The Dodd-Frank bill passed in 2010 removed this immunity, making them liable for bad faith ratings that did not represent the real risk. As some people may recall, this created a temporary problem in the market as many debt instruments were suddenly re-rated to eliminate this legal liability. This is also related to the downgrade of US Treasury debt from AAA status in 2011.
Remember Arthur Anderson. They're gone, but the US Supreme Court concluded that they weren't guilty! They make O J Simpson look like the picture of innocence, and yet somehow the Supreme Court felt the need to grant certiorari and then decide actually people who do crimes aren't necessarily guilty of those crimes if they're rich old white men...
I don't think that's enough, David Duncan in particular should have gone to jail, but it's not as if there were no consequences and to be fair to the US government they went after AA hard.
> They were indicted for shredding documents. These documents were drafts and other items that do not support the final product. All accounting firms establish policies for routinely shredding such documents.
See - all routine. Sure, your routine might not include being "reminded" to arrange for piles of documents to be urgently shredded once you hear investigators are coming but that's why you might some day be found guilty of crimes, whereas Arthur Anderson were "not guilty" after all the evidence was destroyed and their chums in the US Supreme Court reached in and overturned verdicts against them for destroying the evidence.
Now, one of the nice things in overseeing the Web PKI is that I don't care whether the auditors are incompetent or crooked, it's the same either way to me. I don't expect even their own bosses to do as much as slap them on the wrist for enabling fraud. If I'm relying on audit then I know I might as well toss a coin, I'm always going to be digging deeper than that to understand what was actually going on regardless of whether the auditors "forgot" or deliberately chose not to look.
Previously, if they rated junk debt as AAA, and you bought that debt based on that rating, you would have no recourse for their misrepresentation of risk as they were granted immunity from such things. To make matters worse, for some regulatory purposes companies were required to buy instruments rated by these organizations and take these ratings at face value.
With the change in law, if someone sells me junk debt rated as AAA by one of these NRSROs, I can now sue the NRSRO in court for damages for misrepresenting risk. For any particular rating, there are thousands of companies, often with deep pockets, who have standing to recover losses from the rating companies for misrepresentation of risk. Even if they avoid criminal liability, there is the very real prospect that the civil liability would destroy them.
The models the rating agencies were using were not secret. They defined to a great extent what was allowed to go into a pool, and how much support and credit enhancement would be necessary for the senior tranche to get a AAA rating. So as a pension fund manager, if I see to pieces of AAA paper of similar maturity trading at radically different yields, I have to consider am I getting a deal, or does the smart money know something about one of these deals? And honestly if I just buy in bulk, relying on the rating alone without due diligence on the deals, shouldn't I bear some responsibility?
Beyond that, it's not clear that you could prove civil liability. The ratings were based on models, and the models were based on historical experience (and some wishful thinking.) But when push comes to shove in the context of billion dollar lawsuits, you can imagine they'll tease the wishful thinking out of the models and show that their rating models, though flawed, were based on a reasonable interpretation of historical experience and that ratings are not an endorsement or a guarantee of suitability.
As someone who witnessed the crisis up close, the ultimate cause of the crisis was a bunch of ordinary people, both on Main street and on Wall Street, making good faith decisions that seemed rational at the time, but in retrospect proved to be idiotic.
https://www.cnbc.com/2018/05/24/trump-signs-bank-bill-rollin...
We also cannot downplay the significance of speculation systems themselves. There needs to be more burdens put on such financial mechanisms to prevent them from getting out of hand like in 2008.
Plus these are securities, and all market participants should have access to the same public information. It is a problem to have half the investors in the dark about the transaction if they couldn't pay for a private rating (which in turn would negatively affect pricing).
The borrowers were different so there was really no precedent, but just a cursory review of historical data would make what we experienced highly unlikely.
[0] https://en.wikipedia.org/wiki/Subprime_mortgage_crisis#/medi...
on the other hand, it is easy to predict that: when the average joe holds "home ownership" up as the sterling example of "making it"; then the average politician will determine that the best way to make voters happy is to increase home ownership by lowering barriers, and exempting home ownership from risk, taxes, estates, bankruptcy, medical expenses, etc. all in the name of "obvious" fairness;
then [it's easy to predict that]: mortgages and mortgage backed institutions will become unsound.
TL;DR a crisis like this is going to happen again, and it happened before, see previous "savings and loan" crisis.
bonus lesson in finance/accounting: if the problem is framed and worded properly, it's easy to see that money paid for rent is not actually "wasted money down the drain", and that it is a fallacy that it is better to put the money toward a mortgage.
Let's say out of college you live in your old room at mom's while you save money to get your own place. Your job turns out well and you're making good money, but instead of renting your own apt, you stay at mom's to save for a down payment on a first house. You save up, and you buy a place. OK so far?
