the next and so on. The bonds at the bottom of the pile got the highest interest rate, but if homeowners defaulted, they would absorb the first losses.
It was this segregation of payments that protected the bonds at the top of the structure and enabled Moody’s to classify them as triple-A. Imagine a seaside condo beset by flooding: just as the penthouse will not get wet until the lower floors are thoroughly soaked, so the triple-A bonds would not lose a dime unless the lower credits were wiped out.
Structured finance, of which this deal is typical, is both clever and useful; in the housing industry it has greatly expanded the pool of credit. But in extreme conditions, it can fail. The old-fashioned corner banker used his instincts, as well as his pencil, to apportion credit; modern finance is formulaic. However elegant its models, forecasting the behavior of 2,393 mortgage holders is an uncertain business. “Everyone assumed the credit agencies knew what they were doing,” says Joseph Mason, a credit expert at Drexel University. “A structural engineer can predict what load a steel support will bear; in financial engineering we can’t predict as well.”
Mortgage-backed securities like those in Subprime XYZ were not the terminus of the great mortgage machine. They were, in fact, building blocks for even more esoteric vehicles known as collateralized debt obligations, or C.D.O.’s. C.D.O.’s were financed with similar ladders of bonds, from triple-A on down, and the credit-rating agencies’ role was just as central. The difference is that XYZ was a first-order derivative — its assets included real mortgages owned by actual homeowners. C.D.O.’s were a step removed — instead of buying mortgages, they bought bonds that were backed by mortgages, like the bonds issued by Subprime XYZ. (It is painful to consider, but there were also third-order instruments, known as C.D.O.’s squared, which bought bonds issued by other C.D.O.’s.)
Miscalculations that were damaging at the level of Subprime XYZ were devastating at the C.D.O. level. Just as bad weather will cause more serious delays to travelers with multiple flights, so, if the underlying mortgage bonds were misrated, the trouble was compounded in the case of the C.D.O.’s that purchased them.
Moody’s used statistical models to assess C.D.O.’s; it relied on historical patterns of default. This assumed that the past would remain relevant in an era in which the mortgage industry was morphing into a wildly speculative business. The complexity of C.D.O.’s undermined the process as well. Jamie Dimon, the chief executive of JPMorgan Chase, which recently scooped up the mortally wounded Bear Stearns, says, “There was a large failure of common sense” by rating agencies and also by banks like his. “Very complex securities shouldn’t have been rated as if they were easy-to-value bonds.”
The Accidental Watchdog
John Moody, a Wall Street analyst and former errand runner, hit on the idea of synthesizing all kinds of credit information into a single rating in 1909, when he published the manual “Moody’s Analyses of Railroad Investments.” The idea caught on with investors, who subscribed to his service, and by the mid-’20s, Moody’s faced three competitors: Standard Statistics and Poor’s Publishing (which later merged) and Fitch.
Then as now, Moody’s graded bonds on a scale with 21 steps, from Aaa to C. (There are small differences in the agencies’ nomenclatures, just as a grande latte at Starbucks becomes a “medium” at Peet’s. At Moody’s, ratings that start with the letter “A” carry minimal to low credit risk; those starting with “B” carry moderate to high risk; and “C” ratings denote bonds in poor standing or actual default.) The ratings are meant to be an estimate of probabilities, not a buy or sell recommendation. For instance, Ba bonds default far more often than triple-As. But Moody’s, as it is wont to remind people, is not in the business of advising investors whether to buy Ba’s; it merely publishes a rating.
Until the 1970s, its business grew slowly. But several trends coalesced to speed it up. The first was the collapse of Penn Central in 1970 — a shattering event that the credit agencies failed to foresee. It so unnerved investors that they began to pay more attention to credit risk.
Government responded. The Securities and Exchange Commission, faced with the question of how to measure the capital of broker-dealers, decided to penalize brokers for holding bonds that were less than investment-grade (the term applies to Moody’s 10 top grades). This prompted a question: investment grade according to whom? The S.E.C. opted to create a new category of officially designated rating agencies, and grandfathered the big three — S.&P., Moody’s and Fitch. In effect, the government outsourced its regulatory function to three for-profit companies.
Bank regulators issued similar rules for banks. Pension funds, mutual funds, insurance regulators followed. Over the ’80s and ’90s, a latticework of such rules redefined credit markets. Many classes of investors were now forbidden to buy noninvestment-grade bonds at all.
Issuers thus were forced to seek credit ratings (or else their bonds would not be marketable). The agencies — realizing they had a hot product and, what’s more, a captive market — started charging the very organizations whose bonds they were rating. This was an efficient way to do business, but it put the agencies in a conflicted position. As Partnoy says, rather than selling opinions to investors, the rating agencies were now selling “licenses” to borrowers. Indeed, whether their opinions were accurate no longer mattered so much. Just as a police officer stopping a motorist will want to see his license but not inquire how well he did on his road test, it was the rating — not its accuracy — that mattered to Wall Street.
The case of Enron is illustrative. Throughout the summer and fall of 2001, even though its credit was rapidly deteriorating, the rating agencies kept it at investment grade. This was not unusual; the agencies typically lag behind the news. On Nov. 28, 2001, S.&P. finally dropped Enron’s bonds to subinvestment grade. Although its action merely validated the market consensus, it caused the stock to collapse. To investors, S.&P.’s action was a signal that Enron was locked out of credit markets; it had lost its “license” to borrow. Four days later it filed for bankruptcy.
Another trend that spurred the agencies’ growth was that more companies began borrowing in bond markets instead of from banks. According to Chris Mahoney, a just-retired Moody’s veteran of 22 years, “The agencies went from being obscure and unimportant players to central ones.”
A Conflict of Interest?
Nothing sent the agencies into high gear as much as the development of structured finance. As Wall Street bankers designed ever more securitized products — using mortgages, credit-card debt, car loans, corporate debt, every type of paper imaginable — the agencies became truly powerful.
