From: Seeing Through Wall StreetRestoring trust to the economy will require bringing transparency to the markets.By Eliot Spitzer. Slate 12/23/08
"First, for our Treasury Department—and the Federal Reserve—which seem able to lend or guarantee at a scale unheard of until now: Where is all the money going, and how is it decided who gets it? Many of the investments appear to be much less critical than an investment in Lehman Bros. would have been, for example. If this reflects learning, wonderful. But what is the current metric for evaluation?
"Speaking of Lehman, what precisely was the conversation at the Fed among the various bankers that led to the conclusion not to give Lehman assistance but to give AIG an almost unlimited Fed pipeline? What, exactly, did each bank tell the government about its exposure to Lehman or AIG, and when?
"What did the government tell the banks about their obligation to lend, once they had received the infusion of billions to restore their balance sheets? As we have seen, the banks are holding onto an enormous amount of the cash, failing to inject needed oil into a system whose gears have ground to a halt. It defies common sense that the banks have been permitted to receive this capital and yet have not been required to lend in any significantly greater volume. As a result, the economy continues to fall like a rock.
"When did the Fed, Treasury, or the Office of the Controller of the Currency begin to evaluate the credit risk of the subprime debt pipeline, and what did any of them do about it? This is the old what-did-they-know-and-when-did-they-know-it question.
Have these government entities begun to think through the possibility of requiring banks that securitize debt to maintain an ownership of some significant percentage of this debt? That would begin to address the risks that result when those who originate debt really have no concerns or accountability for the long-term capacity of borrowers to pay.
"For the banks, which have received an unceasing supply of credit and guarantees: We have heard too often from those at the top that "we didn't have operational responsibility; we relied on our risk managers." We are now major equity investors in these banks. Our capital is now at risk. So let's get—right now—all the analysis of the subprime debt that was originated, securitized, or bought. If the credit departments got it so wrong, we deserve to know that so we can remedy the situation by bringing in analysts with greater skills. If the credit analysis was correct and the risk managers were sending warnings up the chain, we deserve to know that as well. Because then the senior managers—despite their disclaimers—have some questions to answer. There are few things more essential for a bank than knowing that its loans will be paid back. We had better figure out how the banks got it so wrong. Any bank unwilling to release these documents should not get public funding.
"Also for the banks: What would it cost to modify meaningfully all the subprime mortgages such that delinquencies and defaults can be brought back into line? Have they calculated this figure? Loan modification is a necessary step to resolving the underlying housing crisis, and one way or another, it has to get done. Why loan modification wasn't a condition of the banks' receipt of capital is a mystery that remains unresolved.
"For the rating agencies, we should also require public disclosure—of their subprime analysis. Let them withstand the public scrutiny of the process that generated AAA ratings on debt that so soon became toxic. Perhaps they will be vindicated. Perhaps there really was no way to see around the corner. Or perhaps we will conclude that the agencies simply do not have the analytical tools to sense inflection points, in which case their ratings really are not worth a great deal."
"First, for our Treasury Department—and the Federal Reserve—which seem able to lend or guarantee at a scale unheard of until now: Where is all the money going, and how is it decided who gets it? Many of the investments appear to be much less critical than an investment in Lehman Bros. would have been, for example. If this reflects learning, wonderful. But what is the current metric for evaluation?
"Speaking of Lehman, what precisely was the conversation at the Fed among the various bankers that led to the conclusion not to give Lehman assistance but to give AIG an almost unlimited Fed pipeline? What, exactly, did each bank tell the government about its exposure to Lehman or AIG, and when?
"What did the government tell the banks about their obligation to lend, once they had received the infusion of billions to restore their balance sheets? As we have seen, the banks are holding onto an enormous amount of the cash, failing to inject needed oil into a system whose gears have ground to a halt. It defies common sense that the banks have been permitted to receive this capital and yet have not been required to lend in any significantly greater volume. As a result, the economy continues to fall like a rock.
"When did the Fed, Treasury, or the Office of the Controller of the Currency begin to evaluate the credit risk of the subprime debt pipeline, and what did any of them do about it? This is the old what-did-they-know-and-when-did-they-know-it question.
Have these government entities begun to think through the possibility of requiring banks that securitize debt to maintain an ownership of some significant percentage of this debt? That would begin to address the risks that result when those who originate debt really have no concerns or accountability for the long-term capacity of borrowers to pay.
"For the banks, which have received an unceasing supply of credit and guarantees: We have heard too often from those at the top that "we didn't have operational responsibility; we relied on our risk managers." We are now major equity investors in these banks. Our capital is now at risk. So let's get—right now—all the analysis of the subprime debt that was originated, securitized, or bought. If the credit departments got it so wrong, we deserve to know that so we can remedy the situation by bringing in analysts with greater skills. If the credit analysis was correct and the risk managers were sending warnings up the chain, we deserve to know that as well. Because then the senior managers—despite their disclaimers—have some questions to answer. There are few things more essential for a bank than knowing that its loans will be paid back. We had better figure out how the banks got it so wrong. Any bank unwilling to release these documents should not get public funding.
"Also for the banks: What would it cost to modify meaningfully all the subprime mortgages such that delinquencies and defaults can be brought back into line? Have they calculated this figure? Loan modification is a necessary step to resolving the underlying housing crisis, and one way or another, it has to get done. Why loan modification wasn't a condition of the banks' receipt of capital is a mystery that remains unresolved.
"For the rating agencies, we should also require public disclosure—of their subprime analysis. Let them withstand the public scrutiny of the process that generated AAA ratings on debt that so soon became toxic. Perhaps they will be vindicated. Perhaps there really was no way to see around the corner. Or perhaps we will conclude that the agencies simply do not have the analytical tools to sense inflection points, in which case their ratings really are not worth a great deal."
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http://www.nysscpa.org/cpajournal/2003/1203/nv/nv2.htm
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