Just once, I would like to see Wall Street held accountable
by Richard Lawless
SAN JUAN/TEMECULA – Let’s face it, if you or I were to participate in a scheme that caused $30 billion dollars in losses, we would be sent away for the rest of our natural lives. Unfortunately, if you work for one of the big three Credit Rating Agencies (Moody’s, Fitch or S&P) or a major Bank, like Chase, Citibank or Goldman Sachs, you have a get out of jail free card.
Starting back in 2007 and 2008 when the mortgage backed securities crisis brought our country to its knees, it became clear that Wall Street would have to find another vehicle to replace the huge fees they were earning from rating and selling junk mortgage bonds as safe investments. Before 2007 came to an end, it was clear Wall Street decided to transfer that very same business model to the municipal bond market. The very same strategies that caused the 2007-2008 financial meltdown.
Starting in 2007 the Municipal Bond market exploded; not by accident, but by design. In 2007 there was less than a trillion dollars in bonds in the market. Today that number is over 4 trillion dollars. This kind of reckless expansion takes cooperation between all parties, the Issuing Agencies, the Ratings Companies and Wall Street’s biggest Banks.
Everyone knows that the 2007-2008 financial crisis was a result of the big three Credit Rating Agencies, knowingly and willingly, issuing high credit rating for packages of mortgages that everyone in the industry knew were unpayable. The Banks then knowingly and willingly sold those mislabeled investments to innocent investors. The Rating Agencies and Banks earned record fees and the American economy lost trillions of dollars. Only one poor Banker was ever prosecuted. Why not do it again? So they did.
We know that trillions in Municipal Bonds are now in the market place carrying ratings that indicate they are safe investments. A simple read of the bonds offering memorandum shows the Issuing Agency to be technically bankrupt with huge, unmanageable pension obligations. Many of these Agencies are also facing significant lawsuits, are in violation of critical bond agreements and reflect actions that indicate unsafe management by the Agencies leaders. Still, they receive investment grade ratings.
Like the mortgage bond crisis, the Agencies could never pay for the debt they issued, so they are required to refinance this debt frequently to avoid the inevitable defaults non-payment would create. The Ratings Agencies and Banks make record fee income as long as the refinancing continues. This is called a Ponzi Scheme and Bernie Madoff went to jail for the same thing.
Well, the house of cards collapsed in Puerto Rico this year and all these facts have come to light. We know the personnel who signed off on the fraudulent credit ratings; we know the personnel who sold these junk bonds as safe investments. None of these folks have been interviewed by the SEC or the FBI. All of the Wall Street firms are in clear violation of the newer Dodd Frank legislation and any number of criminal codes.
Once again the power of Wall Street and the political corruption will only guarantee future defaults. Today it is $30 billion, next year, Chicago, Connecticut or California and maybe a few trillion in losses. All created intentionally by what one could only consider a criminal enterprise.
(Richard Lawless is a former senior banker who has specialized in evaluating and granting debt for over 25 years. He has a Master’s Degree in Finance from the University of San Diego and Bachelor’s Degree from Pepperdine University. He sits on a number of Corporate Boards and actively writes for a number of finance publications).
