Making Sense of the Credit Debacle
Duff is raising many interesting issues, but I think we can move the focus from what is theoretically wrong to the actual screw-ups: Who did what, was it illegal, and how did they get away from it for so long?
In many instances, there was this gradual creeping expansion of both actions and beliefs based upon what has become a discredited ideology. The incremental changes were less violations of explicit laws than a pushing of the envelope into a gray area legally but a bright line philosophically.
Forget churn and burn, let's get more current and consider the ramifications of what took place in the ratings agencies. The three big firms were unique entities with a special regulatory function. They had morphed from a group that was paid by bond investors to objectively rate fixed income products. That somehow morphed into a "pay-for-play" partnership with the big banks. The payola relationship turned their old business model upside-down.
But keep in mind these highly lucrative newfangled ratings firms were only possible if you had 1) a Fed chairman encouraging all manner of innovation (a euphemism at best) and 2) an SEC that was not only underfunded and understaffed but that willfully decided not to monitor closely or enforce regulatory rules governing the agencies.
It wasn't a perfect storm—it was a series of very specific decisions made at the highest levels of government that had enormous ramifications. The column I wrote in Barron's last year details a full decade of these bad decisions.
As for accountability, that process has only just begun. You got the sense it started with the voters, who would have elected anyone who ran against W's policies. There was so much unfocused anger against what happened that was the second wave of public demand for accountability,the first being investors voting with their feet.
The next wave is going to be the criminal investigation, indictments, and jail terms. I would not be surprised if one of the ratings agencies gets either Arthur Andersen'd (i.e., indicted out of business) or radically revamped via government mandate. We have already seen that take place with the five big investment banks, which have effectively been wiped away.
As to Greenspan, Floyd Norris had a New York Times column this week that noted for all its haplessness under Greenie, the Fed has been rewarded with more, not less power. And, amazingly, they have escaped blame for much of what has happened. (That will change in about 60 days when Bailout Nation hits the bookstores.) I pinged Floyd about it, and we ended up discussing how much culpability the press has in the debacle. To be honest, I am not sure. Even though I am a media junkie, I never take what I read as gospel and am always surprised when people do.
That is the next major conversation worth having: How culpable is the financial press for what happened? Did they do a good or a bad job? We have a conference coming up in June, and I am really thinking about making that a major panel discussion.
Barry Ritholtz is a money manager, proprietor of The Big Picture blog, and author of the forthcoming Bailout Nation.