1) Find a credible source on the internet that connects to The Big Short or to your mutual fund. This source should drive your research project. Think of it as one of the sources that will be in your Works Cited Page.
3) After you read the source that you find, answer the following questions as a blog entry below:
- How does the text connect to your research project? (relevant)
- What evidence do you have that the text you found is credible? (credible)
- Create a clear, specific argument based on the text. (argument)
- Support the argument with thoughtful analysis, using cause/effect, compare/contrast, problem/solution, part/whole, or other methods of analysis. (analysis)
Keep in mind that everyone else will see what you write below, so please keep it professional. This post is due Thursday, 4/18, by 12:00am.
4) Come to class on Friday ready to discuss the reading and the text you found!
If you need support or have questions, my office hours are Monday and Wednesday from 3:15-4:15 in Room 229.
Many aspects can be taken into account when trying to find the sole culprit at blame for the 2007 sub-prime mortgage crisis. However, it can be agreed upon that the rating agencies played the biggest role by both Michael Lewis and Stephen Foley (the author of the article I found). The main reason why the rating agencies played the biggest role when taking the blame for the crisis was because they “[validated] the transformation of sub-prime mortgages into triple A rated securities, based on mistaken assumptions about the US housing market, they contributed to the infection of the global financial system,” (Stephen Foley).
ReplyDeleteThis source comes from FT.COM; a website that provides online viewers with global information as well as in depth analysis on current political and financial events. They also allow their viewers to research articles about companies, the market, the global economy, management, and personal finance. The author of this piece, Stephen Foley, is a market correspondent for the Financial Times and in 2009 won the British Press Awards, Business & Finance Journalist of the Year making this source a credible one; the website and author leave no room for questioning.
As rating agencies continuously rated triple-B bonds as triple-A, investors were investing their money on something that was basically nonexistent. This was because the rating agencies, along with investments banks, lending agencies and investors, all ASSUMED that housing prices never failed. Their Ponzi scheme backfired. After teaser rates turned into floating interest rates, the entire economy began to fall and soon we found ourselves in an economic crisis. Quickly after, several reforms were trying to be made against the top three rating agencies known; Moody’s, Fitch, and Standard & Poor’s. It is said that 96% of all the world’s bonds are rated by these agencies “Yet one by one, ideas for radical reform of the industry have failed,” (Foley). This creates a high level of tension. Trying to completely shut these agencies down would not have worked at all. That is why the thought of reform was taken into initiative.
EVEN THEN, it didn't happen. Foley states that, “[there is] no evidence that has led to any action by regulators”. Because these three rating agencies performed immensely well in other bonds that they rated pertaining to different criteria, being able to change them became a challenge. It is a known fact that reform needs to happen but as Lewis said in “The Big Short”, “If mere scandal could have destroyed the big Wall Street investment banks, they would have banished long ago,” (xvii). The same goes for the rating agencies.
The article I read this week was, "An Alternative to Rating Agencies" by Donald J. Johnston. This article is about America's lack of faith in private rating agencies and it builds off of this idea to propose that the government form a public rating agency. This relates to my gradually evolving paper on The Big Short because it provides a solution that could potentially reform our poor performing fiscal system. Private rating agencies failed the American public because they offered, " investors a triple-A rating on what was essentially financial garbage"(Johnston 1). These rating agencies wanted to make large sums of money and could only do so if they had clients that provided them with bonds to rate. Investment banks understood that they were the main source of demand for rating agencies so they played these rating agencies off of each other to obtain the highest possible ratings on their subprime mortgage bonds. If they received ratings they weren't pleased with these investment banks would turn to other rating agencies that would be willing to embellish (or flat out lie) about the quality of a subprime mortgage bond. In consequence, investors began investing in subprime mortgage bonds that were rated as essentially riskless, but that were actually very risky. The purpose of a public rating agency would be to ensure that ratings are accurate. This agency would in turn have to monopolize itself and would need to buy out competitors as well as offer great financial incentives to prevent raters from leaving to accept better paying jobs at investment banks. My paper will make a similar argument where I will argue that reforming the rating agency system should prevent a repeat of the 2008 fiscal crisis.