In structured-credit vehicles like Subprime XYZ, the agencies played a much more pivotal role than they had with (conventional) bonds. According to Lewis Ranieri, the Salomon Brothers banker who was a pioneer in mortgage bonds, “The whole creation of mortgage securities was involved with a rating.”
What the bankers in these deals are really doing is buying a bunch of I.O.U.’s and repackaging them in a different form. Something has to make the package worth — or seem to be worth — more that the sum of its parts, otherwise there would be no point in packaging such securities, nor would there be any profits from which to pay the bankers’ fees.
That something is the rating. Credit markets are not continuous; a bond that qualifies, though only by a hair, as investment grade is worth a lot more than one that just fails. As with a would-be immigrant traveling from Mexico, there is a huge incentive to get over the line.
The challenge to investment banks is to design securities that just meet the rating agencies’ tests. Risky mortgages serve their purpose; since the interest rate on them is higher, more money comes into the pool and is available for paying bond interest. But if the mortgages are too risky, Moody’s will object. Banks are adroit at working the system, and pools like Subprime XYZ are intentionally designed to include a layer of Baa bonds, or those just over the border. “Every agency has a model available to bankers that allows them to run the numbers until they get something they like and send it in for a rating,” a former Moody’s expert in securitization says. In other words, banks were gaming the system; according to Chris Flanagan, the subprime analyst at JPMorgan, “Gaming is the whole thing.”
When a bank proposes a rating structure on a pool of debt, the rating agency will insist on a cushion of extra capital, known as an “enhancement.” The bank inevitably lobbies for a thin cushion (the thinner the capitalization, the fatter the bank’s profits). It’s up to the agency to make sure that the cushion is big enough to safeguard the bonds. The process involves extended consultations between the agency and its client. In short, obtaining a rating is a collaborative process.
The evidence on whether rating agencies bend to the bankers’ will is mixed. The agencies do not deny that a conflict exists, but they assert that they are keen to the dangers and minimize them. For instance, they do not reward analysts on the basis of whether they approve deals. No smoking gun, no conspiratorial e-mail message, has surfaced to suggest that they are lying. But in structured finance, the agencies face pressures that did not exist when John Moody was rating railroads. On the traditional side of the business, Moody’s has thousands of clients (virtually every corporation and municipality that sells bonds). No one of them has much clout. But in structured finance, a handful of banks return again and again, paying much bigger fees. A deal the size of XYZ can bring Moody’s $200,000 and more for complicated deals. And the banks pay only if Moody’s delivers the desired rating. Tom McGuire, the Jesuit theologian who ran Moody’s through the mid-’90s, says this arrangement is unhealthy. If Moody’s and a client bank don’t see eye to eye, the bank can either tweak the numbers or try its luck with a competitor like S.&P., a process known as “ratings shopping.”
And it seems to have helped the banks get better ratings. Mason, of Drexel University, compared default rates for corporate bonds rated Baa with those of similarly rated collateralized debt obligations until 2005 (before the bubble burst). Mason found that the C.D.O.’s defaulted eight times as often. One interpretation of the data is that Moody’s was far less discerning when the client was a Wall Street securitizer.
After Enron blew up, Congress ordered the S.E.C. to look at the rating industry and possibly reform it. The S.E.C. ducked. Congress looked again in 2006 and enacted a law making it easier for competing agencies to gain official recognition, but didn’t change the industry’s business model. By then, the mortgage boom was in high gear. From 2002 to 2006, Moody’s profits nearly tripled, mostly thanks to the high margins the agencies charged in structured finance. In 2006, Moody’s reported net income of $750 million. Raymond W. McDaniel Jr., its chief executive, gloated in the annual report for that year, “I firmly believe that Moody’s business stands on the ‘right side of history’ in terms of the alignment of our role and function with advancements in global capital markets.”
Using Weather in Antarctica To Forecast Conditions in Hawaii
Even as McDaniel was crowing, it was clear in some corners of Wall Street that the mortgage market was headed for trouble. The housing industry was cooling off fast. James Kragenbring, a money manager with Advantus Capital Management, complained to the agencies as early as 2005 that their ratings were too generous. A report from the hedge fund of John Paulson proclaimed astonishment at “the mispricing of these securities.” He started betting that mortgage debt would crash.
Even Mark Zandi, the very visible economist at Moody’s forecasting division (which is separate from the ratings side), was worried about the chilling crosswinds blowing in credit markets. In a report published in May 2006, he noted that consumer borrowing had soared, household debt was at a record and a fifth of such debt was classified as subprime. At the same time, loan officers were loosening underwriting standards and easing rates to offer still more loans. Zandi fretted about the “razor-thin” level of homeowners’ equity, the avalanche of teaser mortgages and the $750 billion of mortgages he judged to be at risk. Zandi concluded, “The environment feels increasingly ripe for some type of financial event.”
A month after Zandi’s report, Moody’s rated Subprime XYZ. The analyst on the deal also had concerns. Moody’s was aware that mortgage standards had been deteriorating, and it had been demanding more of a cushion in such pools. Nonetheless, its credit-rating model continued to envision rising home values. Largely for that reason, the analyst forecast losses for XYZ at only 4.9 percent of the underlying mortgage pool. Since even the lowest-rated bonds in XYZ would be covered up to a loss level of 7.25 percent, the bonds seemed safe.
XYZ now became the responsibility of a Moody’s team that monitors securities and changes the ratings if need be (the analyst moved on to rate a new deal). Almost immediately, the team noticed a problem. Usually, people who finance a home stay current on their payments for at least a while. But a sliver of folks in XYZ fell behind within 90 days of signing their papers. After six months, an alarming 6 percent of the mortgages were seriously delinquent. (Historically, it is rare for more than 1 percent of mortgages at that stage to be delinquent.)
