LEVITT ON THE MORTGAGE CRISIS:
On Thursday, I posted a Spine calling attention to two elements of the current discussion on the disintegration of the mortgage markets and the stock markets. The first was the article in TNR by Joshua Rosner about the culpability of the ratings agencies who'd given AAA marks to funds and companies that were about to go bust. My second subject may look like a side-item, but it isn't. The fact that Moody's had collapsed from $76 to $46 on Thursday is a sign that investors know what this largest of the raters is: a big fraud. Yesterday, it fell $1.75 to $44.28, near to its year low of $43.70. The lower it goes the greater the investing public has come to its senses.
Here is the gist of his argument:
Yesterday, a commanding voice entered the argument in the Wall Street Journal. It was Arthur Levitt Jr., who started his career as a spectacular investor. Then he was the reforming chairman of the Security and Exchange Committee. His piece, "Conflicts and the Credit Crunch," goes more or less over the same ground as Rosner, but with an enviable authoritative touch and perhaps more lenient punch. But still.
As documented both in the media and by the Securities and Exchange Commission (SEC), credit ratings agencies -- such as Moody's Investor Service, S&P, and Fitch Ratings -- are playing both coach and referee in the debt game. They rate companies and issuers that pay them for that service. And, in the case of structured financial instruments which make it possible to securitize all those subprime mortgages, they help issuers construct these products to obtain the highest possible rating. These conflicts are hard to spot because transparency among these agencies is murky at best, and currently it is difficult to hold these agencies accountable for any wrongdoing.