Financial Crisis Caused by Government-Not the Free Market

[iluvatar5150]

Mortgages were bought by the thousands from the original lenders and bundled into new debt instruments, Real Estate Investment Trusts (REITs). Mortgages are traditionally considered safe but bland investments, giving a steady reliable return over their life, averaging 30 years. Morningstar, for instance, is one of the bond rating companies - they rated the new instruments AAA based on the underlying mortgages. Which was fine, at first, but then more and more junk mortgages got bundled in to the point where many of the REITs were mostly junk, but still, the rating companies refused to change the rating from AAA to E, even after the defaults began as the balloon payments came due.

Close, but not quite.

Not Morningstar, but Moody's, S&P, and Fitch. Morningstar didn't start publishing credit ratings until 2009.

And it was mortgage-backed securities and collateralized debt obligations, not REIT's. REIT's are actual companies, some of which invest in mortgage-backed securities. It was the securities that were mis-rated.

 

[DaisyDay]

Close, but not quite.

Not Morningstar, but Moody's, S&P, and Fitch. Morningstar didn't start publishing credit ratings until 2009.

And it was mortgage-backed securities and collateralized debt obligations, not REIT's. REIT's are actual companies, some of which invest in mortgage-backed securities. It was the securities that were mis-rated.

Ah, thank you for the corrections. I was going by memory and, well, ... again, thanks.

 

[Thursday]

Morningstar Moody's was one. I forget the other...Standard & Poor's maybe?

Edited to reflect correction. See iluvatar5150's next post for details.

They intentionally skewed ratings? That is illegal. Were charges filed?

 

[Vylo]

Who lied and didn't go to jail, besides Hillary?

In general? Everyone who hasn't gone to prison .

In this specific topic, very few actual names were given out. It was institutional, and very few people were held accountable.

 

[DaisyDay]

They intentionally skewed ratings?

They were unconscionably slow to revise their ratings downward. It was negligent, but it's hard and resource intensive to prove criminality, especially with all that was going on at the time (global financial crisis - this wasn't local).

That is illegal. Were charges filed?

Investors get screwed all the time. It's rare for anyone to be held accountable. Every now and again, the rules are revised and made more stringent, then Congress is lobbied and the rules get relaxed; it cycles.