ReplyDeleteThis article is credible because it is from the New York Times, a world- renowned news organization that prides itself on its reputation. The New York Times is known for the great articles it publishes so it makes sure it doesn't publish any false information. Publishing such information could destroy the image of this organization. In addition the article's author, Donald J. Johnston, is a founding partner and senior counsel of Heenan Blaikie, a leading Canadian law firm. He also has plenty of expertise in the field of finance, so he is well qualified to provide information on rating agencies.
I agree with the article and we should have a government run rating agency. A government run rating agency will be more effective at providing accurate ratings because it will encourage accurate ratings through incentives. As mentioned in the first paragraph, raters that excel at their job end up leaving them to pursue careers at investment banks. In The Big Short Steve Eisman argues that things should be the other way around. Investment bank workers should want to leave their jobs to obtain a job at a rating agency. Unfortunately, rating agencies do not make as much money as successful investment banks to provide the necessary financial incentives that would encourage accurate ratings. Since a public rating agency would use tax payer money to pay raters, it would have to be heavily regulated. This would ensure accurate ratings. On the other hand a skeptic would argue that private rating agencies could just continue giving inaccurate Triple-A ratings to compete with the public rating agency. To combat this, incentives for accurate ratings must be incredibly attractive at the public rating agency. That means a lot of tax money to pay workers bonuses although this may require the government to decrease funds on other government projects. However, this should be a small sacrifice to increase investor confidence and encourage a thriving economy.
The article “U.S., S&P Settle In for Bitter Combat” suggests that rating agencies are to blame for the economic meltdown. The U.S. government believes that S&P committed fraud through false ratings of collateralized debt obligations. S&P is the biggest rating agency in the country and they are being made an example of in this suit. This relates to chapter 10 in “The Big Short” because investment banks and rating agencies are held accountable for the economic meltdown because they committed fraud. Mitigating their methods solves The Big Short. Identifying investment banks and rating agencies as culprits allows the government to make strict regulations that are effective.
ReplyDelete“U.S., S&P Settle In for Bitter Combat” is a credible source because it was published in prestigious news source. Publishment in The Wall Street Journal gives it great credibility, especially since it provides financial information. Any flaw in the information they provide would ruin their reputation and decrease their credibility in the future. Moreover, this article was written by three people, Jeannette Neumann, Evan Perez, and Jean Eaglesham. Perez studied journalism at the University of South Florida and has been at The Wall Street Journal since 1998. He is a reporter in the Washington bureau at The Wall Street Journal. He was part of the team that was nominated for a Pulitzer Prize in 2004. Perez has been working at The Wall Street Journal and any misinformation would ruin his reputation and cost him his career. If any of the three writers provided inaccurate information, it would jeopardize all three of them.
Rating agencies are at the focal point of the economic catastrophe, they had the opportunity to prevent synthetic CDO’s from being sold, yet they were blinded by greed and gave Triple-B rated bonds Triple-A ratings. “U.S. Attorney General Eric Holder said Tuesday the damages being sought... are justified based on ‘egregious’ conduct and rampant fraud that "goes to the very heart" of the crisis” (Neumann). Rating agencies were competing for banks to buy their services that they did not care if they gave inaccurate ratings. There was greed and corruption that prevented the rating agencies from their job honestly and righteously. “Triple-A ratings from S&P and its two main rivals made it possible for even conservative investors to buy securities created from subprime loans, fueling the creation of more bonds by banks and securities firms” (Neumann). The crisis was exacerbated because people that saw the downfall of the economy bet against this faulty system using credit default swaps. The false Triple-A ratings by the rating agencies made the banks and firms think that the towers of collateralized debt obligations were safe, which is why they were willing to sell its insurance on them so freely. This is evident when it states, “In its lawsuit, the Justice Department said banks and credit unions suffered losses of more than $5 billion on more than 40 collateralized debt obligations with inflated ratings by S&P” (Neumann). Inflation lead to a stock boom because people thought that they were making a lot of money and there was a lot of money in the market, but in reality there was less money and value. “‘S&P's desire to ensure market share…led it on a misguided venture to take securities it knew were lead and to tell the world through its ratings that they were gold...’” (Neumann). The rating agencies were not the only ones that wanted more market share. The subprime mortgage bond is evidence that investment banks, lenders, and brokers also acted recklessly in the pursuit of more capital. The only way to remediate the flaws in this economic procedure is to eliminate subprime mortgages and stop giving loans to borrowers that cannot pay them back. There is no legal way to eliminate corruption and greed, there will always be corruption and greed. The best bet is to remove risk from corruption and greed.
