S&P: We Knew Nothing! Nothing!
Repeat that headline in your best Sergeant Schultz voice for maximum effect. Then read the testimony of Deven Sharma, President of Standard & Poors in the same voice:
S&P is not alone in having been taken by surprise by the extreme decline in the housing and mortgage markets. Virtually no one -- be they homeowners, financial institutions, rating agencies, regulators, or investors -- anticipated what is occurring. Although we highlighted to investors looming issues we saw in the housing market as far back as early 2006, the reality remains that in publishing our initial ratings on many of these securities we never expected such severe, negative performance in the housing and mortgage markets. There is no doubt that had we anticipated the extraordinary events that have occurred -- and we did not -- we would have utilized different economic forecasts and would not have assigned many of the original ratings that we did . . . (emphasis added)
You decide: Perjury, or mere ignorance?
A significant number of economists, strategists, academics and blogs all forecast the housing disaster way way in advance. Not only me, but Nouriel Roubini, and James Grant and John Paulson and Jim Rogers and Peter Schiff, and lots of sites: Calculated Risk and The Mess that Greenspan Made and ML-Implode and Mish and Housing Doom and NJ Real Estate Report and iTulip, and, well, you get the idea.
But it turns out that two S&P analysts, April 2007, via an IM conversation, were also discussing it:
Rahul Dilip Shah: btw: that deal is ridiculous
Shannon Mooney: I know right ... model def does not capture half of the risk
Rahul Dilip Shah: we should not be rating it
Shannon Mooney: we rate every deal
Shannon Mooney: it could be structured by cows and we would rate it
>
IM Conversation via House Oversight Committee
>
Source:
TESTIMONY OF DEVEN SHARMA, PRESIDENT, STANDARD & POOR’S
BEFORE THE COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM UNITED STATES HOUSE OF REPRESENTATIVES
OCTOBER 22, 2008
http://oversight.house.gov/documents/20081022125052.pdf
See also:
Ratings agencies 'put system at risk,' CEO says
Testimony shows watchdogs were 'Kool-Aid drinking' lapdogs
Rex Nutting
MarketWatch 5:19 p.m. EDT Oct. 22, 2008
http://tinyurl.com/5fjkpp
Credit Rating Agency Heads Grilled by Lawmakers
GRETCHEN MORGENSON
NYT, October 22, 2008
http://www.nytimes.com/2008/10/23/business/economy/23rating.html
Wednesday, October 22, 2008 | 03:58 PM | Permalink
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Comments
Virtually no one -- be they homeowners, financial institutions, rating agencies, regulators, or investors -- anticipated what is occurring.
Er, so what was that Irrational Exuberance speech in 1996 all about? Even the otherwise reckless Greenspan warned about us turning into Japan 12 years ago (really Robert Shiller deserves the credit).
It's not that nobody saw this coming; it's that it was deliberately ignored or kept quiet for profit.
Posted by: super-anon | Oct 22, 2008 4:04:41 PM
Well, apparently John Paulson had it figured out.
Fund manager John Paulson made billions betting against subprime-backed securities
He has got my vote for the next Treasury Secretary.
Posted by: BlackSwan2008 | Oct 22, 2008 4:05:03 PM
they knew. but they did not believe.
Posted by: just trade | Oct 22, 2008 4:05:41 PM
I love the smell of smoking guns in the morning - it smells like convictions!
Posted by: Winston Munn | Oct 22, 2008 4:06:32 PM
moooooooo!
Posted by: MikeBC | Oct 22, 2008 4:07:02 PM
If you read the Economist on a regular basis - you knew that housing was a global bubble, and that CDOs were an unregulated monster.
Posted by: kurt milne | Oct 22, 2008 4:08:22 PM
I was suspicious, but it was only when Casey Serin burst onto the scene in late 2006 that the full picture came into view.
The very products that were driving prices up -- by making house payments, if not houses, "affordable" for a year or three -- were the ones that were going to fail sooner rather than later, removing idiot, if able, buyers from the market and taking the prices and tranches down with them.
The Germans, as relayed by Winston Churchill, have a saying: "The trees do not grow to the sky."
Posted by: Troy | Oct 22, 2008 4:08:43 PM
Any double inverse funds need to be sold immediately. Look at the 6 week charts on them. QID over QQQQ for instance has lost 20% of it's value even though QQQQ is breaking a new low.
It's the volatility which are killing them. Any volatility to the upside causes the fund to lose more than 2 times.
Who rated the credit swaps on the double inverse funds? I wonder if no one can pay them?
Posted by: John Borchers | Oct 22, 2008 4:12:36 PM
Perjury, or mere ignorance?
A little of both: Pignorance
Posted by: Winston Munn | Oct 22, 2008 4:14:28 PM
Ve Vere Chust Pfollowing Ordahs!
Mein Fuhrer! I CAN VALK!!!
