Common sense in the European parliement!

[Brian Ellis]

Credit rating agencies should be more transparent and be accountable, Director of Cambridge Centre for Economic & Public Policy Philip Arestis has said.

Arestis, who was addressing an event organised by Cyprus –UK Business Association and Cyprus Commercial Representatives Association in Nicosia on Monday on recession and economic policy implications, said that “there is sufficient consensus that credit rating agencies have contributed to the current financial crisis”.

Noting that the accuracy of forecasts by credit rating agencies is clearly important, he spoke of the need for some accountability, noting that a conflict of interest exists in as far as at least larger credit rating agencies rely for most of their revenue on the issuers they rate.

http://famagusta-gazette.com/arestis-credit-rating-agencies-should-be-more-transparent-p15250-69.htm

[Umfriend]

Oh, I do not deny that the three major rating agencies had an important role in the credit crisis. Please review carefully which accusations I have argued against, never that of ****ing up in this regard (but, rather, being complicit to, involved in or active in market manipulation and/or insider trading).

Having said that, this crisis would not have occured as it has without the cooperation of, at least, central banks (think monetary easing inducing asset price inflation, accepting ABS as collateral), banking regulators (think Basel II and its huge reliance on public ratings), governments (think running deficits under benign economic conditions, covering up deficits), professional investors (think relaxing their own due diligence) and certain banks/institutions actively driving transactions on questionable assets (think Goldman Sachs, Bear Stearns).

[Dr Mordrid]

Or the other govt. policy that drove the real estate crisis here: "...make houses affordable for everyone!" regardless of ability to pay.

[Umfriend]

Or the other govt. policy that drove the real estate crisis here: "...make houses affordable for everyone!" regardless of ability to pay.

I did not mention that one as I do not actually know enough about that angle. Could be relevant indeed (and perhaps explain why the crisis was virtually limited to US assets as opposed to, e.g., European mortgage loans.

Of course, repealing Glass-Steagal may have contributed as well.

[cjolley]

I did not mention that one as I do not actually know enough about that angle...

Doc's comment about the Community Reinvestment Act is boilerplate right wing talking point. Disconnected from the real world.

http://en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis

http://fcic.law.stanford.edu/report/conclusions

http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_conclusions.pdf

...
The Commission also probed the performance of the loans purchased or guaranteed
by Fannie and Freddie. While they generated substantial losses, delinquency
rates for GSE loans were substantially lower than loans securitized by other financial
firms. For example, data compiled by the Commission for a subset of borrowers with
similar credit scores—scores below 660—show that by the end of 2008, GSE mortgages
were far less likely to be seriously delinquent than were non-GSE securitized
mortgages: 6.2% versus 28.3%.
We also studied at length how the Department of Housing and Urban Development’s
(HUD’s) affordable housing goals for the GSEs affected their investment in
risky mortgages. Based on the evidence and interviews with dozens of individuals involved
in this subject area, we determined these goals only contributed marginally to
Fannie’s and Freddie’s participation in those mortgages.
Finally, as to the matter of whether government housing policies were a primary
cause of the crisis: for decades, government policy has encouraged homeownership
through a set of incentives, assistance programs, and mandates. These policies were
put in place and promoted by several administrations and Congresses—indeed, both
Presidents Bill Clinton and George W. Bush set aggressive goals to increase homeownership.
In conducting our inquiry, we took a careful look at HUD’s affordable housing
goals, as noted above, and the Community Reinvestment Act (CRA). The CRA was
enacted in 1977 to combat “redlining” by banks—the practice of denying credit to individuals
and businesses in certain neighborhoods without regard to their creditworthiness.
The CRA requires banks and savings and loans to lend, invest, and provide
services to the communities from which they take deposits, consistent with bank
safety and soundness.
The Commission concludes the CRA was not a significant factor in subprime lending
or the crisis. Many subprime lenders were not subject to the CRA. Research indicates
only 6% of high-cost loans—a proxy for subprime loans—had any connection to
the law. Loans made by CRA-regulated lenders in the neighborhoods in which they
were required to lend were half as likely to default as similar loans made in the same
neighborhoods by independent mortgage originators not subject to the law.
...

[Dr Mordrid]

Lies, damned lies, and statistics

Does the term "self-serving" mean anything to you? Many, if not most, of those on the committee - IN BOTH PARTIES - were in Congress at the time CRA and other legislations encouraginfg subprime home loans were passed. Saying anything other than "NOT OUR FAULT!!" would be like slitting their own political throats.

[Umfriend]

Lies, damned lies, and statistics

Does the term "self-serving" mean anything to you? Many, if not most, of those on the committee - IN BOTH PARTIES - were in Congress at the time CRA and other legislations encouraginfg subprime home loans were passed. Saying anything other than "NOT OUR FAULT!!" would be like slitting their own political throats.

Having read a bit about this now I deem this insufficient.

http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932010

It may well be that policies caused FNMA and FHLMC to take on risky assets but it seems clear that:
1. The assets they took on, controlling for certain characteristics, performed way better compated to assets originated by non-GSEs; and,
2. The market share of FNMA/FHLMC was at most 44% (2003) and just 22% in 2005.

As such, it may have played a role but there were a lot of other factors that in itself could have caused the crisis but without them would not have resulted in a crisis due to FNMA/FHLMC alone.

To be sure, if on a market share of 33%, 7% becomes delinquent you have 2.32% of bad credit on the entire sub-prime sector. With the 67% the delinquency rate at 28% you have 18.8% of the entire sub-prime sector being problematic (and that is the non-CRA-subject originators).

Given the conflicting views on regulation, the "right" does have an incentive to lay blame there where it paints a disfavourable view on regulation. I'll accept that that may well be the case with the position that HUD policies w.r.t. FNMA/FHLMC caused the credit crisis.