The document, “Regulation, Market Structure, and Role of the Credit Rating Agencies” by Emily McClintock Ekins and Mark A. Calabria discusses how the rating agencies’ past structure was the reason of its demise. The document suggests that if the Securities and Exchange Commission (SEC) hadn’t designated the Nationally Recognized Statistical Rating Organizations (NRSROs), the crisis may have been avoided with competition. This relates to the thesis of my The Big Short paper because I am writing about reformations the SEC can implement on rating agencies. This document addresses the idea of how an oligopolistic set-up for the rating agencies was a mistake, however, I may be writing about this idea in the paper, considering that adding competition to the market may do more harm than good.
ReplyDeleteThis article is credible because the Cato Institute published it. The Cato Institute is a think tank founded in 1974 that publishes information on public policies, free market, liberty and government. The Cato Institute is considered the 6th most influential U.S. think tank for Economic Policy and Social Politics so; this institute would avoid publishing false information to avoid ruining its accreditation. Additionally, Mark A. Calabria, an author of this document, was a member of the U.S. Senate Committee on Banking, Housing and Urban Affairs handling issues on housing, mortgage finance, and economics. Furthermore, the other author, Emily McClintock, has engaged in several years of research regarding political economy. Clearly, because of these individuals’ experiences, they have extensive knowledge on the U.S. economy, the housing market and financing, which makes them credible.
Although changing the rating agencies’ oligopolistic structure may protect consumers from paying high fixed costs, the addition of competition to a limited market may lead to an increase in fraud and economic loss among rating agencies. The document first states, “During the financial crisis of 2008, the financial markets would have been better served if the credit rating agency industry had been more competitive.” On one hand, with increased competition in the rating agency market, customers would benefit economically as with all competition comes the idea of providing the best prices to attract and maintain the most customers. If competition expanded among rating agencies, consumers would be able to avoid fixed high prices of monopolies and have a wider ranger of options to shop around for, finding the best deals. In addition, with increased competition comes easier entry into the market. Easier entry allows for the establishment and development of new companies, thus resulting in the availability of jobs within these companies. On the contrary, increased competition in this market may harm workers as well. Competition may result in the closing of businesses that cannot meet the needs of its customers. For example, if a company was offering low prices for its ratings, yet could make up enough revenue to cover employee salaries, workers would be laid off workers to reduce costs. Aside from the possible losses of jobs, these rating agencies may still be susceptible to fraud. The document states, “It is unlikely that this [oligopolistic] framework could result in anything except misaligned incentives…and distorted market information…” This idea is true in both an oligopolistic and competitive market. As previously discussed, businesses would do anything to obtain and keep customers, even if that means providing ratings that are not accurate. To attract more customers, these agencies may offer upgraded ratings for customers even if the information is false. Ultimately, because the quality of these ratings would decrease, fraudulent information would be published to the public, misleading investors into investing in risky securities, eventually loosing money for these individuals whose investments fail. Overall, although a competitive market has its benefits, they are outweighed by the consequences.
The article I found this week titled “U.S. Accuses S. & P. of Fraud in Suit on Loan Bundles” by Andrew Ross Sorkin and Mary Williams Walsh explains the accusations of civil fraud being placed on Standard & Poor’s by the U.S. Justice Department. Considering that S. & P. is one of “the nation’s largest credit-rating [agencies]”, it made sense for me to choose this article as it connects to my argument against rating agencies and how they (alongside lending agencies) had been major contributors to the stock market crash of 2008. Sorkin, Walsh and Michael Lewis all contribute to this argument within both the article and Lewis’ The Big Short by explaining just how rating agencies such as S. & P. had caused turmoil and ultimately disastrous conditions in Wall Street.
ReplyDeleteThis article is credible since it comes from the New York Times website, a company that has continuously provided its millions of readers with accurate and up-to-date information. As one of the most popular news companies in the world, the New York Times has earned its reputation for providing readers with precise and faultless news coverage. This type of reputation makes it clear that the company would not attempt to print and sell false information to their customers with the reason being that by doing so, the chances of the company losing their reputation increases dramatically. By keeping their reputation in check, the New York Times gains more credibility, and is therefore a trustworthy source of information. Additionally, both Sorkin and Walsh have a history of working in the business and finance fields, indicating that they both know a substantial amount of information based on the market and what occurs in it.