Moody’s monitors began to make inquiries with the lender and were shocked by what they heard. Some properties lacked sod or landscaping, and keys remained in the mailbox; the buyers had never moved in. The implication was that people had bought homes on spec: as the housing market turned, the buyers walked.
By the spring of 2007, 13 percent of Subprime XYZ was delinquent — and it was worsening by the month. XYZ was hardly atypical; the entire class of 2006 was performing terribly. (The class of 2007 would turn out to be even worse.)
In April 2007, Moody’s announced it was revising the model it used to evaluate subprime mortgages. It noted that the model “was first introduced in 2002. Since then, the mortgage market has evolved considerably.” This was a rather stunning admission; its model had been based on a world that no longer existed.
Poring over the data, Moody’s discovered that the size of people’s first mortgages was no longer a good predictor of whether they would default; rather, it was the size of their first and second loans — that is, their total debt — combined. This was rather intuitive; Moody’s simply hadn’t reckoned on it. Similarly, credit scores, long a mainstay of its analyses, had not proved to be a “strong predictor” of defaults this time. Translation: even people with good credit scores were defaulting. Amy Tobey, leader of the team that monitored XYZ, told me, “It seems there was a shift in mentality; people are treating homes as investment assets.” Indeed. And homeowners without equity were making what economists call a rational choice; they were abandoning properties rather than make payments on them. Homeowners’ equity had never been as high as believed because appraisals had been inflated.
Over the summer and fall of 2007, Moody’s and the other agencies repeatedly tightened their methodology for rating mortgage securities, but it was too late. They had to downgrade tens of billions of dollars of securities. By early this year, when I met with Moody’s, an astonishing 27 percent of the mortgage holders in Subprime XYZ were delinquent. Losses on the pool were now estimated at 14 percent to 16 percent — three times the original estimate. Seemingly high-quality bonds rated A3 by Moody’s had been downgraded five notches to Ba2, as had the other bonds in the pool aside from its triple-A’s.
The pain didn’t stop there. Many of the lower-rated bonds issued by XYZ, and by mortgage pools like it, were purchased by C.D.O.’s, the second-order mortgage vehicles, which were eager to buy lower-rated mortgage paper because it paid a higher yield. As the agencies endowed C.D.O. securities with triple-A ratings, demand for them was red hot. Much of it was from global investors who knew nothing about the U.S. mortgage market. In 2006 and 2007, the banks created more than $200 billion of C.D.O.’s backed by lower-rated mortgage paper. Moody’s assigned a different team to rate C.D.O.’s. This team knew far less about the underlying mortgages than did the committee that evaluated Subprime XYZ. In fact, Moody’s rated C.D.O.’s without knowing which bonds the pool would buy.
A C.D.O. operates like a mutual fund; it can buy or sell mortgage bonds and frequently does so. Thus, the agencies rate pools with assets that are perpetually shifting. They base their ratings on an extensive set of guidelines or covenants that limit the C.D.O. manager’s discretion.
Late in 2006, Moody’s rated a C.D.O. with $750 million worth of securities. The covenants, which act as a template, restricted the C.D.O. to, at most, an 80 percent exposure to subprime assets, and many other such conditions. “We’re structure experts,” Yuri Yoshizawa, the head of Moody’s’ derivative group, explained. “We’re not underlying-asset experts.” They were checking the math, not the mortgages. But no C.D.O. can be better than its collateral.
Moody’s rated three-quarters of this C.D.O.’s bonds triple-A. The ratings were derived using a mathematical construct known as a Monte Carlo simulation — as if each of the underlying bonds would perform like cards drawn at random from a deck of mortgage bonds in the past. There were two problems with this approach. First, the bonds weren’t like those in the past; the mortgage market had changed. As Mark Adelson, a former managing director in Moody’s structured-finance division, remarks, it was “like observing 100 years of weather in Antarctica to forecast the weather in Hawaii.” And second, the bonds weren’t random. Moody’s had underestimated the extent to which underwriting standards had weakened everywhere. When one mortgage bond failed, the odds were that others would, too.
Moody’s estimated that this C.D.O. could potentially incur losses of 2 percent. It has since revised its estimate to 27 percent. The bonds it rated have been decimated, their market value having plunged by half or more. A triple-A layer of bonds has been downgraded 16 notches, all the way to B. Hundreds of C.D.O.’s have suffered similar fates (most of Wall Street’s losses have been on C.D.O.’s). For Moody’s and the other rating agencies, it has been an extraordinary rout.
Whom Can We Rely On?
The agencies have blamed the large incidence of fraud, but then they could have demanded verification of the mortgage data or refused to rate securities where the data were not provided. That was, after all, their mandate. This is what they pledge for the future. Moody’s, S.&P. and Fitch say that they are tightening procedures — they will demand more data and more verification and will subject their analysts to more outside checks. None of this, however, will remove the conflict of interest in the issuer-pays model. Though some have proposed requiring that agencies with official recognition charge investors, rather than issuers, a more practical reform may be for the government to stop certifying agencies altogether.
Then, if the Fed or other regulators wanted to restrict what sorts of bonds could be owned by banks, or by pension funds or by anyone else in need of protection, they would have to do it themselves — not farm the job out to Moody’s. The ratings agencies would still exist, but stripped of their official imprimatur, their ratings would lose a little of their aura, and investors might trust in them a bit less. Moody’s itself favors doing away with the official designation, and it, like S.&P., embraces the idea that investors should not “rely” on ratings for buy-and-sell decisions.
This leaves an awkward question, with respect to insanely complex structured securities: What can they rely on? The agencies seem utterly too involved to serve as a neutral arbiter, and the banks are sure to invent new and equally hard-to-assess vehicles in the future. Vickie Tillman, the executive vice president of S.&P., told Congress last fall that in addition to the housing slump, “ahistorical behavorial modes” by homeowners were to blame for the wave of downgrades. She cited S.&P.’s data going back to the 1970s, as if consumers were at fault for not living up to the past. The real problem is that the agencies’ mathematical formulas look backward while life is lived forward. That is unlikely to change.
