Standard & Poor's and the Financial Crisis
Judgment day cometh for Standard & Poor's (S&P) and its credit rating agency peers. We are pretty sure that if you are an American who has seen his retirement savings dwindle, his job go to pot, his house foreclosed upon, or his marriage ruined due to financial stresses, you will want to read on a bit further.
"The Greek" earned clients a 23% average annual return over five years as a stock analyst on Wall Street. Since then, while writing for Wall Street Greek and others, he presciently predicted the financial crisis and housing and banking failures of the Great Recession. Visit the front pages of Wall Street Greek now to see our current coverage of business news, global financial markets, real estate, shipping, fine art, antiquities, technical analysis and global affairs.
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Standard & Poor's faced another round of Congressional inquiry today, along with other rating agencies Moody's (NYSE: MCO) and Fitch. We thought you should know how important a role we believe, and Congress and most experts seem to agree, Standard & Poor's (owned by McGraw-Hill (NYSE: MHP)), and its industry peers played in the financial crisis.
We remind interested readers that this crisis led to an awesome degree of global economic value destruction, which included the deep loss of so much of our own citizenry's investment wealth and retirement savings. The economic recession that ensued took unemployment to levels never seen before, except during the Great Depression; and those jobless numbers are expected to stick high for some time to come. Hank Paulson said in his own testimony and in his book that he believes unemployment might have reached 25% if not for desperate government measures to prevent it. Those are the same measures that cost us precious taxpayer funds to implement. Those funds might have been used in a different way otherwise. Maybe they could have been distributed to municipalities to help them pay firemen, policemen, teachers, bus drivers and other municipal employees, who are now losing their jobs instead... That's not to mention the services and safety the common man is left without.
Today's renewal of this almost forgotten catalyst of the financial crisis stands to get in between rating agency lobbying efforts that seek to prevent legislation that would make it easier for investors to sue these companies.
Have you lost your job because of the crisis? Has your marriage fallen apart because of your financial problems? Has your health deteriorated? What do you think Congress should do regarding the rating agencies? Please comment here, and you might consider letting your Congressman know what you want him to do, as our government will come to some conclusion on Standard & Poor's and the rating agencies in the next few weeks ahead.
According to the Senate Permanent Subcommittee on Investigations, Standard & Poor's and peers were too influenced by Wall Street, operated without adequate resources and used outdated models to grade mortgage securities. Some have argued that S&P and Wall Street knew exactly what they were doing, and you'll recall the rating agency employee's email that was dug up by Congress, in which he stated, "We drank the Kool-Aid." The statement has been rehashed over and over again in Congressional hearings and popular press. But who really ended up drinking the Kool-Aid, the rating agencies or Americans on Main Street? US Representative Dennis Kucinich called S&P's and the other rating agencies' actions "criminal," and I quote! According to folks brighter than I, though you did not have to be too bright to see it, the agencies reportedly had conflicts of interest, receiving payments from companies they rated. There's a guy named Egan who would agree; he started a company that rates credit and gets paid by investors rather than the issuers of the securities. Why can't S&P and the others do it that way?
If you have some advice for S&P, we are pretty sure they are interested in your opinion (now anyway).
Standard & Poor's mailing address and headquarters is located at:
55 Water Street
New York, NY 10041
The agencies sure seemed sorry today as some of their current and former representatives trembled before Congressional members. Still, if Americans do not ensure their Congressmen know how they feel, then can we be sure things will change? How sorry will these companies be if they get away with it without penalty?
You will probably want to read this piece we wrote about the credit rating agencies in October of 2008 as a refresher. Yep, it's been that long and no retribution has been paid yet for the egregious failure Downtown.
And do not miss this video from way back when...
"Credit-rating agencies allowed Wall Street to impact their analysis, their independence and their reputation for reliability," Senator Carl Levin, the Michigan Democrat who heads the investigative panel, told reporters in Washington yesterday. "They did it for the big fees that they got."
The failure to rate mortgage-backed securities to properly reflect the logical risk that real estate prices might decline (putting subprime credit at great risk, despite pooling); the what some would call negligent overlooking of the lax mortgage writing and issuance that occurred to help drive the unsustainable housing bubble (instead again rating securities investment grade); and the unchecked conflicts of interest and poor supervision of these firms placed the US and global economies in their worst position since the Great Depression. Life savings were destroyed; elderly retirees were forced back to work! If not for the desperate work of US central bankers, we fear the situation would have been worse than during the Depression.
You have a chance now to make sure your Congressman supports strict penalties against this kind of negligence, now while it is still possible.
Durable Goods Orders
March Durable Goods Orders were reported Friday. Durable Goods Orders fell 1.3%, versus economists' expectations for a 0.4% increase, according to Bloomberg's survey. However, take a closer look, because when excluding the volatile big-ticket transportation segment, Durable Orders improved by 2.8%. In our weekly copy, we warned "Greek" readers that "this is a volatile economic data point, and that wide variation from forecast is completely possible, and could shake up markets Friday morning." Did you benefit from that knowledge?
New Home Sales
We also said, "New Home Sales have been anemic forever, so excitement may ensue if March sales come in as expected." We continued, "Try to temper your enthusiasm though, as February marked a record low sales pace. Remember, I do not expect the First-Time Homebuyers Tax Credit plays a role here yet." I do not believe that it did either; I think that sales just got better on better weather and due to seasonal influences over record low sales levels in February. Sales came in at a pace of 411K, versus economists' forecasts for an increase to 330K, versus the 324K revised rate seen in February.
The Day's Earnings Reports
The Burkenroad Reports Investment Conference kicked off in New Orleans, with Cal-Maine (NYSE: CAG) presenting. The EPS schedule included news from Honeywell (NYSE: HON), Schlumberger (NYSE: SLB), Active Power (Nasdaq: ACPW), Akzo Nobel (OTC: AKZOF.PK), AMCOL International (NYSE: ACO), Arkansas Best (Nasdaq: ABFS), CMS Energy (NYSE: CMS), Cypress Sharpridge Investments (NYSE: CYS), Delta Apparel (NYSE: DLA), Donegal Group (Nasdaq: DGICA), Dover (NYSE: DOV), Encore Bancshares (Nasdaq: EBTX), Eni S.p.A. (NYSE: E), Exelon (NYSE: EXC), FLIR Systems (Nasdaq: FLIR), Horizon Lines (NYSE: HRZ), Idexx Laboratories (Nasdaq: IDXX), Ingersoll-Rand (NYSE: IR), Johnson Controls (NYSE: JCI), MDC Holdings (NYSE: MDC), MetroCorp Bancshares (Nasdaq: MCBI), National Penn Bancshares (Nasdaq: NPBC), NorthWestern (NYSE: NWE), Patriot Coal (NYSE: PCX), Prosperity Bancshares (Nasdaq: PRSP), Rockwell Collins (NYSE: COL), SonicWall (Nasdaq: SNWL), T. Rowe Price (Nasdaq: TROW), Taser International (Nasdaq: TASR), Telefon AB Ericsson (Nasdaq: ERIC), The Travelers Cos. (NYSE: TRV), Viad (NYSE: WI), Wilmington Trust (NYSE: WL) and Xerox (NYSE: XRX).
Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.