According to the article, the Justice Department is “accusing the firm of inflating the ratings of mortgage investments and setting them up for a crash when the financial crisis struck.” Since it is clear that rating agencies had been one of the main contributors to the crash, this accusation against S. & P. makes sense because of the fact that they had been one of the top rating agencies to follow through with their plan of creating false ratings on mortgage bonds. It seems as if S. & P. thought they were out troubled waters since, because they are a rating agency, they technically shouldn’t be sued because the ratings they send out are a personal evaluation. However, when their actions are proven to be false and also contribute to one of the worst events in Wall Street’s history, that is where a line is drawn. Adding more fuel to the fire, “S.& P. told prosecutors it could not admit guilt without exposing itself to liability in a multitude of civil cases”, basically admitting that they’ve had a long list of lies that they have yet to come clean from. If it hadn’t been for the rating agencies’ dishonesty, it would be highly likely that the crash wouldn’t have happened.
Had S. & P. and other rating agencies chosen to take an honest route within their jobs instead of attempting to gain more profit, this entire mess could have been avoided. Additionally, “Rating agencies continue to create an even bigger monster — the C.D.O. market,” which could also be avoided if the agencies choose what’s right from wrong. It’s extremely beneficial for the government to step in and attempt to correct what these rating agencies had destroyed - the U.S. economy. By doing so, the government is able to regulate the rating agencies’ actions and prevent the chances of another crash occurring due to the dishonesty of money-hungry agencies within the market.
The article that I found this week is called “Graphics Chip Designer Bolts Apple to Rejoin AMD”. From this article we are able to get some more insight on why Apple, reached a 52 week low recently, that affected some of my own investments. That it especially important for my investment fund because it concentrates on products that are used everyday. This article was posted in the Wall Street Journal, a well known new organization that specialize on finances. The author of the article Arik Hesseldahl specializes on technology reports since 1996 that over 15 years of experience making him a qualified source to evaluate technological companies. Since many of the of the graphic chip designers left Apple to go to AMD, Apple has had a severe lost in its stock value to a 52 week low.. Apple “it seems to be losing some very good talent these days” (Hesseldahl) That has created a ripple effect for Apple stocks because “Raja Koduri, who spent the last four years at Apple overseeing its graphics chip work”(Hesseldahl). Koduri played an important accede for Apple’s graphic chips that are used in the iPhone and iPad that are currently Apples strongest products. Here’s where the problem comes in, because Apple lost Koduri and other it does not have the ability to be the “the fastest in the industry[of graphic chip]”(Hesseldahl) This is live when the housing prices stopped increasing there was no place to pull out money form because the companies were dependent on the prices to go up. What happen to Apple it was creating graphic chips at an accelerated rate and now that it lost strong amenity in that field its stock value has decreased. Therefore Apple is a more risky investment now that would have to be watched closely, this could also create potential opportunity for a patient investor that would wait out the dip Apple has taken and buy the stocks now that there at a lower price to then sell than at a higher rate. Overall this article gives investors more insight on what really went wrong with Apple.
ReplyDeleteThe article “Can Netflix’s Stock Keep Marching Higher?” by Trefis is one that focuses on Netflix’s stock and how the company’s future stock might look. This text connects to my investment portfolio because I invested in Netflix knowing that it is very known and used by people all around the World. Also this article connects to my investment portfolio because it informs me on how well Netflix’s stock is doing and how it will look in the future with it’s competitors like Amazon and Comcast.
ReplyDeleteThe text I found is credible because it was published on Nasdaq’s website. Nasdaq is the largest U.S electronic stock market. Nasdaq has approximately 3,200 companies on average and have about 2 million shares. Furthermore, Nasdaq’s technology and public company services support the operation of over 70 exchanges. Therefore, Nasdaq will publish an accurate and credible source on their website so that their customers can be very informed on the competition in the Stock Market. Additionally, this article was written by Trefis. Trefis was founded by MIT Engineers and former Wall Street analysts whose goal was to create a website where people will understand how products impact Stock prices. In Trefis, the authors research facts to come up with the Trefis price estimate for each company’s stock. The author, Trefis, is also a credible source because the company uses extensive data to show what drives the value of a company’s business.