Roger Lowenstein, a contributing writer, last wrote for the magazine about the Federal Reserve chief, Ben Bernanke. His new book, “While
America Aged,” will be published next month.
Triple-A Failure
By ROGER LOWENSTEIN
The Ratings Game
http://www.nytimes.com/2008/04/27/magazine...agewanted=print
In 1996, Thomas Friedman, the New York Times columnist, remarked on “The NewsHour With Jim Lehrer” that there were two superpowers in the world — the United States and Moody’s bond-rating service — and it was sometimes unclear which was more powerful. Moody’s was then a private company that rated corporate bonds, but it was, already, spreading its wings into the exotic business of rating securities backed by pools of residential mortgages.
Obscure and dry-seeming as it was, this business offered a certain magic. The magic consisted of turning risky mortgages into investments that would be suitable for investors who would know nothing about the underlying loans. To get why this is impressive, you have to think about all that determines whether a mortgage is safe. Who owns the property? What is his or her income? Bundle hundreds of mortgages into a single security and the questions multiply; no investor could begin to answer them. But suppose the security had a rating. If it were rated triple-A by a firm like Moody’s, then the investor could forget about the underlying mortgages. He wouldn’t need to know what properties were in the pool, only that the pool was triple-A — it was just as safe, in theory, as other triple-A securities.
Over the last decade, Moody’s and its two principal competitors, Standard & Poor’s and Fitch, played this game to perfection — putting what amounted to gold seals on mortgage securities that investors swept up with increasing élan. For the rating agencies, this business was extremely lucrative. Their profits surged, Moody’s in particular: it went public, saw its stock increase sixfold and its earnings grow by 900 percent.
By providing the mortgage industry with an entree to Wall Street, the agencies also transformed what had been among the sleepiest corners of finance. No longer did mortgage banks have to wait 10 or 20 or 30 years to get their money back from homeowners. Now they sold their loans into securitized pools and — their capital thus replenished — wrote new loans at a much quicker pace.
Mortgage volume surged; in 2006, it topped $2.5 trillion. Also, many more mortgages were issued to risky subprime borrowers. Almost all of those subprime loans ended up in securitized pools; indeed, the reason banks were willing to issue so many risky loans is that they could fob them off on Wall Street.
But who was evaluating these securities? Who was passing judgment on the quality of the mortgages, on the equity behind them and on myriad other investment considerations? Certainly not the investors. They relied on a credit rating.
Thus the agencies became the de facto watchdog over the mortgage industry. In a practical sense, it was Moody’s and Standard & Poor’s that set the credit standards that determined which loans Wall Street could repackage and, ultimately, which borrowers would qualify. Effectively, they did the job that was expected of banks and government regulators. And today, they are a central culprit in the mortgage bust, in which the total loss has been projected at $250 billion and possibly much more.
In the wake of the housing collapse, Congress is exploring why the industry failed and whether it should be revamped (hearings in the Senate Banking Committee were expected to begin April 22). Two key questions are whether the credit agencies — which benefit from a unique series of government charters — enjoy too much official protection and whether their judgment was tainted. Presumably to forestall criticism and possible legislation, Moody’s and S.&P. have announced reforms. But they reject the notion that they should have been more vigilant. Instead, they lay the blame on the mortgage holders who turned out to be deadbeats, many of whom lied to obtain their loans.
Arthur Levitt, the former chairman of the Securities and Exchange Commission, charges that “the credit-rating agencies suffer from a conflict of interest — perceived and apparent — that may have distorted their judgment, especially when it came to complex structured financial products.” Frank Partnoy, a professor at the University of San Diego School of Law who has written extensively about the credit-rating industry, says that the conflict is a serious problem. Thanks to the industry’s close relationship with the banks whose securities it rates, Partnoy says, the agencies have behaved less like gatekeepers than gate openers. Last year, Moody’s had to downgrade more than 5,000 mortgage securities — a tacit acknowledgment that the mortgage bubble was abetted by its overly generous ratings. Mortgage securities rated by Standard & Poor’s and Fitch have suffered a similar wave of downgrades.
Presto! How 2,393 Subprime Loans Become a High-Grade Investment
The business of assigning a rating to a mortgage security is a complicated affair, and Moody’s recently was willing to walk me through an actual mortgage-backed security step by step. I was led down a carpeted hallway to a well-appointed conference room to meet with three specialists in mortgage-backed paper. Moody’s was fair-minded in choosing an example; the case they showed me, which they masked with the name “Subprime XYZ,” was a pool of 2,393 mortgages with a total face value of $430 million.
Subprime XYZ typified the exuberance of the age. All the mortgages in the pool were subprime — that is, they had been extended to borrowers with checkered credit histories. In an earlier era, such people would have been restricted from borrowing more than 75 percent or so of the value of their homes, but during the great bubble, no such limits applied.
Moody’s did not have access to the individual loan files, much less did it communicate with the borrowers or try to verify the information they provided in their loan applications. “We aren’t loan officers,” Claire Robinson, a 20-year veteran who is in charge of asset-backed finance for Moody’s, told me. “Our expertise is as statisticians on an aggregate basis. We want to know, of 1,000 individuals, based on historical performance, what percent will pay their loans?”
The loans in Subprime XYZ were issued in early spring 2006 — what would turn out to be the peak of the boom. They were originated by a West Coast company that Moody’s identified as a “nonbank lender.” Traditionally, people have gotten their mortgages from banks, but in recent years, new types of lenders peddling sexier products grabbed an increasing share of the market. This particular lender took the loans it made to a New York investment bank; the bank designed an investment vehicle and brought the package to Moody’s.
Moody’s assigned an analyst to evaluate the package, subject to review by a committee. The investment bank provided an enormous spreadsheet chock with data on the borrowers’ credit histories and much else that might, at very least, have given Moody’s pause. Three-quarters of the borrowers had adjustable-rate mortgages, or ARMs — “teaser” loans on which the interest rate could be raised in short order. Since subprime borrowers cannot afford higher rates, they would need to refinance soon. This is a classic sign of a bubble — lending on the belief, or the hope, that new money will bail out the old.
