Michael Capuano: Why Are We Using the FDIC in the Bailout? And Why Do We Trust Ratings Agencies?
Michael Capuano (D-MA) did the best job grilling Geithner and Bernanke about Geithner’s new bailout plan today. He challenged Geither’s claim that this leverages private investment at a 6 to 1 ratio, arguing that with the FDIC funding, it’s actually 13 to 1.
He then asks how much toxic assets are out there, noting that there are more than a trillion dollars of toxic assets out there.
In addition he questions why we should be reassured that these are AAA assets, since the rating agencies have been so wrong about these assets so far.
Are they going to fund these things by floating collateralized debt obligations? Geithner says no. Then Capuano reads from the Treasury website using precisely that language. Geithner says he doesn’t consider that a collateralized debt obligation. He gets interrupted before he finishes his question about the losses that FDIC might incur.
Let’s hope someone follows up on Capuano’s question when Geither returns for another round on Thursday.
when you have rating agencies in cahoots with banks, you know you have a problem… unfortunately the problem has been going on for a long time… the money spent on overseeing these types of things has been almost non existent.. now everyone is playing catch up but the horse got out of the barn a long time ago..
Both ON and OFF Topic:
ON
There was/still is a pretty lively kibbitz [distinct from live blog] on today’s Fed/Treasury Cash for Trash [I prefer Nudge the Sludge — this is really about Plumber’s Helper-ing the economy] over at a econgeek testosterone-filled site called seekingalpha.com — including Portofio’s Felix Salmon, Mark “Duck” Thoma & Brad “Timmeh’s only BFF” Delong — alone worth this link:
http://tinyurl.com/cqqt5k
OFF
Delong explaining NOT having to leave early – while dropping off a little fortune cookie:
“Ah. No lunch with the Chancellor to talk about John Yoo–Chancellor is off giving university budget presentation instead. So I am still ehre [sic] …”
When I worked at a new york area law firm, I was in the Structured Finance division, packing ALT-A mortgages into securities for Bear Stearns. The rating agencies were well aware of the garbage going into these things, even as early as 2006. Often S&P would reach out to us with “advice” on how better to structure the mortgage pools (of what turned out to be crap) so as to be able to get the AAA rating. And, of course, so S&P could get paid. Why anyone would give credence to their “ratings” at this point is well beyond me… this needs to be a governmentally regulated portion of the market if people and pension funds and municipalities and whoever are making investment decisions based on the fact that something is “AAA”…. There is a huge inherent conflict of interest in the way ratings (especially of these crap mbs’s) are apportioned– the reward structure is perverse. Then people are SHOCKED! that these MBSs aren’t the AAA they’re cracked up to be!
Great comment, thanks
Sure synchs with other info that I’ve encountered on the corruption of ratings agencies.
I hope you somehow get your issues more visibility, because the idea of making the ratings a government function makes a lot of sense, although I can already hear whining and yelping in the distance.
I heard that 6-1 nonsense earlier, and am glad someone got back to it. The plan is for an 80:20 public:private partnership, plus 85 percent public financing to private borrowers of their 20 percent share, for a total of 97 percent, or about 13:1 leverage.
It’s interesting, but probably just a side note, that this is the kind of loan that, when extended to household mortgage borrowers, that is ultimately responsible for the whole mess in the first place.
Actually Geithner has a point on the CDO, in that a CDO has a particular kind of structure involving tranched, separately-rated payouts which are in principle tradable as securitized entities, while the vehicles in the plan are just collateralized whole debts of a more routine sort and will not be popping out of the oven tranched, securitized, etc.
Ms E Wheel – That same crew at talkingalpha got into your questions a little – variously expressing surprise & doubt about the CDOs being exempted from the Nudge the Sludge program.
Otherwise:
I’ll take Mysteries & Miseries of Finance for $200, Bizarro World Alex:
Why Are We Using the FDIC in the Bailout?
FDIC is one of the few USG agencies Bush & Cheney didn’t completely fuck up, & maybe the only one that has anything serious to do with the economy, still employing old-fashioned standards for testing solvency & using pre-Enron GAAP, with a bunch of competent bodies. Geithner-san pretty much admitted he’s spending a helluva lot of his time now recruiting for Treasury.
And Why Do We Trust Ratings Agencies?
Do we?
I hope that I don’t get whomped for mentioning ‘Fukuyama’ here, but he wrote a book called ‘trust’, in which he points to ’social capital’ as a key asset of any nation.
Then he looks at where trust is located in different cultures and nations; in the US, it was in the government because we have traditions of joining Chambers of Commerce and interacting with people not in our ‘kinship structure’, where as in China, a lot of ‘trust’ is still rooted in the family structure. (This struck me as quite true, FWIW.)
