The Invisible Hand-Job of Capitalism

First we confirm what we long suspected–bankers were manipulating the LIBOR rate to benefit themselves, corrupting one of the “market” measures at the core of the financial system.

And now, in an Abu Dhabi Commercial Bank suit against Morgan Stanley over residential backed mortgages, we get proof that banks pressured ratings agencies to rate shitpile as gold and even wrote their own ratings reports.

For example, when the primary analyst at S.& P. notified Morgan Stanley that some of the Cheyne securities would most likely receive a BBB rating, not the A grade that the firm had wanted, the agency received a blistering e-mail from a Morgan Stanley executive. S.& P. subsequently raised the grade to A.

And when a Morgan Stanley colleague asked for information about the Cheyne deal, Rany Moubarak, an analyst at Morgan Stanley on the deal, wrote in an e-mail: “I attach the Moody’s NIR (that we ended up writing)” referring to the new issue report published by Moody’s in August 2005.

The court filings also demonstrate a lack of methodology for analyzing the Cheyne debt. For example, in an e-mail before the deal was sold, S.& P.’s lead analyst wrote to a colleague: “I had difficulties explaining ‘HOW’ we got to those numbers since there is no science behind it. The documents show that the lead analyst at Moody’s noted there was “no actual data backing the current model assumptions” for segments of the Cheyne deal.

The ratings agencies were also reluctant to turn down business from issuers of complex securities like Cheyne, the documents show. Perry Inglis, a former managing director in S.& P.’s structured finance unit, wrote to colleagues in an e-mail in February 2005: “I don’t want to miss one deal because of our model assumptions either. Is there any possibility of ‘tweaking’ the default table to get all of this so that we don’t have to compromise?”

Like the LIBOR rates, this Morgan Stanley suit shows that ratings were just made up out of thin air.

Robbins Geller also provided a helpful CliffsNotes version of the evidence in the form of an unredacted response to the defendants’ motion for summary judgment. (A redacted version was filed in February, with page upon page blacked out.) This is a hot filing. Abu Dhabi quotes deposition testimony from “S&P’s most senior quantitative analyst in Europe,” for instance, that says “the ratings of (the SIVs) were inappropriate because the ratings of the underlying assets were not appropriate. So it leads to the conclusion that they should not have been rated.” In other snippets quoted in the filing, rating agency analysts complained about “difficulties in explaining HOW we got to these numbers since there is no science behind it” and about “(making) up haircuts that were palatable to SIV issuers.”

A lead S&P analyst on the deal, according to the plaintiffs, said in an email to his boss that the default rates the agency was using for asset-backed securities were guesswork. “From looking at the numbers it is obvious that we have just stuck our preverbal (sic) finger in the air,” the analyst wrote.

Sure, we already knew all this; these filings just offer long-awaited proof.

But amid the furor (in the UK at least) over the LIBOR scandal, it seems a good time to hammer on the lie at the heart of all the myths about these MOTUs: this is not capitalism. It hasn’t been capitalism for a very very long time. So if we’re saving something in the name of capitalism, we sure as hell ought to be sure it bears even marginal resemblance to capitalism before we continue to prop up a totally arbitrary abusive system.

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15 replies
  1. chetnolian says:

    I commented this morning on yesterday’s piece on Libor but probably nobody has noticed. So let me be the first to say here that we have got shot of our American banskter Bob Diamond. He was thinking he could tough it out but word has it the Chairman of the Bank of England, whose otherwise inexhaustible patience is clearly running out, told him that, really, he couldn’t.

    The S&P news is exactly as bad as Libor as it neatly removes the last creaky plank from the “self-regulating market” fiction. The really scary thing is that whereas people like us would like this all to be dealt with by law, it is not clear governments, even the government of the USA and certainly not the UK, have anywhere near enough power to stop the guys who stole all our money from getting away with it scot free, or indeed to go on stealing it.

  2. emptywheel says:

    @chetnolian: Yeah, I’m interested in whether more details of the conversation between Diamond and King will come out. After reading To Big to Fail, it’s pretty clear the regulators encouraged anti-competitive behavior in 2008, so it is not inconceivable that King did tell Diamond to up their LIBOR rate.

    Which, in the same way Geithner has fought mightily to keep details of the AIG bailout (among others) secret, so will they here. Because it’s bad enough the corporations were gaming the system. But if it becomes clear the corporations and the regulators were, then people will lose faith in the system.

    Heh.

  3. phred says:

    @chetnolian: Thanks for the scoop on Diamond being forced out. It’s outrageous how guys like him and Dimon think they are entitled to their appointed place in the aristocratic universe no matter what.

