Tip of the hat to Andrew Leonard for his Salon article "Panic on Wall Street." Those of you who get the cocktail-party query, "You’re in finance, what the heck is going on?" might want to jot down some of his simplified explanations on an index card.
I have a few favorites, though I'm biased, since I've been making many of the same arguments for years. For example:
"[I]nvestment bankers are clever fellows. In cahoots with the ratings agencies, they came up with a way to magically transform a low-rated security to a high-rated security."
Indeedy. It's called securitization and I've found myself debating it recently with another blogger.
But defenders of securitization do so by patiently explaining, over and over, how cool the technique is on paper. What they refuse to even acknowledge is that the props that hold up structured financings are often hopelessly conflicted. I've pointed out how these conflicts affect rating agencies, most recently here, but also here.
Leonard says the same: "The culpability of the ratings agencies — Fitch, Standard & Poor's, Moody's — should be not underestimated. It might be helpful to think of them as the bribed referees in this game."
Indeed, four years ago, I wrote an article in which one law professor argued that "the securitization industry owes its very existence to the willingness of rating agencies to rate ABS securities based on 'extravagantly hedged' true-sale opinions." And why wouldn't they? The rating agencies' market is defined by the number of rated companies. But a securitization automatically turns one company into two ratings jobs.
If someone guaranteed you could double your market overnight, how many awkward questions would you ask?
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