In the NASDAQ stock market, Netflix’s stock has increased by more than 80% and trades are approximately $180. The price has drastically increased because Netflix has gained “high streaming subscribers, better cost control, and lower DVD subscriber losses” (Trefis). This means that Netflix has gained more customers which led to a decrease on DVD users. Furthermore, Netflix is trying to differentiate itself with its content. The company has already eliminated their biggest competition which was DVD business whose high margin is declining but Netflix is still looking for ways to stay at the top. Competition is a big priority in the stock market where it will not only help Netflix gain subscribers, but it can also impact its margins as competitors bid up the cost of the content.
This week the article that I found was “ JP Morgan Chase Faces Full-Court Press of Federal Investigations” by Jessica Silver-Greenberg and Ben Protess. This article states that prosecutors are examing JP Morgan’s act on hurting more than 5,000 homeowners, and failing to alert authorities after suspicions on two people who according to several people had direct knowledge of the matter. As a result now nearly a year after reporting a multibillion-dollar trading loss, the bank is facing a criminal inquiry over whether it lied to investors and regulators about the risky wagers. This connects to my investment fund because this can affect how to bank performs which then can affect me since I am holding about 5 shares on this fund and was planning to buy more. It also connects to the Big Short and the role of fraud investment banks like JP Morgan played for the financial world.
ReplyDeleteThis article is from the New York Times a well trusted daily newspaper founded and still publishing in New York City since 1851. Jessica Silver-Greenberg one of the authors previously worked for the Wall Street Journal as writer for the consumer banking before she started working with the New York Times. Ben Protess has worked as part of the investigative unit of CBS News in Chicago before working for the New York Times and graduated with honors from Columbia University in New York City. This makes it a credible source because both authors have background on the financial world.
I believe that this can affect my investment fund because according to Silver-Greenberg and Protess... “Tensions between JP Morgan and its primary regulator were highlighted in a recent Senate report that examined the $6.2 billion trading loss”. How do I as the investor for this fund know that this won’t happen again? It is in my understanding that the bank is working on the situation but what if it this action causes more problems for the market world, how will I be reassured that it is under control. As stated in the article “investigators will also seek information about whether some top bank executives misled investors and regulators about the severity of the losses. Even as losses mounted last year, the bank did not publicly disclose the problem for months “. How do they know something extremely wrong will not come out of it, how do they know the bank is still doing it or other banks are doing the same thing? Where does that leave me as the investor for this fund should I sell all my holds as a repercussion or should I stay with them and hope for the best. This connects to the Big Short because it is an example of an investment bank hurting the market. According to the article … “The increased scrutiny presents a challenge for the bank and its influential chief executive, Jamie Dimon, who was widely praised for steering JP Morgan through the 2008 financial crisis, leaving it in far better shape than its rivals. The bank was able to come out of the “fire” with minor burns but if it were to happen again would it survive? The financial crisis of 2008 hit the country and Wall Street especially really bad. Problems like these makes me wonder if history is about to repeat itself.
“SEC’s Day of Reckoning on Transparency: Dodd-Frank Section 1504 on Disclosure of Natural Resource Revenues,” discusses new regulations that the Securities and Exchange Commission, (SEC), are establishing in order to make information from rating agencies transparent, or, more public to its customers. This exact act on the financial issue is what should be done to fix our current crisis, and to prevent any future dooms. When information is publicly available, there is less of a chance of fraud.
ReplyDeleteThe writer, Daniel Kaufman, is a nonresident senior fellow to the Global Economy and Development program at the Brookings Institution, where this article was founded. “He carries out policy analysis and applied research on economic development, governance, regulation and corruption around the world. He is a world-renowned writer, lecturer and analyst on governance, corruption, and development worldwide, with experience in... industrialized and transition economies.” It is clear to us that the author is very well informed and aware of financial disputes. He is able to analyze issues that may include big entities such as the government. He is currently president of the Revenue Watch Institute and previously served as a director at the World Bank Institute. Brookings conduct high-quality, independent research on American events.
One of the major problems that led to the financial crash in 2008 were the poor ratings from rating agencies on stocks. The agencies would rate these risky investments to be very good investments, knowing that they were risky. Investors would buy these risky investments unknowingly, yet ignorant for not doing their own research or asking questions, and then unwillingly now own bad triple-B stocks. In The Big Short, it is explained that the root of the financial problem was the lack of information kept by investment banks and rating agencies. If this information was to be released, then things will become more fair, therefore less fraud and any other chances of another crash. In argument, and relating to what Kaufman states in his research, government should get involved to make transparency and disclosure requirements to make rating agencies release information on their ratings and stocks. Investors will then have information and will know what they're actually buying and won’t get involved in a further issue. They’ll be aware and able to make safe transactions.