    This bit however, is disouraging: “it is not clear governments, even the government of the USA and certainly not the UK, have anywhere near enough power to stop the guys who stole all our money from getting away with it scot free, or indeed to go on stealing it”. I had hoped for better enforcement on your side of the pond. Our side is hopeless.

    All of which makes the Abu Dhabi suit really intriguing… Where will the force that knocks down the global financial house of cards come from? The oil barons in the Middle East? That might be fun. The west has meddled in their affairs for over a century, perhaps now it is their turn to make certain folks in the west mighty uncomfortable.

  4. emptywheel says:

    @phred: Good point. While I don’t think this bank has ties to the ADIA–the sovereign wealth fund–I’ve always been waiting for the big sovereign wealth funds to start demanding some heads. Not least bc some of those SWFs could back their threats with geopolitical threats.

  5. H. Candace gorman says:

    Redacted? On what basis…surely not national security?state secrets? Or is there a new category- bank secrets?

  6. phred says:

    @emptywheel: Yep. The little people (mortgage holders and individuals with piddling IRA accounts) will get nowhere, but the people at the top of the food chain have the power to get redress for having been massively ripped off.

    I don’t care where the necessary force comes from, just that it comes. And soon.

  7. The Raven says:

    This is capitalism, as capitalism was prior to the 1930s banking regulations. Capitalism never was what Hayek and Rand wanted it to be, any more than Soviet Communism was what Marx and Engels dreamed of.

  8. What constitution says:

    See? I told you all last summer — when S&P was threatening to downgrade US credit rating — that it would be easier and cheaper to just bribe a few ratings agencies to keep the rating at AAA than it would be to reach an agreement with the Republicans. The only thing preventing that was the premise that the ratings agencies were objective and moral — what a crock, duh. Won’t get fooled like that again, no.

  9. Jessica says:

    “this is not capitalism. It hasn’t been capitalism for a very very long time. So if we’re saving something in the name of capitalism, we sure as hell ought to be sure it bears even marginal resemblance to capitalism before we continue to prop up a totally arbitrary abusive system.”

    Well put. Distortion, corruption and abuse of any system obscures useful debate over whether it’s successful or a complete failure and needs replacing. But I suspect that’s exactly what the powerful players want: to obfuscate the truth about what makes them so powerful. Keep the masses arguing within the acceptable boundaries and, just as important, to keep them distracted by endless argument. It drives me batty at times.

  10. Z says:

    Oh wise and fair rulers, tell us again why debt forgiveness would ruin capitalism?

    This really ought to be used as an impetus for a social movement for debt forgiveness. The logic and the morality justifies it. Not only was future tax payer money given to the banks to bail their asses out during the crisis, but the banks have also been systematically ripping us off for many years now on interest rates that have cost citizens heaps of money. They owe us money – much more than “our” governments are extracting from them in any settlements – but yet only our debts to the banks are being enforced because the banks own the enforcement arm commonly mis-referred to as our government.

    Z

  11. MaryCh says:

    @H. Candace gorman: Years ago in an Admin Law class, the Prof ran through the main exemptions to FOIA, e.g. national secrets. When he got to bank records he just said “They’re exempt because banks always get what they want.” That was well before Dick Durbin became a Senator.

  12. emptywheel says:

    @H. Candace gorman: Originally it was redacted under business secrets or whatever they call it. This is a rare case where the judge has overridden that ruling to allow it to come out.

  13. orionATL says:

    @The Raven:

    right.

    with respect to regulating banks properly, the actual task is not at all difficult. the problem is not the the u.s. or u.k. cannot regulate banks; it is that there is no political will to regulate banks.

    this situation arises for two reasons:

    1. the banks have bought politicians (like schumer and obama) who in turn have appointed bank-favorable regulators (like holder and lanny breuer and the head of the sec’s criminal division) and

    2. there are not adequate whistleblower laws, therefore, the information on what the banks have done to subvert and monopolize banking practices is not easily available to the public.

    specifically, the flagrant abuse by banking lawyers of “proprietary information” and “confidentiality agreements” puts would-be whistleblowers in the personally disastrous position of facing ON THEIR OWN the legal and financial might of banking corporations.

    not just for banking, but for every aspect of corporate and government misconduct, illegality, or folly,

    nothing would change the power imbalance between citizens’ and society’s interests on the one hand, and the self-interest of corporate and gov’t institutions, like a really strong, protective whistleblowing statute.

  14. stig says:

    The invisible hand wears a diamond pinkie ring, and hands envelopes of cash under the table.

  15. stig says:

    Today’s invisible hand is soft, with a fine manicure, and hands fat envelopes of cash under the table.

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