Borneo

Markets are up for that money. Do not be fooled. There is much room for them in the fall.

But in the current crisis: It has been developing for two decades.

Again, is a wise and astonishing piece of commentary, the latter on the economic catastrophe that its author, Edward Jay Epstein, differs in its elegant and pessimistic seen coming for several years. He was then informed that the “fundamental error” on Wall Street and its financial system are the rating agencies. It was not really his idea. It is Michael Milken, who revealed the fraud in a conversation in 1987.

I was noting the criminal conviction of rating agencies - Moody’s (public company), Standard & Poor’s (which is owned by McGraw-Hill) and Fitch (which is closed) for some time.

“It was Milken, right?”

When he met Michael Milken in 1987, immediately zero in on what he identified as “fundamental error” Wall Street in the financial system: its dependence on dozens of services such as Moody’s and Standard & Poor’s, to provide the equivalent of a seal of approval, Triple-A, ie virtually no risk of default. This principle of classification of Wall Street has helped sell hundreds of billions of dollars of corporate bond insurance companies, pension plans, foundations, universities and other institutions. Milken analyze the broadside was as follows: “What is a bank?” Rhetorical question. “This is nothing but a group of loans.” “How safe are these loans?” suite. “They are mainly from three groups that will never be able to pay into a real economic crisis - the owners, farmers and consumers items dear.” “What guarantees these loans?” Very few of these banks tend to have $ 100 in loans for every dollar of equity. “However,” he said, “their obligations get a triple-A rating from rating services.” ‘C’ is crazy, “concluded Milken, such as rating of the measure” the past not the future “of risks. Shortly after, the establishment of financial trounced Milken (who went to jail ), But did not qualify for services.

That was two decades ago. Since then, the rating services have developed their high rating on packages of debt as collateral debt obligations (CDOs), including subprime mortgages and other loans. Since they have much higher rates for the opinions of the debt pool complex plain vanilla corporate bonds, CDOs this expansion has proved to be extremely lucrative for them. Moody’s, which is partly owned by Warren Buffet of Berkshire Hathaway, inclined to over 3 million of costs from 2002 to 2006 for the supply of these indices. Standard & Poor’s pending escalation in the course of abyss suicide in 2000 by expanding its opinion early Piggy-CD0s sustained practice, duly appointed by a financier who was also a second loan for the payment of the first CDO. The advice of other monitoring services, allowing the pool of debt leverage, again and again, while maintaining triple-A rating they seem to be as safe as Treasury bonds for one year . The appearance of conflict of interest here is that the rating services have not only paid by companies that emit the same type of values, but these companies provide all the data on which they are based. SEC rules also make it impossible, but for someone else to launch a new service of notice. Therefore, once the service note gave its approval wallet supported by the CDOs and other wastes from food retailers wheels on Wall Street could mobilize such a magnitude that stratospheric at the end of 2008 some 18 billion dollars in the market of debt hanging over the remainder of the financial markets, and has undermined crucial for the confidence to make it work.

If only Milken critical of the classification of services have been taken more seriously in 1987, which could not now be looking to extend this black hole.

-Edward Jay Epstein-