The article I found this week is called, “Disclosure, transparency, and market discipline” by Xavier Freixas. This article discusses the failure of market discipline pertaining to the financial crisis in 2008. The main problem in the market crash had been the lack of transparency and efficiency, especially when it was needed most. This relates to my research project of The Big Short, by Michael Lewis, since I believe the main cause of the financial crisis was the fact that many did not have access to information. People were ignorant of what they were investing in, mainly because they were running on blind faith, believing that all the ratings and the CDOs and synthetic CDOs that investment banks were selling were safe. No one questioned whether or not the investments being sold were what they said they were. In short, Freixas touches on why exactly transparency in the market is so important.
ReplyDeleteThis article was published by VoxEu which is a policy portal set up by the Centre for Economic Policy Research. Their website protocol states, “By submitting an article to Vox, you affirm that...it contains no matter that is defamatory or is otherwise unlawful..You further affirm that the work contains no materials the publication of which would violate any copyright.” VoxEu clearly affirms that they anything they publish very seriously. They take extra steps to make sure that whatever is submitted to them and then publish does not violate any sort of law. This shows that they would ever attempt to publishing any sort of false information. Additionally, Xavier Freixas is a professor at the Universitat Pompeu Fabra in Barcelona and Research Fellow at CEPR. Also, he is Chairman of the Risk Based Regulation Program of the Global Association of Risk Professionals (GARP). Obviously, Freixas has a good reputation which he would not dare to tarnish by doing something so silly as publishing false information. Therefore, with the combination of VoxEu strict regulation and Freixas’ lack of motive to publish false information, this source is credible.
Before and during the financial crisis of 2008, there was a lack of communication between investment banks and the investors. Investment banks ignorant of certain parts of the market, but investors also failed to make good investments since they moved forward with the little information, thinking it was sufficient. Most importantly, investment banks were fraudulent in their actions but ignorant in the effects of their actions. For instance, synthetic CDOs, “turned out a lot of dicey loans into a pile of bonds, most of which triple-A-rated, then it took the lowest-rated of the remaining bonds and turned most of those into triple-A CDOs” (Lewis. 76). Investments banks purposely re-rated the worst bonds so that they could sell them and portray them as good bonds. Because there was no regulation of the transparency in the market, this was allowed to happen. As a result, “The opacity of structured products, which was no issue in the boom, turned into a major drawback in the crisis; credit ratings were no longer trusted as providing reliable information about default risks; banks’ reported losses were viewed with suspicion by investors” (Freixas). Because investment banks didn’t give out the necessary information to their investors, either because they purposely held it from the investors or that they were ignorant of the information themselves, they were fooled and suffered losses. Basically, “In the boom it is quite likely that the major problem was a lack of market participants’ incentives to use or demand information. In contrast, in the bust, the dominant problem seems to be that transparency is most difficult to achieve when it is needed most” (Freixas). If government had stepped in to regulate the transparency that was in the market then many wouldn’t have suffered so much due to the crash. There needs to be more transparency in the market or else investment banks could get away with fraud because they are ignorant.
the article from CBS that i have found was talking about how the apples manufacturer foxconn place a no Suicide post on the worker do to past event with workers jumping of the building which in placing suicide net so that they won't have the some problem do to the way that they treat workers and the long working hours of 13 and up hours report that a worker dies working 34 hours straight and having 13 year old working on at the factory and CEO the late Steve jobs says the the factory is not a sweatshop and that the factory have "movie theater,hospitals,restaurants,pools"but no one really know that it true do to know one can go into the factory but the man reason why apple place there factory with foxconn in china is do to the demand of the people in the united states and other places that can pay for these products and the company would treat the workers badly if the worker does any mistake with there product and the company can do it because they could easily be replace by someone else in China
ReplyDeleteThe article I found this week is titled “Obama Targets Tight Lending Standards” by Peter King it talks about how the Obama administration aims to lower the lending standards that lending agencies have had since the subprime mortgage crisis. Lending agencies have been lending to people with impeccable credit and people with less than perfect credit have been denied the loans. This relates to The Big Short because it shows how scared the lending agencies are now because of the mistake they’ve made years ago. In The Big Short Lewis talks about the lessons that the market should have learned. Specifically “The Market might have learned a simple lesson: Don’t make loans to people who can’t repay them” after the crash in wall street lending agencies took this lesson VERY seriously. The lending agencies really want to make sure that they would get paid back and don’t want a repeat of what happened in the past. Obama’s plan to lower the lending standards is not the right solution in fact it risks bringing about a repeat of the events in the past. Lending agencies are doing the right thing by having high lending standards. High standards assures the bank that they will get paid back and that is what is they are doing with these high standards. Lowering standards might cause a slope to occur and make the standards so low anyone could get a loan.
