<blockquote>"
Janet Tavakoli, a finance industry consultant who is president of Tavakoli Structured Finance, said the stock market’s gyrations are a result of a severe lack of confidence in the very officials who are charged with cleaning up the nation’s mess.
“It is not enough to throw money at a problem; you also have to use honesty and common sense,” Ms. Tavakoli said. “In fact, if you leave out the last two, you are wasting taxpayers’ money.”
What Ms. Tavakoli means by common sense is a plan that will force institutions to get a fix on what their holdings are actually worth.
...
“If I were queen of the world, I would wade in there with a small army of people and just start straightening out these books,” she said. “Start stripping them down and simplifying contracts so people can start to understand what they own. It would be unprecedented, but so is everything else we are doing.”
THAT move, which would begin the much-needed healing process for investors, would be unprecedented in another way. It might get the people who run our companies and our regulatory agencies into the business of telling the truth.
Naïve, I know. But something to wish for — I’d like to give my hypocrisy meter a breather."</blockquote>
They’re Shocked, Shocked, About the MessBy GRETCHEN MORGENSON
October 26, 2008
SourceMY hypocrisy meter konked out last week.
It started acting up on Wednesday, spinning wildly as executives from the nation’s leading credit-rating agencies testified before Congress about their nonroles in the credit crisis. Leaders from Moody’s, Standard & Poor’s and Fitch all said that their firms’ inability to see problems in toxic mortgages was an honest mistake. The woefully inaccurate ratings that have cost investors billions were not, mind you, a result of issuers paying ratings agencies handsomely for their rosy opinions.
Still, there were those pesky e-mail messages cited by the House Committee on Oversight and Government Reform that showed two analysts at S.& P. speaking frankly about a deal they were being asked to examine.
“Btw — that deal is ridiculous,” one wrote. “We should not be rating it.”
“We rate every deal,” came the response. “It could be structured by cows and we would rate it.”
Asked to explain the cow reference, Deven Sharma, S.& P.’s president, told the committee: “The unfortunate and inappropriate language used in these e-mails does not reflect the core culture of the organization I am committed to leading.”
Maybe so, but that was a lot for my malarkey meter to absorb.
Then, on Thursday, my meter sputtered as Alan Greenspan, former “Maestro” of the Federal Reserve, testified before the same Congressional questioners. He defended years of regulatory inaction in the face of predatory lending and said he was “in a state of shocked disbelief” that financial institutions did not rein themselves in when there were billions to be made by relaxing their lending practices and trafficking in exotic derivatives.
Mr. Greenspan was shocked, shocked to find that there was gambling going on in the casino.
MY poor, overtaxed, smoke-and-mirrors meter gave out altogether when Christopher Cox, chairman of the Securities and Exchange Commission, took his turn on the committee’s hot seat. His agency had allowed Wall Street firms to load up on leverage without increasing its oversight of them. But he said on Thursday that the credit crisis highlights “the need for a strong S.E.C., which is unique in its arm’s-length independence from the institutions and persons it regulates.”
He said that with a straight face, too.
There was more. Mr. Cox went on to suggest that his hapless agency should begin regulating credit-default swaps.
This, recall, is that $55 trillion market at the heart of almost every big corporate failure and near-collapse of recent months. Trading in these swaps, which offer insurance against debt defaults, exploded in recent years. As the market for the swaps grew, so did the risks — and the interconnectedness — among the firms that traded them.
During the years when these risks were ramping up unregulated, Mr. Cox and his crew were silent on the swaps beat.
How exasperating. After all the time and taxpayer money spent trying to resolve the financial crisis, we’re still in the middle of the maelstrom. The S.& P. 500-stock index was down 40.3 percent for the year at Friday’s close.
Yes, the problems are global, and made more complex by Wall Street’s financial engineers. And a titanic deleveraging process like the one we are in, where both consumers and companies must cut their debt loads, is never fun or over fast.
Still, as the stock market continues to grind lower, something more may be at work. And that something centers on trust and credibility, which have been lacking in corporate and government leadership in recent years.
Like the boy who cried wolf, corporate and regulatory officials have issued a lot of hogwash over the years. Until recently, investors were willing to believe it. Now they may not be so easily gulled.
Companies, even those in cyclical businesses, routinely told investors that the reason they so regularly beat their earnings forecasts was honest hard work — and not cookie-jar accounting. They were believed.
Politicians proclaiming that the economy was strong and that the crisis would not spread kept our trust.
Brokerage firms insisting that auction-rate securities were as good as cash won over investors — and, as we all know now, that market froze up.
Wall Street dealmakers were fawned over like all-knowing superstars, their comings and goings celebrated. No one doubted them.
Banks engaging in anything-goes lending practices assured shareholders that safety and soundness was their mantra. They, too, got a pass.
Directors who didn’t begin to understand the operational complexities of the companies they were charged with overseeing told stockholders that they were vigilant fiduciaries. Investors suspended their disbelief.
And regulators, asserting that they were policing the markets, convinced investors that there was a level playing field.
Is it any surprise that virulent mistrust seems to own the markets now?
Janet Tavakoli, a finance industry consultant who is president of Tavakoli Structured Finance, said the stock market’s gyrations are a result of a severe lack of confidence in the very officials who are charged with cleaning up the nation’s mess.
“It is not enough to throw money at a problem; you also have to use honesty and common sense,” Ms. Tavakoli said. “In fact, if you leave out the last two, you are wasting taxpayers’ money.”
What Ms. Tavakoli means by common sense is a plan that will force institutions to get a fix on what their holdings are actually worth.
“If you are going to hand out capital, you have to first revalue the assets or take over so that you can force a mark to market,” she said. “Force restructurings, mark down the assets to defensible levels and let the market clear.”
She also suggests that financial regulators impose a form of martial law, allowing them to rewrite derivatives contracts that bind counterparties to terms they may not even comprehend.
“If I were queen of the world, I would wade in there with a small army of people and just start straightening out these books,” she said. “Start stripping them down and simplifying contracts so people can start to understand what they own. It would be unprecedented, but so is everything else we are doing.”
THAT move, which would begin the much-needed healing process for investors, would be unprecedented in another way. It might get the people who run our companies and our regulatory agencies into the business of telling the truth.
Naïve, I know. But something to wish for — I’d like to give my hypocrisy meter a breather.