, Salem, MA

November 20, 2013

Anderson: Moody's blues: 'Too big to fail' back for another round

Barbara Anderson
The Salem News

---- — When President Kennedy was assassinated, I was a sophomore at Penn State. During most of the 50 years following, even when my mother and I watched the Oliver Stone movie on television, I accepted the Warren Commission report that Oswald acted alone; it seemed reasonable enough to blame one crazy communist, and crazy to imagine conspiracies.

Now in 2013, after decades of watching various government insanities, nothing seems too crazy, and I’d no longer bet on the Warren Commission being right. Rather than add to the many columns written for this anniversary of the Kennedy assassination, I’ll give you a column about the ongoing assassination of the American economy.

Full disclosure: I know almost nothing about Wall Street, about the stock and bond markets. So, as I was looking for used adventure novels for Chip’s and my winter reading at the St. Andrew’s fall fair, I wasn’t interested when a church worker overseeing the book tables handed me Michael Lewis’ “The Big Short: Inside the Doomsday Machine,” insisting I must read it. Still, for the sale dollar, I was reluctant to reject his recommendation; once I started it, I was reluctant to stop reading.

I missed this 2011 New York Times best-seller because until I watched “Too Big to Fail” in 2012, I didn’t realize how essential it is to know what HBO promoted as “the true story behind the 2008 economic crisis.” The movie covers the 36 days of the almost-fiscal meltdown, caused by the crash of the subprime real estate market and allegedly resolved with the passage of the TARP bailout and, of course, the 2008 election of the Great Man himself, healer of all wounds financial and otherwise.

According to “The Big Short,” the “doomsday machine” was turned on in the 20th century; some say in 1999, when, according to Wikipedia, the repeal of the Glass–Steagall law “permitted Wall Street investment banking firms to gamble with their depositors’ money that was held in affiliated commercial banks.” I have absolutely no expertise here but wonder if doomsday didn’t become inevitable when someone in the early days of human history felt he needed to invent the word “greed.”

Aside from arguing in vain with Barney Frank about potential problems with Fannie Mae, the Bush administration didn’t address the sub-prime mortgage issue, probably because it didn’t understand what was going on: No one except the most inside of insiders knew that the mortgage bond hedge-fund process was, as one insider told Lewis, “insane.” Short explanation: While some in the mortgage industry were giving mortgages at subprime rates (i.e, lower than normal, often with no down payment), just to tempt people to buy homes they couldn’t afford, others were packaging and selling these poor risks and some were betting that they would default. And eventually they did. Insurance companies couldn’t cover the losses.

Since companies you don’t usually associate with mortgages got caught up in these unwise investments, the stock market, as well as the bond market, became infected. All together, they were “too big to fail,” and the government (Congress and the Bush administration) stepped in with a bailout (Troubled Assets Relief Fund, i.e. TARP).

The revelation in the book that most intrigued me was the role played by the rating agencies, especially Moody’s, with which I’d had my own run-ins, as they testified against state and local tax cuts. It seemed to me that all Moody’s cared about was making sure the state government had unlimited tax dollars to pay back its lenders; long-term viability of the state economy wasn’t on its radar screen. So, I wasn’t surprised to read in “The Big Short” that one reason Wall Street firms bought these mortgages was that their packages were getting the highest bond ratings from Moody’s. Lewis quoted one Goldman Sachs trader, “Guys who can’t get a job on Wall Street get a job at Moody’s” where ...“the asset-backed people are basically brain-dead.”

So, the zombies validated the greeders who got very rich selling, packaging and/or betting against the viability of subprime mortgages. I know this all sounds crazy; you have to read the book, which caused me to alternately laugh out loud and grab my jaw as it fell toward the floor. A great Christmas gift for people on your list who are annoyingly clueless about Big Government and Big Business.

At least, since all this has come out, regulators are keeping an eye on the subprime mortgage industry, sort of, though I still hear ads on the radio urging people to apply for a mortgage with no down payment, and for some reason, Fannie Mae is still in existence, and Moody’s is still rating bonds.

But here’s the new game to watch. Glancing at the Nov. 12 Wall Street Journal abandoned on a table, I saw bold headlines in the “Money & Investing” section: “Hedge Funds Muscling into Munis.” Get this: The same kinds of greeders who almost collapsed our private sector are now “barreling into the municipal-debt market at a time when many investors fear increasing defaults.”

Some of the nation’s municipalities face bankruptcy because of their unsustainable public employee benefits. So, now we toss Big Labor into the scary Big Government-Big Business combination.

Wanna bet there’s somebody looking for a way to bet that municipalities’ bonds fail? Let’s watch to see how many Detroits and San Bernardinos will go bankrupt before someone considers the aggregate failure “too big” and expects a bailout from a federal government that is already $17 trillion in debt of its own, with another $93 trillion in unfunded liabilities.

Maybe the government can appoint a commission, chaired by our own Sen. Elizabeth Warren, and call it the Warren Commission.


Barbara Anderson of Marblehead is president of Citizens for Limited Taxation and a Salem News columnist.