This is something I read in Sunday’s NYT magazine; the story was about Moody’s bond- and security-rating service:
To get why (Moody’s stratospheric growth) is impressive, you have to think about all that determines whether a mortgage is safe. Who owns the property? What is his or her income? Bundle hundreds of mortgages into a single security and the questions multiply; no investor could begin to answer them. But suppose the security had a rating. If it were rated triple-A by a firm like Moody’s, then the investor could forget about the underlying mortgages. He wouldn’t need to know what properties were in the pool, only that the pool was triple-A — it was just as safe, in theory, as other triple-A securities.
Over the last decade, Moody’s and its two principal competitors, Standard & Poor’s and Fitch, played this game to perfection — putting what amounted to gold seals on mortgage securities that investors swept up with increasing élan. For the rating agencies, this business was extremely lucrative. Their profits surged, Moody’s in particular: it went public, saw its stock increase sixfold and its earnings grow by 900 percent.
By providing the mortgage industry with an entree to Wall Street, the agencies also transformed what had been among the sleepiest corners of finance. No longer did mortgage banks have to wait 10 or 20 or 30 years to get their money back from homeowners. Now they sold their loans into securitized pools and — their capital thus replenished — wrote new loans at a much quicker pace.
Mortgage volume surged; in 2006, it topped $2.5 trillion. Also, many more mortgages were issued to risky subprime borrowers. Almost all of those subprime loans ended up in securitized pools; indeed, the reason banks were willing to issue so many risky loans is that they could fob them off on Wall Street.
But who was evaluating these securities? Who was passing judgment on the quality of the mortgages, on the equity behind them and on myriad other investment considerations? Certainly not the investors. They relied on a credit rating.
You may have to read this a few times to absorb it. Go ahead. When you’re ready, come back and ask yourself how often you’ve heard someone of late say, “The mortgage mess is very simple — people didn’t pay their mortgages.” I think of this as the Stupid Simple Meme. A SSM reduces a complex issue to something that can be fit on a bumper sticker, and conveniently transfers 100 percent of the blame to the most powerless saps on the stage.
The bankers? They were just doing what comes nacherly — making money. How can we blame a business for making money? That’s what businesses do! And if they did it by churning fees, by ignoring the simplest due diligence in vetting loan applications, by marketing through outright lies? Details, details. The bad people are the ones who didn’t pay their mortgages.
The disaster in New Orleans? It was the fault of the people who chose to live below sea level, and the deaths were a natural result of people who simply refused to leave. (Are you listening, the Netherlands?) Granted, not everyone had Ashley Morris yelling in their ear for the last three years, but I’m still amazed at how many people shrug their shoulders at what happened there, who say it was simply inevitable, an act of God, something no levee could have held back.
(In case you think I’m only singling out right-wing Simple Stupids, the left has them, too: Remember “the cure for homelessness is housing”? Yeah, even 20 years ago it seemed a little pat.)
I have a new rule: Whenever anyone says, “It’s really very simple…” about a complicated problem, I stop listening.
Anyway, why bother? VRSA is going to get us all, and remember, folks: It came…from…Michigan! Mm-ha-ha-ha-ha-ha-ha.
(What is VRSA, you ask? Why, it’s MRSA, only with a V, for Very Very Very Scary.)
Actually, that story is worth reading, if only for yet another fascinating Detroit factoid:
Metro Detroit has a history of antibiotic resistance. Illegal drug users 20 to 30 years ago injected antibiotics with heroin in a misguided effort to avoid getting contaminated by dirty needles. As a result, many local bacteria developed resistance to penicillin and its relatives, such as methicillin.
Can you tell it’s Grumpy Monday around these parts? The weather has turned — and just as the redbuds were emerging, dammit — and we’re promised two-thirds of a week when we’ll be lucky to see 50 degrees, joy oh joy. We spent the last day of mild temperatures opening the cottage, which was both uneventful (no squirrels came down the chimney and decomposed under the pillow, like last year). Unfortunately, the shared dock has become a real problem. What was originally agreed upon as a sensible policy — two boats per cottage, back when a boat was an outboard with a 10-horse motor on the back — is now ridiculous. When did a recreating family of four come to need a ski boat, a pontoon and two Jet-Skis? A pox on all their houses; when gas goes to $5 a gallon maybe we can have a little water to actually swim in. I kept my head down, raked leaves and scrubbed things. There’s something about cleaning that empties the head and calms the spirit. Add a leaf fire, and things get just about perfect.
Bloggage? Oh, a little:
A few weeks ago I wondered what would happen to a newspaper if you took away paper, ink, trucks, Teamsters and the like. Answer: The Capital Times of Madison, Wis., which becomes an online-only paper very soon. Future: Very very murky. (This was the plan for my alma mater, derailed when Knight Ridder derailed itself. Never happened, but I will still watch this transformation with interest and, i fear, dread.)
The photo with this story kind of startled me, because as soon as I looked at it, before I even registered who was in it, I said, “Oh, huh. Indiana.” It has to do with the color and height of the cloud ceiling, something about that color of brown, I dunno. For a second I even thought it was Fort Wayne, and if pressed, I’d have said it was on Pontiac Street, beside the old Rialto theater. No, it was Anderson, but still: Indiana. Weird.
Not much, I know, but hey — it’s Monday. Give me some time to get rolling.