Posted by: Dr. Kenneth Noisewater | Oct 22, 2008 4:15:11 PM
It's been posted a thousand times before, but any time someone says it wasn't obvious there was a bubble I give them a t-shirt with this graph printed on it:
http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif
Posted by: super-anon | Oct 22, 2008 4:17:25 PM
Andrew Lahde knew about the coming storm... took $10 mil and turned it into $80+ mil in a year and a half...
http://ftalphaville.ft.com/blog/2008/10/17/17194/andrew-lahde-bows-out-in-style/
Posted by: Createabull | Oct 22, 2008 4:30:45 PM
ANY testimony before Congress has a "lawyer" problem. Everything said has a lot of weight in possible future litigation so the lawyers advise to use mendacity and feign ignorance unless there is no other recourse.
My pet theory on this real estate thing with builders, reits, renters and land owners in general is that LAND is the ultimate wealth and status simble for the rich. Hence, they'll do just about anything to bouy the price of real estate. Hence you have stocks like NVR levitating long after they should have tanked. When the wind starts to seriously be absent from rich sails, then stocks like NVR will be a bell weather telling you the bottom is near.
Posted by: AGG | Oct 22, 2008 4:32:12 PM
As a registered Republican, I would have to take exception with your constant criticism of the lack of integrity in our financial and economic markets, Barry. You seem to belong to that part of the country that is not the real America, not for America.
And today, I thought we had them where we wanted them. Ed Rendell worried about Pennsylvania and there was a poll showing McCain was ahead in Florida by one point. We had the Glorious Bull Market Rally of Monday. Everything was set up for our "narrow victory scenario". And now reality with its liberal bias rears its ugly head.
As a registered Republican, it is un-American to believe in Black Swans or Black Presidents. This mental recession is completely un-American, and any attention to facts or data is frankly Socialist. I hope that all of you buy some stocks, let's get one more sucker's rally going, and preserve the official race (Caucasian) and religion (Christianity) of this great nation.
Heil McCain!
Posted by: CNBC Sucks | Oct 22, 2008 4:32:20 PM
I got suspicious when my "Meathead," neighbor said he was moving into a brand new MicMansion with only putting his signature down.
Posted by: JustinTheSkeptic | Oct 22, 2008 4:33:04 PM
Winston Munn - Perjury + Ingnorance = "Pignorance"
Perfect word for it!
Posted by: Estragon | Oct 22, 2008 4:33:44 PM
@ super-anon
that graph says it all.
as for the Perjury, or mere ignorance?---
it really is time to call in Sgt. Joe Friday and the Bunko Squad!
Happy B-Day Barry
"Over there in BARRYtown they do things very strange"
Posted by: MarkTX | Oct 22, 2008 4:34:30 PM
Hanlon's razor: Never attribute to malice that which can be attributed to stupidity.
Posted by: Byno | Oct 22, 2008 4:34:34 PM
Any double inverse funds need to be sold immediately. Look at the 6 week charts on them. QID over QQQQ for instance has lost 20% of it's value even though QQQQ is breaking a new low.
It's the volatility which are killing them. Any volatility to the upside causes the fund to lose more than 2 times.
These funds work great if you have good timing and buy them near peaks and unload them near troughs, but as you point the don't work well if you hold them for long periods of time because of the volatility.
I suggest thinking of them as a short-term trading instrument (i.e. only hold them for days or weeks at a time).
Posted by: super-anon | Oct 22, 2008 4:35:52 PM
One problem with this kind of thing is that "knowledge" is in the eye of the beholder. How often when one colloquially say the know something, it is only an educated guess based solely on information conveyed by somebody, with a lot of blanks being filled in? And how many "factual" statements are mere opinion.
OTOH, being an expert is all about making supposedly high-quality educated guesses and recognizing material information as such, so there is always the possibility of negligence.
Posted by: cm | Oct 22, 2008 4:39:41 PM
i vote for slimy, lying weasel.
Posted by: clipb | Oct 22, 2008 4:41:01 PM
You decide: Perjury, or mere ignorance?
With a 2006 total compensation of $3,196,784, it doesn't matter which one you pick. Either way he was way over paid.
Posted by: greenewable | Oct 22, 2008 4:43:37 PM
I think an economy structured by cows would do better than this one.
Posted by: donna | Oct 22, 2008 4:44:33 PM
I knew it, and if I knew it, everybody should have known it.
Perjury.
Posted by: Marcus Aurelius | Oct 22, 2008 4:47:34 PM
John Borchers @ 4:12:36 PM
QID is now $77.45 versus 47.09 on 9/12/08, for a ratio of 1.64. The INVERSE of the corresponding ratio for QQQQ is 1.42. I don’t think that volatility per se is the culprit; the price performance of the QID is supposed to be -2X the DAILY price of QQQQ. Thus, QID may not be the ideal instrument. But it does afford certain advantages over put options (particularly the time decay issue).
Nevertheless, I did sell my QID at the close today.
Posted by: DL | Oct 22, 2008 4:47:54 PM
