Commentary By Ron Beasley
The shift in economic policy over the last thirty years could have been written by Ayn Rand. Greed was a virtue meaning regulation was the ultimate sin. The corporate community depended on honest gatekeepers in the form of accounting firms to make sure their business practices were on the up and up. When ENRON fell so did their accounting firm Aurthur Anderson. In an attempt to increase the profits of the consulting side of the business the auditing side looked the other way.
The financial paper business also has gatekeepers, the bond rating firms. In the latest financial meltdown they too let profits get in the way of their gate keeping responsibilities. This great piece of investigative journalism from McClatchy explains how this did not happen over night.
How Moody's sold its ratings -- and sold out investors
As the housing market collapsed in late 2007, Moody's Investors
Service, whose investment ratings were widely trusted, responded by
purging analysts and executives who warned of trouble and promoting
those who helped Wall Street plunge the country into its worst
financial crisis since the Great Depression.A McClatchy
investigation has found that Moody's punished executives who questioned
why the company was risking its reputation by putting its profits ahead
of providing trustworthy ratings for investment offerings.Instead,
Moody's promoted executives who headed its "structured finance"
division, which assisted Wall Street in packaging loans into securities
for sale to investors. It also stacked its compliance department with
the people who awarded the highest ratings to pools of mortgages that
soon were downgraded to junk. Such products have another name now:
"toxic assets."
The rating agencies claim that they cannot be held responsible because they were just offering opinions. Before the economy can improve that need to change - a trustworthy gatekeeper is needed.
Experts such as Columbia University's Coffee think that Congress
must impose some legal liability on credit rating agencies. Otherwise,
they'll remain "just one more conflicted gatekeeper," and the process
of pooling loans � essential to the flow of credit � will remain
paralyzed and economic recovery restrained."If (credit) remains
paralyzed, small banks cannot finance the housing demand. They have to
take them (investment banks) these mortgages and move them to a global
audience," said Coffee. "That can't happen unless the world trusts the
gatekeeper."
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