Sen. Henry Waxman, that bald headed twit, held hearings today to roast Moody's, Standard and Poor's and the other bond rating services. The raters gave AAA ratings to "mortgage backed securities" which later tanked and took down the financial markets. Although the roasting is well deserved and fun to watch, it misses the point.
The goodness of the "mortgage backed securities" was no better than the goodness of the mortgages backing them. There is no way a bean counter in a Manhatten office can know how good a mortgage in California or Florida is. To evaluate a mortgage, you have to know the value of the real estate (which requires a visit to the property and local knowledge) , the income of the borrower (which is privacy protected) and interview the borrowers. No way a bean counter at a rating agency can do this.
The buyers of the "mortgage backed securities" should have known this. Once a mortgage maker knows he can sell the mortgage for cash, and all the risk is passed to the buyer, then he will make a mortgage to anyone with breath in his body. We should close the entire secondary mortgage market because it is impossible to know the soundness of any mortgage backed security.
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