So given the fact that any thinking person is going to have zero trust in the ratings agencies, I’d say just do the post mortem, buy the grave marker, and figure out how to do it under regulatory oversight that actually can provide the needed ’social capital’, without markets become ‘black’, and extortion drives a large portion of the transactions.
Exactly. I forget the exact figure and will look for a cite, but at one point in 2007 there were TENS OF THOUSANDS tranches of this MBS crap rated AAA. And guess how many corporations? Less than fifty! If that doesn’t point to a f*cked up rating system, then I don’t know what does.
The agencies are a joke– they had this patina of impartiality that has been stripped quite bare. I’m with you, rotl, I say bury them- the sooner the better.
The ‘patina of impartiality’ seems to be coming off a lot of institutions these days; no wonder some people are flipping out. It’s tough: the pedophile priests gave the Catholic Church a bad name, the ‘unnamed sources’ and Judy Millers who were corrupting public information have nearly sunk the media (as we knew it, which is a shame for good reporters everywhere), and so on some levels it’s kind of as if ‘the market’ is being revealed as a place where economic pedophilia ran rampant.
The bad part is that it’s so disgusting and infuriating.
The good part is… since that’s how bad it was, at least now if we can unload the death grip of market fundamentalists, the DC/NY axis, and Wall Streeters, maybe a more functional system can be put in place.
I think Wall Street wants to rewind and use taxpayer bailouts to save its ass — Goldman at the front of the move to use this ‘crisis’ to become even more powerful. That could happen unless people articulate their insistence to electeds; no matter how corrupt the markets, they still have to follow laws.
A lot depends on political will and street smarts, IMHO.
But anyone who thinks we can go back is just not thinking clearly at all.
I have the impression that the ratings agencies are as reliable as the BBBs: they’re both paid for their services, which means that as a user, you have no way of telling whether that rating is real or just paid advertising.
Ok, so some of the underlying properties have already been foreclosed or may be close to foreclosure. There should be a pretty good idea of the cash inflows that would result. I assume at the point of foreclosure the banks would have a loss on their books and future projected cash flows for that particular piece of property would be known and the hedge funds would have a good basis for a bid, if the were just one piece of property rather than a bundle. There is likely to a difference between the what the banks would like to receive 60% and what the the hedge funds would like to pay 30%. Therefore, if someone, who earns only $20000 per year and who did not just graduate from med schoool, bought a house for $300000 with $0 downpayment and an adjustable rate mortgage (SCREAMS Fraud) and the house now has a market value of 20% – $60000 and the bank would like $180000 and the hedge might be willing to pay $30000 does the math work out? From what I hear from various sources this is typical situation?
They are using the FDIC as a front because Geithner and Treasury don’t have the cred to do it on their own. And they figure that because FDIC insures depositors and so is very popular with most Americans the Congress won’t leave it to twist in the wind when things go south in the Geithner plan.
As for the ratings agencies, they are a sign of how bankrupt both government and Wall Street are in an intellectual sense. Again these are some of the major villains in this piece. Their credibility should be completely blown but instead both government and Wall Street continue to cite them as if their ratings still had meaning. And importantly the Obama Administration has gone out of its way to avoid reforming them.
I have a question. There are hedge funds that made money on this. They knew what was going on. Why don’t we use these people to help us out of this quandary. They seem to know more than the execs at these big bank/insurance companies.
let’s get very clear, here.
geithner, bernanke have known what has been going on in this market for years.
they are not greenhorns.
yet, listening to the hearings today, i thought that the congress treated them as if they had just landed from pluto…and were just trying to ameliorate the system as if they had no historical involvement[just men from mars].
but, that is a fiction. both of them know everything about how this trainwreck was created. and both of them want to refrain from repairing the tracks. why is that? is it because they don’t want to upset their friends?
barry obombya is a fraud. just a more mulatto george walker bush. oh, he speaks better. his baritone is more pleasing. but, he is just another actor. fronting for the banksters.
I missed that to shoot my mouth off, but Capuano is always good. And he was on to the bloviating by that part in the hearing.
Thanks for capturing this. Capuano’s points were important & effectively went unrefuted. I’m with Krugman — this is “an awful mess.”
The Constant Weader at http://www.RealityChex.com
I meant $90000 from the hedge fund. Anyway, if underlying transactions like this are a significant percentage of the total in the bundle, then the math will not workout. Someone at the top of the mortgage company mess(es) needs to be indicted as well as some others who allowed it to go on.
Just a dog and pony show. Makes good sound bites.