October 23rd, 2008

From yesterday's hearing before the House Committee on Oversight and Government Reform.

This IM log is getting a fair amount of play in the financial blogs this morning.

Excerpted from an Instant Message Conversation between Shannon Mooney and Rahul Dilip Shah, April 5, 2007:
Administrator: This IM session is being recorded and may be reviewed for compliance by McGraw-Hill through its several divisions.

Thursday, April 05, 2007 3:58:42 pm EDT Shah, Rahul Dilip (Structured Finance - New York): btw that deal is ridiculous

Thursday, April 05, 2007 3:59:05 pm EDT Mooney, Shannon: i know right…model def does not capture half of the rish

Thursday, April 05, 2007 3:59:08 pm EDT Mooney, Shannon: risk

Thursday, April 05, 2007 3:59:09 pm EDT Shah, Rahul Dilip (Structured Finance - New York): we should not be rating it

Thursday, April 05, 2007 3:59:17 pm EDT Mooney, Shannon: we rate every deal

Thursday, April 05, 2007 3:59:30 pm EDT Mooney, Shannon: it could be structured by cows and we would rate it

Thursday, April 05, 2007 3:59:54 pm EDT Shah, Rahul Dilip (Structured Finance - New York): but there’s a lot of risk associated with it - I personally don’t feel comfy signing off as a committee member.
To quote the Financial Times:
On Wednesday, the House Oversight Committee of the US Congress held a hearing on the rating agencies. And it released some explosive material - the implications of which don’t yet seem to have quite sunk in. The evidence presented is extremely damning.

While everyone is focusing on the “rated by cows” quote, the important part in this exchange is actually in the final message: the analysts were clearly uncomfortable, but felt there was nothing they could do. The story is similar at Moody’s, where members of the CPDO rating committee, for example, were perfectly aware of grave flaws in the rating model, but felt there was nothing that could - or should - be done.

Why?
Conjecture and more excerpts in the full post.

How very odd.

Google News highlighted a story from Forbes in its business section today.

Entitled "Inflated Treasuries And Deflated Stockholders", and a part of its "Intelligent Investing" section, it discusses businesses whose stock is trading below the value of their liquid assets.

This would not be particularly noteworthy, except for two details: its date line is 06.01.32, 6:00 AM ET, and its author is Benjamin Graham, the famous author of Security Analysis, published in 1934.
We must recognize, therefore, that the situation existing today is not typical of all bear markets. Broadly speaking, it is new and unprecedented. It is a strange, ironical aftermath of the "new era" madness of 1921929. It reflects the extraordinary results of profound but little understood changes in the financial attitude of the people, and the financial fabric of the country.

Two plausible and seemingly innocent ideas, the first that good stocks are good investments; the second, that values depend on earning power--were distorted and exploited into a frenzied financial gospel which ended by converting all our investors into speculators, by making our corporations rich and their stockholders poor, by reversing the relative importance of commercial loans and Wall Street loans, by producing topsy-turvy accounting policies and wholly irrational standards of value--and in no small measure was responsible for the paradoxical depression in which we find ourselves submerged.
I'm not sure whether to be more bemused at Forbes, who have republished the article, or Google News, whose algorithm decided to feature it today.

In either case, I wonder if they're trying to tell us something.