Funny Money: “Downgrade Proof”

With the recession of 2009 far behind us, we can now look back at that mess with a little humor.  Here is a gem I found long-ago that I still find funny today.  (Start up top, then continue below…)

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Thank you creator(s) behind the former Doghouse Diaries.

Leading up to the crash, rating agencies like Moody’s and Standard & Poor gave their blessing to a financial instrument for bundling housing debt, known as the Mortgage-Backed Security.  A company like S&P would review those investments and grade them according to their relative risk.  But as we later discovered, nearly all Mortgage-Backed Securities were given grades between AAA (reserved for “extremely strong” investments) and A (for strong investment).  In fact, their ratings system rarely allows for any grades below “B” out of fear of offending their customers… the people creating & selling the Mortgage-Backed Securities.

If low grades were received, sellers could simply move their business to a competing ratings agency that was willing to give them a better grade.  After finding a high grade, mortgage lenders would bundle loans as an MBS, then sell it to investors… who in turn, re-bundled with other MBSes and re-sold to buyers… who re-re-bundled and re-re-sold.  The cycle continued until it was impossible to tell which investments were being made into which properties and the whole system collapsed.

This mess showed us that S&P issues ratings for the benefit of the sellers (not buyers) even though we all thought it was the other way around.

The irony is that those same ratings agencies decided the US was irresponsible for believing the very same ratings they’d issued.  And in 2011, Standard & Poor downgraded the U.S. credit rating for the first time ever with a sharply worded critique of the American political and financial system.  This made life more expensive & difficult for all of us hard-working tax-payers.

I am telling you this story because there is an important lesson: know who to trust.  Don’t get car advice from someone selling you a car.  Don’t get loan advice from someone selling you a loan.  Don’t get appliance advice from someone selling you appliances.  And don’t get investment advice from someone selling you investments.

In each of those situations, the salesperson is only there to make themselves money.  They can’t care about how your purchases impacts you.  So do your own research.

 


This is the first post in an occasional series that I’ll call “Funny Money” – a more humorous side to personal finance.

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