A new age for fair housing

HOLD IT!!! Who rated those loans?
Uh, wasn’t it the federally structured oligopoly of Moody Madness, Standard and Poorness, and Fitch Failures? The feds even admit that it was their fault…

“The regulation of the Credit Rating Agencies (CRA’s) by the Securities and Exchange Commission (SEC) and the FED has eliminated competition between CRAs and practically forced market participants to use the services of the three big agencies, Standard and Poor’s, Moody’s and Fitch. SEC Commissioner Kathleen Casey has said that these three CRAs have acted much like Fannie Mae, Freddie Mac and other companies that dominate the market because of government actions. While the CRAs issued ratings that were “catastrophically misleading, these same rating agencies enjoyed their most profitable years ever during the past decade.”

And who leaned all over the SEC, the CRA’s, and the banks to “put everyone in a house”? It was the Frank and Dodd comedy show! And instead of being tried for criminal abuse of power, these same bosos were put in charge of the investigation and the “corrective actions”!!! So, now we have the Frank/Dodd act that punishes Wall Street and the banks. For example, that new fee for using a debit card that the banks are being crucified over? Since, Frank/Dodd clobbers the merchant transaction fee, who get stuck with the tab? And who gets stuck with the blame?

I find it hard to understand why First Tuesday continues to publish this liberal propoganda right out of the liberal’s playbook..

In order for Commercial Banks to buy CMO’s they needed to be rated by Moody’s, Fitch, or Standard & Poors due to a 1930′s law, which prevents banks from investing in securities not rated by an outside agency. As reported in the WSJ article “Let’s Write the Rating Agencies Out of Our Law,” 85% of the tranches of CMO’s containing subprime mortgages were rated “AAA” and almost all tranches were rated as investment grade. A banks capital requirements (i.e., allowable leverage) is based on the rating of the security and the type of security. Per the article:

“For every dollar of equity that insurance companies are required to hold for bonds rated AAA, $3 is needed for bonds rated BBB, and $11 is needed for bonds rated just below investment grade (BB). For banks, the sensitivity of capital requirements to ratings is generally even more extreme.”

The WSJ article, “A Silver Lining to the Financial Crisis: A More Realistic View of Capitalism,” further illustrates how Commercial Banks were encouraged to hold CMO’s via regulator capital requirements:

“But under the recourse rule, “well-capitalized” American commercial banks were required to hold 80 percent more capital on commercial loans, 80 percent more capital on corporate bonds, and 60 percent more capital on individual mortgages than they had to hold on asset-backed securities, including mortgage-backed bonds, as long as these bonds were rated AA or AAA or were issued by a government-sponsored enterprise (GSE), such as Fannie or Freddie. Specifically, $2 in capital was required for every $100 in mortgage-backed bonds, compared to $5 for the same amount in mortgage loans and $10 for the same amount in commercial loans.”

So to recap, Commercial banks bought “AAA” rated Mortgage-backed securities because they were safe and allowed the banks to further extend their capital (i.e., greater leverage). So banks were encouraged by banking regulations to buy Fannie or Freddie mortgage-backed securities because they required less capital than holding individual mortgages and commercial loans for which the bank performs its own credit risk assessment instead of the ratings agencies.