global economy

CA Public Employees Retirement System Sues – Over Ratings of Mortgage Backed Securities

Finally a large financial entity, Calpers, the California Public Employees Retirement System, worth an estimated $173 billion, has sued those responsible for rating the Toxic Assets that are now decimating our national and global economy.

The three primary rating agencies; Moodys, Standard and Poors, and Fitch made “negligent misrepresentations” to the pension fund. The agencies’ ratings “proved to be wildly inaccurate and unreasonably high.” Calpers goes on to say that the methods used to assess these securities were “seriously flawed in conception and incompetently applied”.

It has been my contention all along that this group is by far the most culpable in this affair, because they took perfectly lousy financial instruments and slapped triple A ratings on them; the equivalent of United States Bonds. These complicated instruments that only the most sophisticated financial engineers could understand, were pushed onto countries, cities, municipalities and large pension funds as the greatest and safest investment since the United States Savings Bond, yet they were the farthest thing from safe. Most of these instruments have now lost ALL of their intrinsic value.

It wasn’t until the three credit agencies set their stamp of approval on these incredibly risky investments that the mortgage backed securities boom on Wall Street exploded. Wall Street entrepreneurs sold their new product to anyone looking for a larger annual return.

After they were sold, the inflow of money (billions or more likely trillions of dollars) was then funneled back to mortgage lenders like Countrywide and New Century Mortgage, who were busy underwriting these risky high yield, subprime loans; the key element within the financial instruments that the giants on Wall Street were so successfully selling. In other words, the securities were selling like hot cakes and Wall Street couldn’t get enough mortgages to back them, and so they pushed their lending partners to create more loans no matter how risky. Why….because they already had them sold to China, Calpers, cities in Norway, etc….. and why were they so easy to sell….. because Moodys, and Fitch, and Standard and Poors were slapping triple A ratings on them…. the highest rating possible.

It makes one wonder why Calpers, who has probably some of the most sophisticated financial experts in the industry, could not detect the risk in these securities? The reason was because of their opaqueness.

The information about what was inside of them was kept hidden from the buyer under the guise that “the securities in these packages were considered proprietary and unavailable for review”. Hence the triple A rating was the key measuring gauge the investor had, to determine the risk in the product that they were buying.

Furthermore, Calpers contends in their suit that the rating agencies were not only responsible for inaccurately rating these financial securities, but that there was an “inherent conflict of interest”, since they were actually paid by the companies issuing the securities.

Finally, the insidious behavior of these institutions reached a new ethical low when Calpers revealed in their lawsuit that the agencies themselves actually assisted, for a hefty fee, those who were creating these securities, so that they would produce a product that would receive the prestigious triple A rating.

No wonder Calpers decided to sue the rating agencies. My only question is what took them so long?

Furthermore, why hasn’t a criminal investigation been initiated? There are people and corporations out there that are undeniably responsible for our financial mess, and in my opinion, should be held accountable. After all, as financial agents they have a fiduciary responsibility to the public, and by issuing triple A ratings on these securities they not only abandoned their responsibility, but assisted in the meltdown of our global economy.

In this time of re-regulating the banking industry, and trying to create laws that would prevent a similar situation, if we do not address this conflict of interest, between Wall Street and the agencies that rate their financial instruments, we are certain to repeat the mistakes that led us into this current financial crisis.

*primary source The New York Times July 2009

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The Property Market and the Global Recession

Australia is one of the few countries, along with Canada, who has felt the credit crunch less than the rest of the world. There may be many reason for this, such as stricter property lending rules or because there is such a large amount of space and supply of land to be able to be used for homes that the vast increases the majority of the world saw from 2004 – 2006 did not happen.

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While Australia has not been completely sheltered by the economic downturn, it has weathered the storm quite well. There is a divide amongst experts as to how the property market will react in 2009 and 2010 in Australia. Most financial analysts tend to think that property values will fall from 5%-10%. Most agree, however, that an increase in value to the property market is not likely before 2011.

In the end, the Australian property market will be affected, either positively or negatively by four overriding factors: debt, employment, the global economy, and housing price stability. In reference to debt, the main issue that is facing the majority of Australian households is that the debt levels are at record highs. In a property market where housing prices are rising, the number of eligible buyers may drastically fall as people are financially unable to take on any more debt.

Employment is a very strong factor in whether the Australian property market will rise or fall. Unemployment rates are on the rise, but because there have been labour shortages in the mines, there has been work for those able to do manual mining labour. Unfortunately, due to the uncertainty in the economy, some businesses are protecting themselves by making full-time employees part-time, as this saves on health care and tax expenses. If the economy does not begin to strengthen, more business will have to move to measures such as this, in addition to redundancies and lay-offs.

The global economy, but specifically the economies of the US and China, needs to strengthen in order for the world to come back to financial order. Many countries are introducing stimulus plans to help revitalize their country, get spending under control, and to help bring financial strength back to their currencies. While the Australian property market will not feel the immediate affects of a strengthening US or Chinese economy, the medium term affects will help to maintain or increase property values.

In order to keep housing stability in Australia, interest rates have to remain low and repossessions must remain few. Banks that are working with their customers in order to allow them to keep their homes are helping bring back the economy. If banks repossess a majority of homes and hold on their books a large amount of overvalued, non-saleable stock, the market will surely fall.

Half way through 2009, the Australian property market has been able to maintain a solid ground. If employment can continue and the stimulus packages of other countries begin to kick in, the property market will remain strong. Although significant rises in the Australian property market should not be expected, a modest increase next year should be an attainable goal.

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