Now owning your own place, do you move into it? Well, think about it, you could stay at mom's and rent this new place you own out to somebody else and let them "waste the rent" while you collect all this fingerquotes "free money". Id est, i.e., if you move into your new place, you are essentially depriving yourself of the rent that you are entitled to earn from it; you effectively pay rent to live in your owned home. You are the one "wasting the rent money".
And the extra details actually work against you: mortgage interest expense is tax deductible, right? Well, if you rent the place out, ALL expenses are tax deductible, that's more deductions than if you live in a place.
As an additional point, is rent "such a waste of money to the tenant" that wealthy people (let's use Bill Gates as an example) buy lots and lots of houses and apartments to rent out to the rental suckers? no, they don't.
TL;DR purely financially, owning is not better than renting; rent is not wasted money, at least not more than the fingerquotes rent you spend when you live in your own place.
and all the bankruptcies and home foreclosures in an economic downturn shows the cost of high leveraged investing. A better way to achieve leverage is high beta stocks. Beta behaves just like leverage, except it automatically rebalances debt/equity on the way up and down. And the base rate of growth of the stock market is substantially higher, so you are leveraging a higher rate, even though you can't lever as much as a home.
and don't forget, owning a home and living in it as real estate prices rise means that you are "throwing away" higher and higher virtual rents that you would be entitled to collect and which factor into the value of your home.
Also, leverage: if you're borrowing money to make an unsecured investment in a scheme, disaster awaits.
The United States allows 'microfinancing' via kickstarter, where poor people are allowed to give money to new ventures without any expectation of return on the given capital. Meanwhile, the rich get the opportunity to invest for actual returns on capital. Do you think an accredited investor is going to give money on kickstarter when they could offer cash as an investment?
So why is giving money allowed, but spending the same money on acquiring shares not? The answer that 'some people got scammed' does not excuse the fact that people are still allowed to spend the same money today, without consumer protections, while not receiving any benefit. In other words, we have created yet another way to privatize the benefits of new ventures (by only allowing rich people to profit off of them) while socializing the costs (the people asked to contribute to new ventures without any ownership interests via microfinancing platforms). The response that this is for consumer protection is crap, and anyone not blinded by legal confirmation bias can see that
Maximal investment limits based on income are perhaps appropriate, but wholesale banning is morally reprehensible, and a direct contributor to income inequality.
Put another way, as a landlord you are the best tenent you will ever have.
Only if you're having no kids which you plan to leave some wealth to inherit. Owning a home is the way for the lower/ middle class to build up trans-generational wealth. Let's just take the following example:
1. I buy a home today and pay it off in 30 years (standard schedule).
2. I get a kid in three years.
3. The kid is ~30 when I become a pensioner and move off to Croatia to smoke pot all day and night... meaning the kid can either move with his family into my fully paid off home, rent it out or sell it off at 4-5x the "original" value. Either way, my kid can keep a vast proportion of his paycheck and either save it up or investing it, thus creating wealth.
If I will spend the rest of my time renting, however, I will leave nothing for my kid to inherit and use as leverage to build their own wealth.
Now you understand why my generation is so truly fucked.
>And if you can save money for a downpayment then you have to compare the opportunity cost of investing those savings versus using them to buy a house.
The house will always win if you are in any metropolitan area. In 20 years property prices in Munich, for example, have tripled or quadrupled, if not more. If you're not in a metro area you don't have the rent problem anyway.
No. I find it incredibly difficult to understand why my generation seems to be so truly 'fucked'. Especially, the type of people who are on HN should be able to save money and make a down payment.
How does it work out when your mom is renting herself and when you went to university she started renting a smaller place without extra room, to save some money?
rent vs own comparison may look a little different when you actually need a place to live
Broader point here: grading systems aren't all that resilient. It only takes one bad actor to threaten the whole system, if we assume ratings (in aggregate) are always believable. Dodd-Frank may have been re-worked but I wouldn't, for a second, assume there isn't a loophole in there that will allow the bad guys to resume.
It's the rating on the debt which makes it clear exactly how risky it is, and allows people to make a decision about it.
What? No. Its a statistical decision. Its a question of how good your data on your risk profile and the risk the creditee represents is.
Maybe we can blind the rating system? If Standard & Poor can't tell whether this instrument they're rating was created by HSBC or me in my basement, they may take a few seconds more to consider whether the scent of shit is because it is in fact just shit in a thin paper shell.
And if you blind them but they still don't give true ratings you can trivially exploit that to fill the market with highly rated shit, destroying the market but leaving the real economy largely untouched. Rinse and repeat until all the dumb money is sucked into your pocket.