Thursday, June 05, 2008

Rating Services Cover Their Asses

Ratings Services Cover Their Asses

“NEW YORK (Reuters) - Standard & Poor's in a sweeping move on Monday that rocked markets cut ratings on a number of major U.S. securities firms including Lehman Brothers Inc and said outlooks on the large U.S. financial institutions are now mostly negative. Other major firms downgraded were Merrill Lynch & Co Inc and Morgan Stanley.” http://www.reuters.com/article/ousiv/idUSN0246031620080602

In a long overdo and shocking move this past Monday, Standard and Poor’s rating service lowered the ratings on several of Wall Street’s heaviest hitters. I suspect they are doing so to prevent further damage and trauma to investors but more so to protect themselves from future lawsuits and litigation. In a major economic crisis such as we are experiencing now, there are numerous culprits responsible for the massive mortgage and credit collapse that are rocking the US domestic markets and global economy. The Federal Reserve Bank a collection of privately owned banks that Congress gave permission to set US monetary, interest and credit policies is the prime perpetrator. But the collapse wouldn’t be this pervasive without the active participation and collusion of players such as Wall Street, the mortgage companies and brokers, insurance companies, the bond rating agencies, the media and the US government.
One of the most crucial players in the massive fraud that has propped Wall Street in recent years has been the bond and financial rating services such as Standard and Poor’s, Moody’s and Fitch who colluded with Wall Street investment and brokerage houses and the shadow banking system (which is made up of unregulated hedge funds, derivatives and other exotic sounding schemes) to trick individuals and institutional entities such as mutual, pension and hedge funds into pouring their money in extremely risky investment vehicles. The rating companies have helped defraud millions of individual and institutional investors (mutual, pension and hedge funds) out of their hard earned money by giving companies and investment banks like Enron or Bear Sterns, for example, favorable ratings when they knew full the accountants, bean counters and CEOs were using what even an idiot like George W Bu$h called “fuzzy math”. They knew the books were cooked and the loans were high risk yet they turned a blind eye and deaf ear and gave them favorable ratings so they could get their commissions and fees.
It is the job of the rating companies to analyze the ability of companies to meet their financial obligations, earn a profit and insure their investors get a good return on their investment. This means doing due diligence, researching and investigating the company’s, industry’s or government’s past history, its current financial status and projecting how well it can fulfill its responsibilities to its shareholders and investors. “Some financial analysts, called ratings analysts, evaluate the ability of companies or governments that issue bonds to repay their debts. On the basis of their evaluation, a management team assigns a rating to a company’s or government’s bonds, which helps them to decide whether to include them in a portfolio. Other financial analysts perform budget, cost, and credit analysis as part of their responsibilities. Financial analysts use spreadsheet and statistical software packages to analyze financial data, spot trends, and develop forecasts. Analysts also use the data they find to measure the financial risks associated with making a particular investment decision. On the basis of their results, they write reports and make presentations, usually with recommendations to buy or sell particular investments.” http://www.bls.gov/oco/ocos259.htm
These reports are the life blood of the ratings service, and an important tool for investors. If the rating services say a company, industry, government or a country is a good risk, a sure thing, it sends a signal that it is ok for investors to invest in that company, industry or government. The current mortgage crisis could never have been as widespread as it is, without the active collusion of the major bond rating companies. These companies knowingly abdicated their professional responsibilities and gave dubious bond offerings such as the shaky subprime mortgages and other loans (auto, student and speculative ventures the Wall Street investment firms subsequently repackaged, bundled and sold around the world) the highest ratings which prompted investors to buy them. The Triple A ratings these services gave and their potential for high returns are what induced many individuals and institutional investors such as pension, mutual and hedge funds and commercial banks to buy them. The bonds and loans were shaky from the jump but the ratings services didn’t care. The name of the game was to get the suckers to buy, buy, buy.
The Fed started it all by lowering interest rates to record levels to stimulate massive borrowing and consumption to keep the US economy afloat following the dot.com bubble’s collapse and the recession of 2000. The Bu$h administration promoted home ownership and “the AmericKKKan Dream” especially to lower class folks and the media pumped it up via advertising and the talking heads on the financial programs. The rating companies got into the act by giving high risk debt packages triple A ratings, for which they got paid handsomely. The mortgage companies, insurance companies and bankers sold people loans they couldn’t afford, bundled them together and sold them as bonds and securitized debt. Duped and unsuspecting suckers bought them to the tune of trillions of dollars.
Now the whole system is coming unraveled. The culprits are scurrying like rats on a sinking ship. Everyone is trying to cover their ass. The Fed and the US government are desperately trying to put together a bail out package that will save Wall Street but under the guise of helping homeowners facing default and foreclosure. Don’t believe the hype, it is a scam to put the onus on taxpayers instead of the banks and speculators! It will be a redo of the Saving and Loan scandal. Now the rating agencies and Bond insurers who faced a crisis of their own this summer, are scrambling to avoid wholesale litigation from institutional investors and the blue bloods who lost billions in the mortgage scams because they believed the ratings were legit and valid.
Keep your eyes and ears open, 2009 will be a year of massive litigation as more and more institutional investors (governments, pension funds, mutual funds etc) lose money because the housing, bond and credit markets continue to contract. It will be a big mess, which will exacerbate the recession. Federal, state and local courts will get involved due to an avalanche of litigation. I predict the courts will side with the bankers and rating companies because money talks and judges like politicians are being bought off yearly. The courts will side with Wall Street, the insurance companies and rating services because if they don’t, the resulting losses in restitution, pay outs and punitive damages will be in the trillions. Joe and Jane Sixpack will get no relief from the courts. Wall Street, the banks and rating services are in deep trouble already and can’t afford that kind of public spanking. So they will collude with the US Congress to bail them out, or the courts will look out for the class interests of the financial elites. As usual the little guy will get shafted.

-30-.

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