Pilant's Business Ethics

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Tag: Moody’s

Rating Firm Cesspool?

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One of the great pleasures of following business ethics on the web is reading Alain Sherter’s columns on BNET. He is well informed and if you read his columns regularly you will get a good feel for how things really work in the financial industry. But that’s not my favorite thing about his writing. It’s the outrage. See if you notice any in the passage below –

Conflicts of interest? Sucking up to Wall Street? Dodging accountability? Tell us something we didn’t know, Bill! Harrington’s justified disgust with Moody’s also begs the question of why he stayed at the firm for more than a decade. The last four of those years were spent within the company’s structured finance unit, which rubber-stamped dodgy mortgage-backed securities with AAA ratings. In the letter he even says he remains “extremely proud” of his work at Moody’s.

Uh, why? Once upon a time, it meant something for a security to be rated AAA — namely, that there was less than a 1 percent chance it would blow up. But during the housing bubble that designation came to be meaningless, as Moody’s, Standard & Poor’s and Fitch effectively rented out their ratings to Wall Street firms selling subprme MBS and collateralized debt obligations. When the financial crisis struck, the vast majority of these securities incurred big losses, while some completely vaporized. Why did the raters do it? Easy: Big banks paid them to.

The irony of the United States of America being downgraded by these corrupt charlatans of finance should never be lost on any of us. Why rating industries have not been aggressively prosecuted for their conduct during the housing boom, I have no idea. How can you value securities composed of 1/3 sub-prime loans (notice the phrase, sub prime, in the title?) as triple A investments? Yet these organizations continue to rake in the cash for opinions which are often little more than their speculation. But they can’t even be honest about their speculations. As you can read in the article, they will change their point of view, if only to please the right people.

We can do better than let these organizations have significant influence over our money or our society.

James Pilant

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Screw Sam! Reconstruct the Mortgages with their Rightful Owners (via Deadly Clear)

There is a lot of anger in this article. But I too share disgust with this government’s willingness to help out every kind of financial institution while ignoring the needs of the Middle Class. These people no longer have a defender in the government just a facilitator of the predation

James Pilant

Screw Sam! Reconstruct the Mortgages with their Rightful Owners U.S.Seeks Ideas on Renting Out Foreclosed Property By EDWARD WYATT Published: August 10, 2011 WASHINGTON— Uncle Sam wants you — to rent a house from Uncle Sam. The Obama administration said on Wednesday that it was soliciting ideas on how to turn the federal government’s inventory of foreclosed houses into rental properties that could be managed by private enterprises or sold in bulk. The goal, the administration said, is to stabilize neighborhoo … Read More

via Deadly Clear

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Moody’s To Cut U.S. Rating?

Moody’s To Cut U.S. Rating?

 

From MSNBC

Moody’s warned Monday that it could move a step closer to cutting the U.S. AAA rating if President Obama’s tax and unemployment benefit package becomes law.

The plan agreed to by President Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years, the ratings agency said.

A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months.

For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasuries, which currently rank as among the world’s safest investments.

We just spent several months with every commentator screaming out that we can’t afford to spend more money, that social security had to be cut, that things could not go on the way they had been and then –

President Obama made a deal with the Republicans to add trillions to the debt! (and social security will still get cut!)

The bizzarro world of Washington marches on. But there will be pain, there will be payback.

James Pilant

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Should Virtue Be Rewarded?

This is another one of those stories. I am always reading them. Another company discarded ethics, fired those who would practice it and promoted those who “aggressively sought profit.”

According to McClatchy, Moody’s Investor Services, fired employees who warned the company of problems with their ratings of mortgage based investments and actively promoted those who helped create the second largest economic crisis in American history after the great depression.

When the company went public in 2000 it granted its middle managers stock options. This had a corrosive effect on the integrity of the rating process. To quote from the article:

“It didn’t force you into a corrupt decision, but none of us thought we were going to make money working there, and suddenly you look at a statement online and it’s (worth) hundreds and hundreds of thousands (of dollars). And it’s beyond your wildest dreams working there that you could make that kind of money,” said one former mid-level manager, who requested anonymity to protect his current Wall Street job.

Now, what do you say? As a teacher of business ethics, this is one of those real life examples, it might be best your students never heard about. After all, when the hero in the white hat is unceremoniously dumped and those who have damaged the economic fabric of modern civilization are promoted and enriched(from what I can tell, apparently very enriched). Given the example, you have to wonder why anyone would take business ethics seriously.

The article indicates that if you were willing to give investments whatever their actual value a good rating, in many cases a triple A rating, you were promoted and given more money. Thousand of people relied on these ratings to determine what to invest in. Those unfortunate enough to rely on these credit rating agencies lost large sums of money. We are talking about minimally billions of dollars. These are inconsequential investors like retirements funds, endowments for educational institutions, and charitable organizations.

Can you doubt for a moment that our civilization is damaged by this kind of behavior. Can you doubt that those who did these things and profited should be punished so that others might be deterred? I see an investigation in progress by the Securities and Exchange Commission but aren’t they the ones who didn’t see a problem in the first place?

Unless these people are punished, do jail time, have their profits taken from them and be socially stigmatized, there is no reason for my students and the rest of the public to say the right things to me and other do-gooders; and then take the money. After all, isn’t that what the “real world” says to do?

This is the link to the McClatchy story: http://www.mcclatchydc.com/economy/story/77244.html?storylink=MI_emailed

This is the link to the book, A Colossal Failure of Common Sense, by Lawrence McDonald.

http://www.amazon.com/Colossal-Failure-Common-Sense-Collapse/dp/0307588335

I recommend you visit Lawrence McDonald’s web site at:

http://www.lawrencegmcdonald.com/

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