For anyone trying to make sense out of credit markets, there’s an interesting cage match under way between Gretchen Morgenson at the NY Times and blogger/journo Felix Salmon over everybody’s current favorite bogeyman, the subprime market.
Now, as then, Wall Street firms and entrepreneurs made fortunes issuing questionable securities, in this case pools of home loans taken out by risky borrowers. Now, as then, bullish stock and credit analysts for some of those same Wall Street firms, which profited in the underwriting and rating of those investments, lulled investors with upbeat pronouncements even as loan defaults ballooned. Now, as then, regulators stood by as the mania churned, fed by lax standards and anything-goes lending. …
The regulators are trying to figure out how to work around it, but the Hill is going to be in for one big surprise,” said Josh Rosner, a managing director at Graham-Fisher & Company, an independent investment research firm in
Rubbish, says Salmon. Executive summary, per Salmon, of Morgenson’s work: :[W[e can ignore it, on the grounds that Morgenson adduces no evidence whatsoever that any crisis is looming at all.”
I don’t have any business pretending to expertise here, but Salmon’s own response doesn’t seem to provide the assurance he thinks he does. In particular, he has an unsettling way off seeming to sidestep the issue. Morgenson says that “Wall Street firms and entrepreneurs made fortunes issuing questionable securities … Regulators stood by as the mania churned…” Salmon responds by showing that mortgage-backed securities issuance peaked back in 2003. But this seems unresponsive; current levels still seem high in terms of history, and it may be that the industry is already struggling to dig itself out of a hole.
Similarly, Morgenson says the problem is obscured by the fact that the industry isn’t marking its loans to market. Salmon responds by saying they can’t mark to market because the market is too thin—which is hardly reassuring. But then he turns round and says that when this debt does trade, it turns out that it hasn’t fallen in price much at all. Say, what? Maybe he was right the first time—that the very rarity of the trades gives away the truth that you can’t sustain those prices.
It will be fun to watch this play out, but for the moment, I tend to lean towards Morgenson, for two reasons:
1) She’s got a pretty good record of being right and simultaneously not caring much about what anyone else things; and
2) I’m a congenital pessimist.
Hat tip to Economist’s View, with some cool comments, including one from Felix.
1 comment:
npr's day to day covered new century's woes. i think the the coverage is pretty balanced.
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