Moody’s learned that almost half of these borrowers — 43 percent — did not provide written verification of their incomes. The data also showed that 12 percent of the mortgages were for properties in Southern California, including a half-percent in a single ZIP code, in Riverside. That suggested a risky degree of concentration.
On the plus side, Moody’s noted, 94 percent of those borrowers with adjustable-rate loans said their mortgages were for primary residences. “That was a comfort feeling,” Robinson said. Historically, people have been slow to abandon their primary homes. When you get into a crunch, she added, “You’ll give up your ski chalet first.”
Another factor giving Moody’s comfort was that all of the ARM loans in the pool were first mortgages (as distinct from, say, home-equity loans). Nearly half of the borrowers, however, took out a simultaneous second loan. Most often, their two loans added up to all of their property’s presumed resale value, which meant the borrowers had not a cent of equity.
In the frenetic, deal-happy climate of 2006, the Moody’s analyst had only a single day to process the credit data from the bank. The analyst wasn’t evaluating the mortgages but, rather, the bonds issued by the investment vehicle created to house them. A so-called special-purpose vehicle — a ghost corporation with no people or furniture and no assets either until the deal was struck — would purchase the mortgages. Thereafter, monthly payments from the homeowners would go to the S.P.V. The S.P.V. would finance itself by selling bonds. The question for Moody’s was whether the inflow of mortgage checks would cover the outgoing payments to bondholders. From the investment bank’s point of view, the key to the deal was obtaining a triple-A rating — without which the deal wouldn’t be profitable. That a vehicle backed by subprime mortgages could borrow at triple-A rates seems like a trick of finance. “People say, ‘How can you create triple-A out of B-rated paper?’ ” notes Arturo Cifuentes, a former Moody’s credit analyst who now designs credit instruments. It may seem like a scam, but it’s not.
The secret sauce is that the S.P.V. would float 12 classes of bonds, from triple-A to a lowly Ba1. The highest-rated bonds would have first priority on the cash received from mortgage holders until they were fully paid, then the next tier of bonds, then the next and so on. The bonds at the bottom of the pile got the highest interest rate, but if homeowners defaulted, they would absorb the first losses.
It was this segregation of payments that protected the bonds at the top of the structure and enabled Moody’s to classify them as triple-A. Imagine a seaside condo beset by flooding: just as the penthouse will not get wet until the lower floors are thoroughly soaked, so the triple-A bonds would not lose a dime unless the lower credits were wiped out.
Structured finance, of which this deal is typical, is both clever and useful; in the housing industry it has greatly expanded the pool of credit. But in extreme conditions, it can fail. The old-fashioned corner banker used his instincts, as well as his pencil, to apportion credit; modern finance is formulaic. However elegant its models, forecasting the behavior of 2,393 mortgage holders is an uncertain business. “Everyone assumed the credit agencies knew what they were doing,” says Joseph Mason, a credit expert at Drexel University. “A structural engineer can predict what load a steel support will bear; in financial engineering we can’t predict as well.”
Mortgage-backed securities like those in Subprime XYZ were not the terminus of the great mortgage machine. They were, in fact, building blocks for even more esoteric vehicles known as collateralized debt obligations, or C.D.O.’s. C.D.O.’s were financed with similar ladders of bonds, from triple-A on down, and the credit-rating agencies’ role was just as central. The difference is that XYZ was a first-order derivative — its assets included real mortgages owned by actual homeowners. C.D.O.’s were a step removed — instead of buying mortgages, they bought bonds that were backed by mortgages, like the bonds issued by Subprime XYZ. (It is painful to consider, but there were also third-order instruments, known as C.D.O.’s squared, which bought bonds issued by other C.D.O.’s.)
Miscalculations that were damaging at the level of Subprime XYZ were devastating at the C.D.O. level. Just as bad weather will cause more serious delays to travelers with multiple flights, so, if the underlying mortgage bonds were misrated, the trouble was compounded in the case of the C.D.O.’s that purchased them.
Moody’s used statistical models to assess C.D.O.’s; it relied on historical patterns of default. This assumed that the past would remain relevant in an era in which the mortgage industry was morphing into a wildly speculative business. The complexity of C.D.O.’s undermined the process as well. Jamie Dimon, the chief executive of JPMorgan Chase, which recently scooped up the mortally wounded Bear Stearns, says, “There was a large failure of common sense” by rating agencies and also by banks like his. “Very complex securities shouldn’t have been rated as if they were easy-to-value bonds.”
The Accidental Watchdog
John Moody, a Wall Street analyst and former errand runner, hit on the idea of synthesizing all kinds of credit information into a single rating in 1909, when he published the manual “Moody’s Analyses of Railroad Investments.” The idea caught on with investors, who subscribed to his service, and by the mid-’20s, Moody’s faced three competitors: Standard Statistics and Poor’s Publishing (which later merged) and Fitch.
Then as now, Moody’s graded bonds on a scale with 21 steps, from Aaa to C. (There are small differences in the agencies’ nomenclatures, just as a grande latte at Starbucks becomes a “medium” at Peet’s. At Moody’s, ratings that start with the letter “A” carry minimal to low credit risk; those starting with “B” carry moderate to high risk; and “C” ratings denote bonds in poor standing or actual default.) The ratings are meant to be an estimate of probabilities, not a buy or sell recommendation. For instance, Ba bonds default far more often than triple-As. But Moody’s, as it is wont to remind people, is not in the business of advising investors whether to buy Ba’s; it merely publishes a rating.
Until the 1970s, its business grew slowly. But several trends coalesced to speed it up. The first was the collapse of Penn Central in 1970 — a shattering event that the credit agencies failed to foresee. It so unnerved investors that they began to pay more attention to credit risk.
