The New York Attorney General is investigating the potential wrongdoing of several banks in relation with the rating of asset backed securities (these instrument that triggered and amplified the financial crises in 2008). In my latest interview on Bloomberg television I try to convey my opinion on this matter:
- It is very obvious that the banks had an interest in obtaining a good rating for their products but this doesn't necessary imply wrongdoing. Rating agencies models were based on past assumptions e.g. for period of times were it was very unlikely to see housing prices to decline countrywide.
- Without doubts the rating was central in the mortgage security business. Without these AAA or high ratings investment banks would have not been able to persuade investors in entering these deals.
- The investigation just started so the crucial question is how much substantial evidence the NY Attorney General office can find (an investigation doesn't necessary imply further action);
- The main mistake by rating agencies was assuming that mortgages in a pool were diversified and a drop in house pricing wouldn't influence the whole pool (e.g. if house pricing drops in California another State like New York would not be affected. This assumption was obviously wrong);
- If this will move to something more then an investigation this can have very negative for these banks. Despite the sophisticated investment argument rating was crucial and essential and if there was some wrongdoing there, banks might be forced to pay substantial damages. This said a criminal case would be difficult to prove and even a civil case would need to be based on more substantial proves than some email communications.
- For the future there two important points to be learned: rating agencies should focus on their strengths and limit their activity where they can provide with valuable opinions, investor should stay away from complex synthetic products and *never* rely solely on rating agencies that simply express an opinion often based (for synthetic products) on limited or historical data.
Reader commentary
Isa Maigari
June 13th, 2010 at 03:48pm
Do you offer full scholarship to African students?
SALAMI OLAIDE
May 23rd, 2010 at 03:05pm
I WANT TO GET FULL SCHOLARSHIP PROGRAM. AM AN UNDERGRADUATE STUDENT OF OSUN STATE UNIVERSITY,NIGERIA.AM PRESENTLY ON 4.4 AS MY GP .THAT WHY I LONG FOR THE SCHOLARSHIP TO ENHANCE MY CAREER IN THE FIELD. THANKS
patrick victor james whelan
May 22nd, 2010 at 05:24am
yes
Munit Mekuria
May 21st, 2010 at 04:49pm
I want to get full scholarship program in Robert Kenedy College.
Manuel Castaneda
May 18th, 2010 at 10:49pm
In 17Th september of 2008, I sent an Introduction of a book THE MONEY,THE EMPLOYMENT AND THE INFLATION,in that book )43 pages)to some embassy like USA,UK,Spain,Germany,Etc, and I worote some advices about the NOW HOW, the economies in the world, can came out and get healthy their eonomy.
Winth that advices, Expresident Bush and the President Obhama Do not let Break enterprises like Ford, Chrysler and some banks.
If you wish, I can send you my book these is in spanish to the mail you send me.
Thank you
MJC
Adetosoye Dare
May 16th, 2010 at 06:04pm
The circumstances that led to the financial crisis are somewhat akin to that which led to the stock market crash in Nigeria. In both cases however, the fnger seems to be pointing strongly at the banks but I think otherwise.
As stated above, banks sought to sell securities which were recommended to the public by rating agencies whose opinions were meant to be independent and reliable but obviously were based on alarmingly limited information and assumptions.
It would be interesting to watch the revelations from the investigations but I hope they do come out with efficient ways to curb further occurences and not just a scape goat.