Page 2 of
2 Countrywide exposes lost
virginity By Julian
Delasantellis
real estate, can just
as easily fall if there's not sufficient mortgage
capital in the system to support them. So far,
price declines outside the superhot markets of
southern California and southern Florida have been
relatively modest, but if mortgage capital does
dry up the price declines could turn into a rout.
A rout could start to feed on itself in that
declining prices could make it impossible for
homeowners to re-finance out of newly reset higher floating
rates
into long-term fixed rates they could manage.
If they can't re-finance, and they can't
make the payments, these homeowners will also lose
their homes. Their properties will be repossessed
and move into foreclosure auctions. That's
increased supply in a market careening and
faltering under the weight of what it already
can't sell; that's another level down towards
what, if left unchecked by outside forces, could
be a fairly hellacious ground floor.
Countrywide's pleading plight illustrates
what is becoming one of the most frightening facts
about the subprimes. As things get worse, the
conditions get set up for things to get even worse
still. No wonder the company is begging. But what
about those Vestal Virgins, the ratings agencies?
Companies are supposed to earn good ratings not
through begging and beseeching, but through sound
business practices and results. These Countrywide
did not have, so it tried begging.
That is
not how the system is supposed to work; the fact
that Countrywide felt brazen enough to give it a
shot says a lot about how we got here today.
Ratings agencies, whether they be rating bonds,
stocks, or derivative instruments, are supposed to
be working for the benefit of the consumers of
these products, the investors. Almost like a
newspaper or TV restaurant or movie reviewer, they
research out the consumer choices, in this case
investment choices, and give a thumbs up or thumbs
down as to what's worthwhile.
From the
Moody's web site.
Moody's Investors Service is among
the world's most respected and widely utilized
sources for credit ratings, research and risk
analysis. Moody's commitment and expertise
contribute to stable, transparent and integrated
financial markets, protecting the integrity of
credit ... Moody's independence and integrity
have earned us the trust of capital market
participants worldwide ... Credit ratings and
research help investors analyze the credit risks
associated with fixed-income
securities.
Steven Joynt, president
and CEO of Fitch Ratings, says his
responsibilities fall along these lines:
The role of a rating agency is to
gather and analyze a variety of financial,
industry, market and economic information,
synthesize that information, and publish
independent, credible assessments of the
creditworthiness of securities and issuers,
thereby providing a convenient way for investors
to judge the credit quality of various
alternative investment options. Simply put,
ratings are a credit opinion. Building
confidence in an opinion, and in a rating
agency, is difficult to win, and easy to lose.
Confidence in Fitch arises from our commitment
to provide the world's securities markets with
objective, timely, independent and
forward-looking credit opinions. The foundation
of meeting that commitment is rooted in several
core principles - objectivity, independence,
integrity and transparency.
Of
course, nowhere in these probity packed
protestations is there any indication that the
ratings agencies can be swayed by the type of
groveling and pleading undertaken by Countrywide.
Why then would the company try it? Why
would the loser take a chance with the Vestal
Virgin?
Of all the financial actors now
having accusing fingers wagged in their faces,
charged with sharing a piece of the guilt over the
subprime meltdown, more should be pointed at the
ratings agencies. Long after the subprime problems
came front and center to the market's attention
last spring, the credit ratings agencies were
still giving their gold medal blessings to just
about all of the derivative instruments emerging
from out of Wall Street's money foundries that had
utilized subprime mortgages as the raw material.
This included the subprime mortgage loans
themselves, the collateralized debt obligations
(CDOs) , asset-based securities (ABSs) and
structured investment vehicles (SIVs) that were
created out of the basic subprime paper, as well
as the big Wall Street financial institutions
themselves.
This should not have been all
that surprising, since, at its core, there is a
huge difference between ratings agencies and movie
and restaurant reviewers. Movie and restaurant
reviewers work for the newspaper, and operate
under strict rules of ethics that forbid any
profiting from favorable treatments they may
proffer to one they review.
It's precisely
the opposite with ratings agencies. They are paid
by those they review and rate, the companies such
as Countrywide. The situation is not hidden and
furtive, but well above board and known to all.