Government responded. The Securities and Exchange Commission, faced with the question of how to measure the capital of broker-dealers, decided to penalize brokers for holding bonds that were less than investment-grade (the term applies to Moody’s 10 top grades). This prompted a question: investment grade according to whom? The S.E.C. opted to create a new category of officially designated rating agencies, and grandfathered the big three — S.&P., Moody’s and Fitch. In effect, the government outsourced its regulatory function to three for-profit companies.
Bank regulators issued similar rules for banks. Pension funds, mutual funds, insurance regulators followed. Over the ’80s and ’90s, a latticework of such rules redefined credit markets. Many classes of investors were now forbidden to buy noninvestment-grade bonds at all.
Issuers thus were forced to seek credit ratings (or else their bonds would not be marketable). The agencies — realizing they had a hot product and, what’s more, a captive market — started charging the very organizations whose bonds they were rating. This was an efficient way to do business, but it put the agencies in a conflicted position. As Partnoy says, rather than selling opinions to investors, the rating agencies were now selling “licenses” to borrowers. Indeed, whether their opinions were accurate no longer mattered so much. Just as a police officer stopping a motorist will want to see his license but not inquire how well he did on his road test, it was the rating — not its accuracy — that mattered to Wall Street.
The case of Enron is illustrative. Throughout the summer and fall of 2001, even though its credit was rapidly deteriorating, the rating agencies kept it at investment grade. This was not unusual; the agencies typically lag behind the news. On Nov. 28, 2001, S.&P. finally dropped Enron’s bonds to subinvestment grade. Although its action merely validated the market consensus, it caused the stock to collapse. To investors, S.&P.’s action was a signal that Enron was locked out of credit markets; it had lost its “license” to borrow. Four days later it filed for bankruptcy.
Another trend that spurred the agencies’ growth was that more companies began borrowing in bond markets instead of from banks. According to Chris Mahoney, a just-retired Moody’s veteran of 22 years, “The agencies went from being obscure and unimportant players to central ones.”
A Conflict of Interest?
Nothing sent the agencies into high gear as much as the development of structured finance. As Wall Street bankers designed ever more securitized products — using mortgages, credit-card debt, car loans, corporate debt, every type of paper imaginable — the agencies became truly powerful.
In structured-credit vehicles like Subprime XYZ, the agencies played a much more pivotal role than they had with (conventional) bonds. According to Lewis Ranieri, the Salomon Brothers banker who was a pioneer in mortgage bonds, “The whole creation of mortgage securities was involved with a rating.”
What the bankers in these deals are really doing is buying a bunch of I.O.U.’s and repackaging them in a different form. Something has to make the package worth — or seem to be worth — more that the sum of its parts, otherwise there would be no point in packaging such securities, nor would there be any profits from which to pay the bankers’ fees.
That something is the rating. Credit markets are not continuous; a bond that qualifies, though only by a hair, as investment grade is worth a lot more than one that just fails. As with a would-be immigrant traveling from Mexico, there is a huge incentive to get over the line.
The challenge to investment banks is to design securities that just meet the rating agencies’ tests. Risky mortgages serve their purpose; since the interest rate on them is higher, more money comes into the pool and is available for paying bond interest. But if the mortgages are too risky, Moody’s will object. Banks are adroit at working the system, and pools like Subprime XYZ are intentionally designed to include a layer of Baa bonds, or those just over the border. “Every agency has a model available to bankers that allows them to run the numbers until they get something they like and send it in for a rating,” a former Moody’s expert in securitization says. In other words, banks were gaming the system; according to Chris Flanagan, the subprime analyst at JPMorgan, “Gaming is the whole thing.”
When a bank proposes a rating structure on a pool of debt, the rating agency will insist on a cushion of extra capital, known as an “enhancement.” The bank inevitably lobbies for a thin cushion (the thinner the capitalization, the fatter the bank’s profits). It’s up to the agency to make sure that the cushion is big enough to safeguard the bonds. The process involves extended consultations between the agency and its client. In short, obtaining a rating is a collaborative process.
The evidence on whether rating agencies bend to the bankers’ will is mixed. The agencies do not deny that a conflict exists, but they assert that they are keen to the dangers and minimize them. For instance, they do not reward analysts on the basis of whether they approve deals. No smoking gun, no conspiratorial e-mail message, has surfaced to suggest that they are lying. But in structured finance, the agencies face pressures that did not exist when John Moody was rating railroads. On the traditional side of the business, Moody’s has thousands of clients (virtually every corporation and municipality that sells bonds). No one of them has much clout. But in structured finance, a handful of banks return again and again, paying much bigger fees. A deal the size of XYZ can bring Moody’s $200,000 and more for complicated deals. And the banks pay only if Moody’s delivers the desired rating. Tom McGuire, the Jesuit theologian who ran Moody’s through the mid-’90s, says this arrangement is unhealthy. If Moody’s and a client bank don’t see eye to eye, the bank can either tweak the numbers or try its luck with a competitor like S.&P., a process known as “ratings shopping.”
And it seems to have helped the banks get better ratings. Mason, of Drexel University, compared default rates for corporate bonds rated Baa with those of similarly rated collateralized debt obligations until 2005 (before the bubble burst). Mason found that the C.D.O.’s defaulted eight times as often. One interpretation of the data is that Moody’s was far less discerning when the client was a Wall Street securitizer.
After Enron blew up, Congress ordered the S.E.C. to look at the rating industry and possibly reform it. The S.E.C. ducked. Congress looked again in 2006 and enacted a law making it easier for competing agencies to gain official recognition, but didn’t change the industry’s business model. By then, the mortgage boom was in high gear. From 2002 to 2006, Moody’s profits nearly tripled, mostly thanks to the high margins the agencies charged in structured finance. In 2006, Moody’s reported net income of $750 million. Raymond W. McDaniel Jr., its chief executive, gloated in the annual report for that year, “I firmly believe that Moody’s business stands on the ‘right side of history’ in terms of the alignment of our role and function with advancements in global capital markets.”
