So now comes Calpers, alleging "wildly inaccurate" credit ratings:
The AAA ratings given by the agencies “proved to be wildly inaccurate and unreasonably high,” according to the suit, which also said that the methods used by the rating agencies to assess these packages of securities “were seriously flawed in conception and incompetently applied.”
....
The security packages were so opaque that only the hedge funds that put them together — Sigma S.I.V. and Cheyne Capital Management in London, and Stanfield Capital Partners in New York — and the ratings agencies knew what the packages contained. Information about the securities in these packages was considered proprietary and not provided to the investors who bought them.
So why did you buy them CALPERS?
I understand fraudulent misrepresentation and I believe there's a solid argument there.
But let's be frank: Investors bought these things to intentionally fuel a speculative bubble - they "clamored for yield" and the banks came up with a way to give them what they wanted.
There's plenty of fraud to go around in here - banks that knew they were making up data they didn't have and ratings agencies that knew they were applying models with absolutely nothing to back up their expectations (other than raw belief - unbacked by evidence, but claimed to be "validated.")
But the fact remains that absent a buyer there is no seller, and the culpability here is not limited to one side of the transaction. On the contrary - the culpability lies with both the buyers and sellers, in that both were willfully turning a blind eye to knowingly-opaque and in some cases knowingly-false claims.
CALPERS has a rather amusing position being that they're in the middle of the biggest bubble area in the country for real estate. Attempting to claim that they didn't know that there was an active real-estate speculative bubble - right in their own back yard - defies logic. So does any claim that they didn't know that people making $8/hour cutting hair were getting $500,000 mortgages.
It wasn't exactly a secret, and the loans had to go somewhere.
I come back to the fundamental truth about securitization:
There is no possible way to increase the total value in a package of loans once the loans have been made. You can only subtract from the total amount of value available, and the more complex the packaging, that is, the more hands touch the paper, the less total value there is for investors because nobody works for free.
You can shift risk but you cannot eliminate risk. If you subordinate one person's claims then for each dollar of loss you protect from being absorbed by one person a different person must absorb more than one dollar of risk, because again, nobody works for free.
This entire scheme was sold to both investors and the public as a way to reduce or "manage" risk.
That representation is a lie; the banks in fact have done nothing other than shift risk from one party to another, charging a fee for doing so.
Deception through securitization was inherently necessary to fuel the housing bubble, as without the perception that risk had been removed nobody would have bought the trash paper. Investors who knew that the mortgage they purchased was in fact not underwritten in the first place - the person who took it out had to prove no income or assets, nor capacity to pay - would not have bought paper at that rate of interest in the first instance.
Only through obfuscating the facts about the loans contained in these "packages" were they able to be sold on to the unwitting, and without the ability to sell these loans they would not have been made.
I wish CALPERS luck in their suit; I believe it will be quite difficult to win, irrespective of whether they were misled, as these were not exactly unsophisticated investors or people who should not have known what they were buying.
Regulators and law enforcement need to take a close look at all participants in these schemes over the last few years - not just the packagers, raters and sellers, such as the banks and ratings agencies, but also the buyers who may have willingly and knowingly suspended disbelief in the pursuit of profit - and are now trying to shield themselves from self-inflicted losses.
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