According to reports [Aug. 29, 2011], the Justice Department is looking into instances in which S&P’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by their superiors.
During the years leading up to the financial crisis, ratings agencies like S&P earned record profits as they awarded their highest ratings to bundles of troubled mortgage loans, which made the mortgages appear less risky.
In the aftermath of the ultimate collapse of the mortgage market, the agencies’ business practices and models have been sharply criticized in Congressional hearings and reports. Agencies such as the Securities and Exchange Commission have also raised questions about whether independent analysis took a back seat in the quest for profit.
If the government finds enough evidence to support such a case, which is likely to be a civil case, it would refute S&P’s longstanding claim that its analysts act independently from business concerns. A successful fraud case would also be good news for investors, as the agencies would be forced to address the inherent conflicts of interest generated by their business model under which the agencies are paid by the companies who securities it is supposed to rate.
It should not be surprising that S&P is not the only rating agency that may have profited at the expense of investors.
The 1933 Glass-Steagall Act, and later the 1956 Bank Holding Company Act, mandated the separation of banks, insurance companies and securities firms. Then along came Ronald Reagan, who led a movement that came to power in 1980 proclaiming faith in free markets and mistrust of government. That conservative philosophy has dominated America for the past 28 years.
Even after taxpayers had to rescue deregulated savings and loans, or S&Ls, with a $200 billion bailout in the late 1980s, the push to loosen regulation paused only briefly. In 1999, President Clinton signed the Financial Services Modernization Act, which tore down Glass-Steagall's reforms by removing the walls separating banks, securities firms and insurers.
Under Clinton and his successor, George bush, the government became eager to promote home ownership. Interest rates were low, the market grew for loans to borrowers with weak credit and private-sector mortgage bonds boomed. About 38 percent of those bonds were backed by subprime loans. They are at the root of today's financial crisis.
A generation ago, banks, credit unions and S&Ls issued home mortgages that they retained on their books as an asset. The lenders had a stake in receiving full repayment of the loans from creditworthy borrowers. But in recent years, mortgages began to be sold to firms that cobbled the loans together to create mortgage-backed securities, or mortgage bonds. Loans to the least creditworthy borrowers carried the highest risk but gave the highest returns, so banks and other institutional investors bought loads of them. Except no one was policing the credit-worthiness of the borrowers.
The process helped more people buy homes, and a booming mortgage-bond market, led by investment banks, was in full swing by 2005.
When borrowers who had secured loans with adjustable interest rates, however, found their rates going up, many were unable to pay. That meant that holders of bonds backed by these mortgages were stuck with securities worth much less than their face value — or nothing at all. That created a solvency crisis for the banks that loaded up on them — and virtually all of them had.
Warning signs began to appear. At least nine federal agencies oversee some part of the mortgage market, and from 2004 to 2007, at least three had issued warnings about risky loans.
Still, none was willing to end the financial revelry.
#2 - TAXATION [or a lack thereof] and ST. RONNIE et al
In 1982, the first full year after the REAGAN tax cuts were enacted, the economy actually shrank 2.2%, the worst performance since the Great Depression. And the effect on the federal budget was catastrophic.
Jimmy Carter’s last budget deficit was $77 billion. Reagan’s first deficit was $128 billion. His second deficit exploded to $208 billion. By the time the "Reagan Revolution" was over, George H.W. Bush was running an annual deficit of $290 billion per year.
Yearly deficits, of course, add up to national debt. When Reagan took office, the national debt stood at $994 billion. When Bush left office, it had reached $4.3 trillion. In other words, the national debt had taken 200 years to reach $1 trillion. Reagan’s Supply Side experiment quadrupled it in the next 12 years.
When Bill Clinton took office he intentionally reversed the Supply Side formula, raising taxes on the wealthy and reducing them on the lowest wage earners. Supply Side true believers predicted the arrival of the Apocalypse. Bob Dole said the stock market would collapse. Newt Gingrich said the world would fall into another Great Depression.
What actually happened?
Between 1992 and 2000, the U.S. economy produced the longest sustained economic expansion in U.S. history. It created more than 18 million new jobs, the highest level of job creation ever recorded. Inflation fell to 2.5% per year compared to the 4.7% average over the prior 12 years.
Real interest rates fell by over 40% producing the greatest housing boom ever. Overall economic growth averaged 4.0% per year compared to 2.8% average growth over the 12 years of the Reagan/Bush administrations. Most impressively, Clinton reversed the mammoth deficits of the Supply Side years, turning them into surpluses. He used these surpluses to begin paying down the national debt.
By virtually every meaningful measure-employment, growth, inflation, interest rates, investment, deficits and debt-the economy performed better once the Supply Side experiment was terminated and replaced with a more honest economic policy where we actually pay our bills as we go.
This might all be ancient history if the specter of Supply Side economics had not reared its ugly head again once Bush II took office. In selling his $1.6 trillion tax cut-half of which went to the wealthiest 1% of Americans-Bush promised in 2001 that it would produce 800,000 new jobs. In fact, by 2003 the economy had already lost 2.7 million jobs - the worst economic performance since the Great Depression.
The effects of Bush’s tax cut on the deficit and debt were exactly what we would expect having seen Reagan’s results - only worse. Bush inherited from Clinton a fiscal surplus of $127 billion. In his first year alone he turned that into a deficit of $158 billion.
#3 - THE WINDS OF WAR
War spending falls behind tax cuts and prescription drug benefits for seniors as contributors to the $14.3 trillion federal debt. The Pentagon's base budget has grown every year for the past 14 years, marking the longest sustained growth period in U.S. history, but it seems clear that that era is ending.
Since the U.S. government issued war bonds to help finance World War II, Washington has asked taxpayers to shoulder less and less of a burden in times of conflict. In the early 1950s Congress raised taxes by 4 percent of the gross domestic product to pay for the Korean War; in 1968, during the Vietnam War, a tax was imposed to raise revenue by about 1 percent of GDP.
No such mechanism was imposed by the Bush Administration for Iraq or Afghanistan, and in the early years of the wars Congress didn't even demand a true accounting of war spending, giving the military whatever it needed.
To be sure, the costs of war are staggering.
According to Defense Department figures, by the end of April 2011 the wars in Iraq and Afghanistan - including everything from personnel and equipment to training Iraqi and Afghan security forces and deploying intelligence-gathering drones - had cost an average of $9.7 billion a month, with roughly two-thirds going to Afghanistan. That total is roughly the entire annual budget for the Environmental Protection Agency.
To compare, it would take the State Department - with its annual budget of $27.4 billion - more than four months to spend that amount. NASA could have launched its final shuttle mission in July, which cost $1.5 billion, six times for what the Pentagon is allotted to spend each month in those two wars.
What about Medicare Part D, President George W. Bush's 2003 expansion of prescription drug benefits for seniors, which cost a Congressional Budget Office-estimated $385 billion over 10 years? The Pentagon spends that in Iraq and Afghanistan in about 40 months.
To those bitching about the fact that what’s going on right now is “Obama’s doing”, get over it. The toilet in the Capitol was already spewing feces years before he got to town.
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