Using Weather in Antarctica To Forecast Conditions in Hawaii
Even as McDaniel was crowing, it was clear in some corners of Wall Street that the mortgage market was headed for trouble. The housing industry was cooling off fast. James Kragenbring, a money manager with Advantus Capital Management, complained to the agencies as early as 2005 that their ratings were too generous. A report from the hedge fund of John Paulson proclaimed astonishment at “the mispricing of these securities.” He started betting that mortgage debt would crash.
Even Mark Zandi, the very visible economist at Moody’s forecasting division (which is separate from the ratings side), was worried about the chilling crosswinds blowing in credit markets. In a report published in May 2006, he noted that consumer borrowing had soared, household debt was at a record and a fifth of such debt was classified as subprime. At the same time, loan officers were loosening underwriting standards and easing rates to offer still more loans. Zandi fretted about the “razor-thin” level of homeowners’ equity, the avalanche of teaser mortgages and the $750 billion of mortgages he judged to be at risk. Zandi concluded, “The environment feels increasingly ripe for some type of financial event.”
A month after Zandi’s report, Moody’s rated Subprime XYZ. The analyst on the deal also had concerns. Moody’s was aware that mortgage standards had been deteriorating, and it had been demanding more of a cushion in such pools. Nonetheless, its credit-rating model continued to envision rising home values. Largely for that reason, the analyst forecast losses for XYZ at only 4.9 percent of the underlying mortgage pool. Since even the lowest-rated bonds in XYZ would be covered up to a loss level of 7.25 percent, the bonds seemed safe.
XYZ now became the responsibility of a Moody’s team that monitors securities and changes the ratings if need be (the analyst moved on to rate a new deal). Almost immediately, the team noticed a problem. Usually, people who finance a home stay current on their payments for at least a while. But a sliver of folks in XYZ fell behind within 90 days of signing their papers. After six months, an alarming 6 percent of the mortgages were seriously delinquent. (Historically, it is rare for more than 1 percent of mortgages at that stage to be delinquent.)
Moody’s monitors began to make inquiries with the lender and were shocked by what they heard. Some properties lacked sod or landscaping, and keys remained in the mailbox; the buyers had never moved in. The implication was that people had bought homes on spec: as the housing market turned, the buyers walked.
By the spring of 2007, 13 percent of Subprime XYZ was delinquent — and it was worsening by the month. XYZ was hardly atypical; the entire class of 2006 was performing terribly. (The class of 2007 would turn out to be even worse.)
In April 2007, Moody’s announced it was revising the model it used to evaluate subprime mortgages. It noted that the model “was first introduced in 2002. Since then, the mortgage market has evolved considerably.” This was a rather stunning admission; its model had been based on a world that no longer existed.
Poring over the data, Moody’s discovered that the size of people’s first mortgages was no longer a good predictor of whether they would default; rather, it was the size of their first and second loans — that is, their total debt — combined. This was rather intuitive; Moody’s simply hadn’t reckoned on it. Similarly, credit scores, long a mainstay of its analyses, had not proved to be a “strong predictor” of defaults this time. Translation: even people with good credit scores were defaulting. Amy Tobey, leader of the team that monitored XYZ, told me, “It seems there was a shift in mentality; people are treating homes as investment assets.” Indeed. And homeowners without equity were making what economists call a rational choice; they were abandoning properties rather than make payments on them. Homeowners’ equity had never been as high as believed because appraisals had been inflated.
Over the summer and fall of 2007, Moody’s and the other agencies repeatedly tightened their methodology for rating mortgage securities, but it was too late. They had to downgrade tens of billions of dollars of securities. By early this year, when I met with Moody’s, an astonishing 27 percent of the mortgage holders in Subprime XYZ were delinquent. Losses on the pool were now estimated at 14 percent to 16 percent — three times the original estimate. Seemingly high-quality bonds rated A3 by Moody’s had been downgraded five notches to Ba2, as had the other bonds in the pool aside from its triple-A’s.
The pain didn’t stop there. Many of the lower-rated bonds issued by XYZ, and by mortgage pools like it, were purchased by C.D.O.’s, the second-order mortgage vehicles, which were eager to buy lower-rated mortgage paper because it paid a higher yield. As the agencies endowed C.D.O. securities with triple-A ratings, demand for them was red hot. Much of it was from global investors who knew nothing about the U.S. mortgage market. In 2006 and 2007, the banks created more than $200 billion of C.D.O.’s backed by lower-rated mortgage paper. Moody’s assigned a different team to rate C.D.O.’s. This team knew far less about the underlying mortgages than did the committee that evaluated Subprime XYZ. In fact, Moody’s rated C.D.O.’s without knowing which bonds the pool would buy.
A C.D.O. operates like a mutual fund; it can buy or sell mortgage bonds and frequently does so. Thus, the agencies rate pools with assets that are perpetually shifting. They base their ratings on an extensive set of guidelines or covenants that limit the C.D.O. manager’s discretion.
Late in 2006, Moody’s rated a C.D.O. with $750 million worth of securities. The covenants, which act as a template, restricted the C.D.O. to, at most, an 80 percent exposure to subprime assets, and many other such conditions. “We’re structure experts,” Yuri Yoshizawa, the head of Moody’s’ derivative group, explained. “We’re not underlying-asset experts.” They were checking the math, not the mortgages. But no C.D.O. can be better than its collateral.
Moody’s rated three-quarters of this C.D.O.’s bonds triple-A. The ratings were derived using a mathematical construct known as a Monte Carlo simulation — as if each of the underlying bonds would perform like cards drawn at random from a deck of mortgage bonds in the past. There were two problems with this approach. First, the bonds weren’t like those in the past; the mortgage market had changed. As Mark Adelson, a former managing director in Moody’s structured-finance division, remarks, it was “like observing 100 years of weather in Antarctica to forecast the weather in Hawaii.” And second, the bonds weren’t random. Moody’s had underestimated the extent to which underwriting standards had weakened everywhere. When one mortgage bond failed, the odds were that others would, too.
