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Greenspan's "Credit Tsunami"

Written By Brian Hicks

Posted October 23, 2008



One by one now, all of the culprits in this mess are headed to their Congressional confessionals. Politicians love show trials.

Yesterday it was the ratings agencies. Their part of the scam was put their triple-A  rated seals of approval on securities that didn’t deserve them.  Of course, we all know all too well how that all worked out.

But hey they were just earning a buck.

And with Wall Street paying the tab, they weren’t too eager to rate them as tough as they should have. After all, who really wants to upset the gravy train?

To that end here’s the instant message that had everyone shaking their heads yesterday. It’s between two S&P  ratings analysts.

It reads:

Rahul Dilip Shah: btw: that deal is ridiculous

Shannon Mooney: I know right … model def does not capture half of the risk

Rahul Dilip Shah: we should not be rating it

Shannon Mooney: we rate every deal

Shannon Mooney: it could be structured by cows and we would rate it.

Nice huh?

Meanwhile, employees at Moody’s Investors Service told executives that issuing dubious creditworthy ratings to mortgage-backed securities made it appear they were either incompetent or  had “sold our soul to the devil for revenue,” according to e-mails obtained by U.S. House investigators.

“Sold our souls”….You just can’t make this stuff up.

But that was yesterday. Today my old pal Alan Greenspan stepped up the microphone to tells us he was shocked it had all fallen apart.

And oh by the way that it wasn’t his fault.   

 “It was the failure to properly price such risky assets that precipitated the crisis,” Greenspan said.  Gee thanks.

Of course, his “once-in-a-century credit tsunami” didn’t exactly start in a vacuum.  Easy Al was there every step of the way. 

Just don’t expect him—or anyone else for that matter—to come clean on it. The blame game is going to be messy.

The housing market, by the way, continues to tumble. Foreclosures are now up 71% over the 3rd quarter last year and prices are still falling.

From Bloomberg by Kathleen M. Howley and Dan Levy entitled: Housing Prices Tumble in August as Foreclosures Surge  

 “U.S. home prices tumbled the most in at least 17 years in August and foreclosures increased to the highest on record, reducing property values as the global credit crisis weakened the economy, according to reports today.

Home prices dropped 5.9 percent from a year earlier, the biggest decline since 1991, when the Federal Housing Finance Agency data starts. Foreclosure filings increased 71 percent in the third quarter from a year earlier, according to Irvine, California-based RealtyTrac, a seller of foreclosure data.

The surge in home foreclosures is dragging down real estate prices in neighborhoods across the U.S. as houses are sold at foreclosure auctions. A recession that began in the third quarter is deepening the housing slump and adding to mortgage defaults as companies shed jobs, according to Jay Brinkmann, chief economist for the Mortgage Bankers Association.

“The people living paycheck to paycheck are at risk if they lose their jobs,” said Rick Sharga, executive vice president for marketing at RealtyTrac, said in an interview. “It will cause more people to lose their homes.”

Every foreclosure cuts the value of all surrounding homes by a total of about $220,000 as it stigmatizes the area and sells at a discounted price, according to the Federal Deposit Insurance Corp. At the end of June, U.S. banks held $9.9 billion of foreclosed properties, up from $8.5 billion three months earlier, according to an FDIC report. Every three months, another 250,000 homes enter foreclosure, the report said.

A total of 765,558 U.S. properties got a default notice, were warned of a pending auction or were foreclosed on in the quarter, the most in records began in January 2005, RealtyTrac said.”

Nice job fellas.

It’s not easy creating a credit tsunami, you know.