July 13, 2007

Enron, Worldcom, Liar's Loans, Ratings Agencies and Whistling Past the Graveyard

And the funniest thing is that it was all so damn obvious. Well, at least to some...

"So far, the stock market keeps whistling past the graveyard," said Matt Smith, president and portfolio manager at Smith Affiliated Capital. "But these issues continue to get worse, and eventually they'll impact [mergers and acquisitions] and private-equity activity, which have been the foundations of the stock market."

Until now, the pricing of risks linked to housing and subprime mortgages remained something of a mystery, as risks remained hidden in the complex world of credit derivatives. But changes in ratings will force a re-pricing of the roughly $800 billion in subprime-mortgage bonds sitting in investment portfolios across the globe.

"Whenever you have such a massive growth in derivatives, as we had with housing, it's [used] to hide the losses," said Smith of Smith Affiliated Capital. "Nobody knows the true counterparty risks."

Some market players believe that, with the rating agencies making their moves so late in the game, they're seeing a replay of the Enron and WorldCom debacles, which played significant parts in popping the 1990s stock-market bubble.

The rating agencies, then as now, have come under fire for changing their ratings only after the bad news was already out.

"The credit agencies are always lagging," said Smith Affiliated Capital's Matt Smith. "But the main difference between now and 2000 is that you could sell stocks quickly; for the real-estate market, it takes three or four years to unfold."

Both Enron and WorldCom had used "creative" accounting methods to artificially boost earnings, until the bursting of the stock bubble revealed their overwhelming debt was more real than much of their projected revenue. Yet the main credit-rating agencies had kept an investment-grade rating on both companies' debt until days before they went bankrupt.

In particular, so-called liar loans, or mortgages that were backed by dubious documentation -- if any -- from borrowers, still ended up receiving high-grade ratings from the agencies.

Peter Shiff, president of Euro Pacific Capital, said the rating agencies' moves this week were too little, too late. He said lenders knowingly relied on inaccurate data. "If the lenders themselves call them liar loans, why should we think they're boy scouts?"

Schiff added: "And it's not just people with bad credit that lied on their mortgages."


Anonymous said...

Funny thing is, there's always a bubble going on somewhere, unless this is the greater depression coming.

I figured the stock boom earlier this year was people getting out of housing. Now it seems to be people getting out of bonds.

Give it about 2-4 months of bond prices rising and I think we've see the last of the bull market and the dollar will just keep dropping like a rock.

Anonymous said...

Come-on people are too smart to let this happen....

Anonymous said...

$48 billion in new money went short after Tuesday's selloff. Anyone think the PPT wanted to teach them a lesson and pop the market up?

Das said...

I have to say, having worked at Wmc as a programmer in underwriting, some people DID see the whole mess thing coming down but to be wrong when management is right is bad enough, even worse when one is right and management is wrong. On so many levels I saw things that can only be described as wrong while I worked there and I am glad I moved on. It is just a tragedy that so many good people that I knew lost or will lose their jobs. Not such a tragedy for some I can think of.
It is as if the corporate machine that is GE took on WMC in the hopes that the market (and thus housing prices) would keep going up indefinitely. As a former Financial Analyst, I cannot believe the Financial Analysts at GE bought into this or even thought buying up wmc would be a good idea. When they did take over they laid off alot of good American IT contractors and outsourced IT to a poor quality Indian IT firm (that they just happened to have ownership interest in). It was as if they had planned to outsource as much as they could from the beginning, but they told us they needed to do this and it would be a good idea. I was lucky enough to have survived that round of layoffs.
Like I said it is a tragedy on so many levels, from the buyout of wmc to the former ceo who took the money and ran, just terrible and the thing is, as the whole thing was happening, people WERE bringing these things up and objecting but i just feel management (Ge and Wmc) lied and had different motives, motives way different than what garbage spewed from their mouths (of the bigwigs). They gave us the spin at our meetings, explained things easily away. The warnings were ignored. At Wmc everyone in sales was making money hand over fist. I saw firsthand the liar loans that were getting approved and was just disgusted. Everything they were saying in the housing blogs about toxic mortgages were exactly right. Then the ceo took off before the s**t hit the fan and left GE holding the bag. I can't say that I feel sorry for them. To me, wmc is like Iraq now, yeah saddam is gone, but now all you have is a wasteland. GE at least is washing their hands of the whole ordeal anyways and is moving on (Wmc they explained is not in their "long term plans", quite a different tune than what they were saying just 3 short years ago)...

Anonymous said...

As long as dumb ass American's keep pouring money in Wall Street Casino via their 401K, the house will still have Dog Shit Common Stock to sell them.

RJ said...

Check out this Bloomberg piece. Are we desparate or what?

"U.S. Urges China to Buy Mortgage Securities Amid Subprime Woes"

Sec. of HUD is pushing Ginnie Mae's MBS crap on China because they offer a better return than U.S. Treasuries and they're backed by the government,ie, us the taxpayers. Pretty crafty. How else are we going to get back those trade surplus dollars sitting in the PBoC? They're not buying up our Treasuries anymore.

Dollars at 80.48 on the USDX.
Oil trading at 73.35

In real 2000 dollars the DOW is at
11504. Peaked in 2000 at a little over 11700.

The world isn't about to end. But our ship of state is springing leaks all over the place. Just as our financial engineers frantically plug up one leak, another bursts through the seams. The whole thing would be highly entertaining if my family and I weren't sailing on the same ship.
Just keep working on building that life boat.

Anonymous said...

I haven't been paying attention.

What's wrong with my Enron stock?

Should I sell and move it into Worldcom?

Anonymous said...


Anonymous said...

1929 ?

At Walmart it's 18.73