Moody’s estimated that this C.D.O. could potentially incur losses of 2 percent. It has since revised its estimate to 27 percent. The bonds it rated have been decimated, their market value having plunged by half or more. A triple-A layer of bonds has been downgraded 16 notches, all the way to B. Hundreds of C.D.O.’s have suffered similar fates (most of Wall Street’s losses have been on C.D.O.’s). For Moody’s and the other rating agencies, it has been an extraordinary rout.
Whom Can We Rely On?
The agencies have blamed the large incidence of fraud, but then they could have demanded verification of the mortgage data or refused to rate securities where the data were not provided. That was, after all, their mandate. This is what they pledge for the future. Moody’s, S.&P. and Fitch say that they are tightening procedures — they will demand more data and more verification and will subject their analysts to more outside checks. None of this, however, will remove the conflict of interest in the issuer-pays model. Though some have proposed requiring that agencies with official recognition charge investors, rather than issuers, a more practical reform may be for the government to stop certifying agencies altogether.
Then, if the Fed or other regulators wanted to restrict what sorts of bonds could be owned by banks, or by pension funds or by anyone else in need of protection, they would have to do it themselves — not farm the job out to Moody’s. The ratings agencies would still exist, but stripped of their official imprimatur, their ratings would lose a little of their aura, and investors might trust in them a bit less. Moody’s itself favors doing away with the official designation, and it, like S.&P., embraces the idea that investors should not “rely” on ratings for buy-and-sell decisions.
This leaves an awkward question, with respect to insanely complex structured securities: What can they rely on? The agencies seem utterly too involved to serve as a neutral arbiter, and the banks are sure to invent new and equally hard-to-assess vehicles in the future. Vickie Tillman, the executive vice president of S.&P., told Congress last fall that in addition to the housing slump, “ahistorical behavorial modes” by homeowners were to blame for the wave of downgrades. She cited S.&P.’s data going back to the 1970s, as if consumers were at fault for not living up to the past. The real problem is that the agencies’ mathematical formulas look backward while life is lived forward. That is unlikely to change.
Roger Lowenstein, a contributing writer, last wrote for the magazine about the Federal Reserve chief, Ben Bernanke. His new book, “While
America Aged,” will be published next month.
Feldstein: U.S. Economic Indicators ‘Pointing Down' - Bloomberg
PIMCO Founder Bill Gross On Inflation - Erin Burnett, CNBC
More on the Oil Burden on the World Economy. - John Authers, FT
GDP Rose 0.9% in Period; Record-High Gas Prices - MarketWatch
PIMCO Founder Bill Gross On Inflation - Erin Burnett, CNBC
More on the Oil Burden on the World Economy. - John Authers, FT
GDP Rose 0.9% in Period; Record-High Gas Prices - MarketWatch
Stop the Fed
before it's too late
As everyone from the US Congress to the general public hunts for explanations for the oil and food crises, the Federal Reserve Board, whose monetary policy is responsible, has exploited this state of ignorance for its own ends. The same US president that pleaded with the Saudis to increase oil supplies should now plead with the Fed to change its monetary course. - Hossein Askari and Noureddine Krichene
before it's too late
As everyone from the US Congress to the general public hunts for explanations for the oil and food crises, the Federal Reserve Board, whose monetary policy is responsible, has exploited this state of ignorance for its own ends. The same US president that pleaded with the Saudis to increase oil supplies should now plead with the Fed to change its monetary course. - Hossein Askari and Noureddine Krichene
The bubble of all US bubbles
Official US responses to the subprime crisis and the war in Iraq are disconcertingly similar, a combination of surge and reality-avoiding rhetoric, with more of both required to move fewer and fewer people's attitudes. This is how bubbles grow and burst - even belief in government spin. - Max Fraad Wolff
Official US responses to the subprime crisis and the war in Iraq are disconcertingly similar, a combination of surge and reality-avoiding rhetoric, with more of both required to move fewer and fewer people's attitudes. This is how bubbles grow and burst - even belief in government spin. - Max Fraad Wolff
Risky pipedreams
for East Timor
Development of gas fields on East Timor's doorstep could bring vast wealth to Asia's youngest and by several measures poorest country. Yet its lack of a skilled population may prevent it from garnering those riches, and doom it to continued poverty. - Jesse Wright
for East Timor
Development of gas fields on East Timor's doorstep could bring vast wealth to Asia's youngest and by several measures poorest country. Yet its lack of a skilled population may prevent it from garnering those riches, and doom it to continued poverty. - Jesse Wright
The dollar-aligned dollar Economies that link their currencies closest to the US dollar are seeing the biggest price increases as a follow-on from lower interest rates in the US. That means the home of the US dollar will take the biggest inflation hit of them all.
THE MOGAMBO GURU
Pawning for the payroll
The US economy is in a downturn, so it is no surprise that garage sales are on the increase and pawnshops are doing a roaring trade. But business owners pawning stuff just to make their payrolls? This is gloom indeed. (May 29, '08)
Pawning for the payroll
The US economy is in a downturn, so it is no surprise that garage sales are on the increase and pawnshops are doing a roaring trade. But business owners pawning stuff just to make their payrolls? This is gloom indeed. (May 29, '08)
U.S. Consumer Spending Slows as Income Gains Weaken; Core Inflation Eases U.S. personal spending slowed in April after record fuel costs, a slump in home values and a deteriorating job market hammered consumer confidence.
US banks likely to fail as bad loans soar
April insured mortgage defaults rise
Consumers pick home over flying; avoided trips cost economy billions
US and European debt markets flash new warning signals
Asian countries begin to burst the oil bubble
Industry's woes trickle down to regional banks
Bad Omens for Banks?
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