Maybe you could rattle off some biggies, like Dick Fuld of Lehman Brothers, or Angelo Mozilo of Countrywide Mortgages.
Or perhaps some companies, like AIG and Bear Stearns.
It could be that you blame a lot of bit players, like the unscrupulous mortgage brokers that would shove through loans on any rundown piece of property made to unsophisticated consumers.
Or maybe it was just one thing – greed – that consumed everyone.
All good answers.
And they’re all wrong.
We’ve always had greed, and if the gods smile on us, we always will have a tempered version, at least.
Greed, in the sense of wanting more and being willing to work hard to get it, motivates many people to innovate and increase productivity.
But it has a dark side, which we all know, since it’s one of the seven deadly sins.
Greed can be obsessive. It can drive people to steal, cheat, and lie.
So we temper the greed component of capitalism with rules.
We put in place safeguards so that everyone has to respect the property of others, and we don’t allow lying, cheating, and stealing.
But what happens when those who are supposed to safeguard us are the liars, cheaters, and thieves?
Unfortunately, the answer is, “Absolutely nothing.” The system will break down, but no one will be held accountable, even if you’re anointed by the government.
As we go through the 10th anniversary of the financial crisis, people will trot out lots of bad actors as they reflect on what happened.
But we know the two companies, and the people who ran them, that drove nine million Americans out of their homes, and ruined the wealth of many more.
They are the rating agencies, and we should have buried them with the bones of Countrywide Mortgage.
Henry Poor got his start in the 1860s. John Moody came later, in the early 1900s, along with Standard Statistics. Among them, they eventually formed the two credit rating companies of Moody’s and Standard & Poor’s.
During the 1900s investors subscribed to their services to get an objective analysis of the credit quality of a company’s debt.
But in 1970, the rating agencies realized they had a gold mine.
By assigning higher ratings to companies, those firms could borrow in the capital markets at a lower interest cost.
Essentially, good ratings helped companies, so the rating agencies started charging issuers instead of subscribers.
You can see how this was the beginning of the end.
And it gets worse.
In 1975, financial institutions were struggling to meet their capital requirements, so they petitioned the SEC to allow them to hold less capital in the form of bonds if most of the bonds carried high ratings from the rating agencies.
The SEC agreed, and dubbed the rating agencies Nationally Recognized Statistical Rating Organizations (NRSROs).
Now Moody’s and Standard & Poor’s had two gold seals.
Companies needed them to give high ratings to lower their cost of capital, and financial institutions needed them to rate a bunch of bonds so that the institutions could determine what to buy.
These forces sort of worked for a while, but the wheels came off the bus in the early 2000s as mortgage bonds exploded.
Debt became more complicated, with derivatives and collateralized derivatives, and the rating agencies got greedy.
Companies threatened to take their business to “the other guy” unless they got favorable ratings, leading credit analysts to put “AAA” on bonds they knew were junk.
This isn’t a guess. We have records of analysts emailing each other about the low quality of bonds they were reviewing.
They put the coveted AAA rating on them anyway, allowing the companies to sell them at a lower interest cost and allowing pension funds, banks, insurance companies, and others, all of which were required to buy AAA, to invest as well.
They were AAA, they had to be good? Right?
There’s one word for this. FRAUD. It’s illegal. They did it anyway.
With high ratings on terrible bonds, investors large and small gobbled it up. The more investors bought, the more bonds that mortgage companies and investment banks wanted to sell, which led to more mortgage lending.
Here we get even more FRAUD, in the form of mortgage lenders doling out cash like lollipops. And we can throw appraisers and home inspectors in the mix as well.
We went from lending to prime borrowers, to sub-prime, to Alt-A, to anybody-with-a-pulse. Their mortgages were packaged into new bonds and sold as AAA-quality stuff, even though it stunk to high heaven.
It’s worth reiterating that these were the very firms who were paid to make sure that we knew which bonds were good and which ones weren’t.
If they had done their job, essentially not committed fraud, then the mortgage meltdown could not have happened.
When the winds of truth blew down this house of cards, the rating agencies claimed they were victims.
Then the Department of Justice sued Standard and Poor’s because they wouldn’t settle and, through discovery, we found out that they knew all along they were slapping great ratings on trash.
But then they came up with a new defense. Their ratings weren’t really objective analysis, but mere “puffery.”
Standard & Poor’s stated their claims of objectivity and integrity were just so much boilerplate, intended to win business, and that their actual ratings were merely opinions that weren’t to be relied upon. Can’t be sued for that, right?
So these NRSROs, which were put forth by the SEC as the arbiters of what’s good and bad in the credit world and then earned billions of dollars in fees because people had to use them were simply talking smack?!
They settled. They paid $1.5 billion, never admitting guilt, never going to jail.
And they’re still around today.
Still relied upon to give ratings on bonds, still used by banks, pension funds, trusts, etc., to determine their mix of investments, still carrying the NRSRO imprimatur from the SEC.
Sure millions of people lost their homes, and millions more lost their life savings, but at least some big firm paid a fine to the federal government and a few states. That makes you feel better, doesn’t it?
Sometimes, there is no justice, even when you can identify the criminals.