Published in CommPRO.biz 2013.08.28

The Customer Is Not Always Right

Let’s review – America has been struggling to rise out of what has been called the Great Recession. A recession brought on by a systematic dismantling of safeguards that protected us for decades after the Great Depression. Engineered by lobbyists working for Wall Street banks and the super rich –the 1% of the 1%– this tearing down of the walls was not intended to cause a recession, just to allow those at the top to make more money.

The recession was an unintended consequence. The big banks had been buying up mortgages to create bundles that investors, pension funds and the like could stash away and collect interest on month after month. What could be safer, we all know real estate never loses value; it always goes up, right? Besides, the banks had these packages checked out; the credit rating services marked them AAA.

This new idea caught on like wildfire. Pretty soon the supply of mortgages wasn’t keeping pace with the need. So the banks pushed the mortgage brokers down the line for more and more mortgages. The brokers urged people to buy, coaching them and fudging the numbers when they didn’t qualify. The banks learned to pile the mortgages with the not-so-nice on the bottom. The rating services were overwhelmed. Under intense pressure from the banks to anoint the investment packages with top ratings, it appears that the services buckled. Soon packages the bankers were calling “Crap” were gaining AAA ratings and being sold by those same bankers to trusting customers.

To understand why the rating services would hang a AAA on what the bankers called “Crap,” we have to look at their business model. The banks asking for AAA ratings paid for them. The banks are the rating service’s customers. They feared that saying no to the banks would just send them to another rating service. They anointed the “Crap” AAA to keep the bucks coming through the door.

That’s pretty much what the Justice Department is saying that Standard & Poor’s did when they sued the rating agency for $5 billion. The DOJ and 14 states are suing S&P, the largest of the rating services. The other two, Moody’s and Fitch, are likely to be next. The $5 billion suit is moving through the California court of District Judge David Carter. S&P rated $4 trillion in various bank investment vehicles over the four years leading up to the collapse.

While S&P is facing the $5 billion lawsuit, keep in mind that the real bad guys are the handful of monster banks that put together the piles of crap and coerced an AAA out of the rating services. What’s more the same banks are back at it– gambling wildly secure in the knowledge that we will have to bail them out again when they stumble. We like to think that doing the right thing is easy. It’s not, what’s easy is taking that first step in the wrong direction