The hypocrisy meter for New York Times Business Columnist Gretchen Morgenson had a rough time last week as she recounted in her Sunday column.
It started when the executives from the nations leading credit-rating agencies testified before Congress that their firms’ inability to see problems in toxic mortgages was an honest mistake. The woefully inaccurate ratings that have cost investors billions of dollars were not the result of the issuers paying rating agencies handsomely for their optimistic opinions. Of course, they had no response to e-mails which suggested that they would give high ratings to an instrument structured by a cow if the price was right.
It continued when the testimony of Alan Greenspan, former Chairman of the Federal Reserve, before the same Congressional Committee defended years of regulatory inaction in the face of predatory lending. Mr. Greenspan claimed to be “in a state of shocked disbelief” that financial institutions did not control themselves when there were billions to be made by relaxing lending practices and trading in exotic derivatives.
Christopher Cox, allegedly the Chairman of the Securities and Exchange Commission, was next up before Congress. Under his leadership, the SEC had allowed Wall Street firms to load up on leverage without increasing its oversight of them. With a straight face, Cox told Congress that the credit crisis highlights “the need for a strong SEC, which is unique in its arm’s-length independence from the institutions and persons it regulates.” He suggested that the SEC should begin regulating credit default swaps. As the trading of credit default swaps exploded in recent years, so did the risks and the interconnectedness among the firms trading them. Unfortunately, in previous years, Mr. Cox had opposed such regulation.
Of course, these events were just a continuation of the “hogwash” that has been fed to the American public in recent years. Companies routinely told investors that they so regularly beat their earnings forecasts because of honest hard work and not cookie-jar accounting. Politicians claimed that the fundamentals of the economy were strong and that the crisis would not spread. Brokerage firms insisted that auction-rate securities were as good as cash until that market froze up. Wall Street dealmakers were fawned over like celebrities. Banks engaged in anything goes lending practices and assured shareholders that safety and soundness were their watchwords. Directors told stockholders that they were vigilant fiduciaries even if they did not understand the operational complexities of the companies they were overseeing. Regulators claimed that they were policing the markets and convinced investors that they were leveling the playing fields. The public believed all of this.
Fortunately, the public has come to recognize that trust and credibility have been lacking in corporate and government leadership in recent years. After all this, it is no surprise that investors are now taking anything that is said with a huge grain of salt.
Some observers believe that 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 mess. According to Janet Tavakoli, a finance industry consultant and President of Tavakoli Structured Finance, you cannot just throw money at a problem. If you fail to use honesty and common sense, you are just wasting the taxpayers’ money.
Part of the common sense referred to by Ms. Tavakoli is that institutions must get a fix on what their holdings are actually worth. She also suggests that financial regulators impose a form of martial law that would allow them to rewrite derivatives contracts that bind counterparties to terms they may not even comprehend.
These moves would begin the much needed healing process for investors and might actually get the people who run our companies and our regulatory agencies into the business ? if not the habit ? of telling the truth.