The ratings agencies know that, while it may all
well and good to provide credible and reliable
ratings to some retired Palm Beach dentist in
Bermuda shorts trading his $50,000 bond portfolio
from the dial-up connection at the Senior Center,
in the long run, it's the lucre from the companies
being rated that gas up the Ferrari and keep the
kids in Harvard.
Countrywide must have
known this too. For, in actuality, the company has
suffered no ratings downgrade since its November 9
entreaty. Earlier in that week, Fitch held steady
the ratings of subprime burdened mortgage insurers
MBIA and Ambac, stating that "Fitch recognizes
that financial guarantors view maintenance of
their 'AAA' ratings as a core part of their
business strategies, and management teams will
take any reasonable actions to avoid a downgrade."
Well, it looks like the loser had a chance with
the Vestal Virgin after all. Good for him-bad for
the rest of us.
There's one other recent
subprime-related story that deserved more
attention than it got.
Of the roughly
100,000 layoffs this year in the US banking and
financial systems, none (with the exception of
Citigroup's Charles Prince) has been as high
profile as Merrill Lynch's Stanley O'Neil, fired
at the end of October after Merrill reported $8
billion in capital writedowns and a quarterly loss
of $2.3 billion. Multiple media sources had
reported that Merrill's first choice to take
O'Neil's place was Laurence "Larry" Fink, the
founder and CEO of the fixed income trading and
advisory firm Blackrock.
Charles Gasparino
of CNBC reported that Fink's interview for the
Merrill job was going fine until right at the end.
That was when Fink, like most American job
interviewees these days, was asked if he had any
questions for the interview team. What you're
supposed to do in this situation is to stick out
your tongue and lick the collected hindquarters of
the interview team until they're just ever so
shiny, bright and pristine-something on the order
of "Gee, is it ever hard to be such important,
handsome senior management for a company so
wonderfully generous, sagacious and magnanimous in
its business practices?"
Fink broke form
on this one. He said he would take the Merrill job
only if he was provided with a rock solid,
take-it-to-the-bank, absolutely reliable bottom
line number as to what the brokerage house's total
exposure to subprime and related products was. At
that, Merrill called up the number 2 guy on the
list, the New York Stock Exchange's CEO, John
Thain, and gave him the job.
Taken
together, the travails of both Countrywide and
Merrill illustrate one of the most disturbing
aspects of the subprime crisis, one that is barely
grasped by the media and not in the least
understood by the politicians. Their understanding
of what's going on is still stuck back at where
the problem was in the spring, back when this was
primarily an issue with the subprime borrowers,
back before we realized just how lustily Wall
Street, as exemplified by Merrill's refusal to
spill the beans to Larry Fink, and the rest of the
American and world's financial system had drunk
from subprime's poisoned chalice.
As I
displayed with my speculations as to the negative
ramifications of a bankruptcy by Countrywide,
until the entire subprime problem, both with the
mortgages and the Wall Street derivatives that
emerged out of them, is comprehensively addressed,
the problem will continue to get worse. The nature
of the problem today guarantees that it will be
worse tomorrow, worse still the day after that.
Waiting for the application of the traditional
laissez-faire tonic for financial panics, allowing
prices to fall so far so as to tempt demand back
into the market, is a prescription for a whole lot
of pain in these interconnected, over-leveraged
markets.
It makes little or no sense to
attempt to speculate as to the total dollar size
of the crisis right now because no one is now even
close to proposing a realistic solution to the
problem; by the time realistic solutions are
proposed, maybe next year, maybe with a new US
president in 2009, the problem will be much worse.
The US national tendency not to address crises
until they become actual full blown Extinction
Level Event (ELE) emergencies is an enormous
impediment to progress here; I doubt if there will
be a serious American political effort to address
global warming prior to thermal atmospheric
conditions causing the floats of the annual New
Year's Day Rose Parade in Pasadena, California to
spontaneously burst into flame.
Well, look
at the bright side. Maybe in the near future a lot
more of us will be able to get lucky with
society's self professed moral sentinels, its
Vestal Virgins. The experience with Countrywide
proves that they are more than willing to barter
their morality for your money; if things get
really bad, well, even Vestal Virgins have to eat.
Julian Delasantellis is a
management consultant, private investor and
educator in international business in the US state
of Washington. He can be reached at
juliandelasantellis@yahoo.com.
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