The Meltdown Culprits are Finally Punished

by Sean Purcell

Real Estate Renaissance Man

Author website

I just finished writing a comment regarding the mortgage meltdown which led to the credit crisis which has caused a real estate recession (don’t you just love our fondness for allegorical alliteration!)  We were playing the blame game over on a post I wrote regarding The Gang of Three and how Wachovia’s current misfortunes may signal the bottom.

While many lenders and originators and agents and appraisers and so on can shoulder some of the blame, we should look to two primary sources for our stone throwing activities: the first is borrowers.  Borrowers, however, get a pass because it is politically, if not financially, incorrect to blame the customer.  That leaves us with number two: the rating agencies.  Yes, the rating agencies: Moodys, Fitch and Standard & Poor’s.  Have you heard much in the press or by the politicians with regard to the rating agencies?   Neither have I, yet I argue that they are the proximate cause and primary culprit in this mess.  Lenders make money by lending money.  Investors make money by investing.  Borrowers can borrow because lenders can lend because investors will purchase on the secondary market.  The secondary market prices and purchases based on the rating given by the neutral, third party rating agency.

But, it turns out that the rating agencies were being shopped and whoever gave the best rating got the job.  So instead of giving investors accurate warnings, which in turn would have made the loans much more expensive, which in turn would have cut way down on the volume of high-risk loans – we instead have rating agencies trying to make money.  There’s that pesky “invisible hand” at work again.

Thankfully we can all relax.  As you can see by reading this article in Business Weekly, New York Attorney General Andrew Cuomo has brought these criminals to justice and hit them with the severest of all punishments: he made them say “sorry.”  They have also agreed to set up some new guidelines (may I suggest: “Keep your hand out of the cookie jar” be first and foremost?)  Wow, nothing like a good strong talking to when you have caused or at least been heavily involved in a $1 trillion problem.  Why do these agencies get such largesse?  Que bono?  The agencies get paid by the very companies whose offerings they are rating.  No reason to rock that boat too hard.