ReplyDeleteThe source comes from mortgageloan.com a website where you could get rate offers on loans from different lenders. It also provides news with mortgage loans to keep people who take these loans up to date. This website brings in many possible customers and gives great up to date information. Giving false information would discredit them and effectively run off their people who use the website which encourages them to make sure that their articles are true. On top of that the author Peter King is a person with about a decade of working with a mortgage lender so he would know what he is writing is true.
Lowering the standards is certainly not the correct solution but neither is not giving loans to anyone. “Since the downturn, however, mortgage lending has nearly dried up for this group of borrowers, whose numbers have increased significantly due to the downturn.” There are still people who need these loans to be able to buy homes. Lending agencies should not stay in fear that they will not be paid back. They don’t want a repeat of what happened but the way to give loans and know that that they will get their money back is with government regulation. Regulation would make the lending agencies ease up a bit because it would not be their fault. When people could blame the government it makes everything easier. Thats not the only reason why however, the way that this system would be set up is that the government not only monitors who gets these loans but for people with a bad credit rating they would get their payments monitored by the government to ensure that they are paying their loan off. Obama’s plan to lower lending standards is not the right way to go there is a need for the government to regulate loans. “If the only people who can get a loan have near-perfect credit and are putting down 25 percent, you’re leaving out of the market an entire population of creditworthy folks, which constrains demand and slows the recovery” This is why the government must enter into the loans market and regulate the loans to help speed up recovery and give a hand to the housing market. This is the right and one of the best solutions.
The article “Councils go after S&P for misleading ratings” written by Clancy Yeates, highlights how Standard & Poor are being fined for giving unreliable collateralized debt obligation (CDO) to the public for investing. This online article highlights the potential ideology that Michael Lewis has in The Big Short as he informs one of the potential suspects that led to the 2008 market crash, potentially relating to these rating agencies as they are recalled as one of the primary suspects to blame for the huge financial loss that American investors made in the CDOs. In addition, the article add that the company was sued $100 million dollars for giving a falsification rating for a CDO, which resulted in million in losses for local councils.
ReplyDeleteThe article "Councils go after S&P for misleading ratings” written by Clancy Yeates is credible because it was published by The Age, which is an Australian newspaper company which was founded in 1854. This company is known for their financial department and distribution to the public. In addition, Clancy Yeates adds to the credibility because Yeates is a reporter that reports any financial and business news, in addition he is a former Canberra business correspondent. Overall improving the credibility of the article because of the experience the author had.
"Councils go after S&P for misleading ratings” highlights how it has been sued for $100 million dollars, which shows the potential outcome when rating agencies don’t do their job correctly. Because there are countless rating agencies which do a lackluster job and rating CDOs, there should more government regulation which economically impacts the company that does not do their job correctly and reduces the fraud that consumes these rating agencies. Due to the lackluster strategies, “Many councils purchased the products from Lehman Brothers Australia. The products had names such as Glenelg, Scarborough and Blue Gum, received very high ratings of AA or AAA but plunged in value during the global financial crisis”, this is clearly evident that shows the financial outcomes when rating agencies do not do their jobs correctly, also being a government incentive of suing them for $100 million dollars as an excellent example of what is a potential outcome when agencies don’t thoroughly inspect CDOs. Similarly, Michael Lewis argues the same ideology by stating, “Bear Stearns hedge funds were informed that their $1.6 billion in triple-A rated subprime-backed CDOs had not merely lost some value, they were worthless” (176), increasing the idea that rating agencies show limited knowledge on how to rate these CDOs, proving that government should regulate this system by having a fee if their jobs are done incorrectly, similarly in S&P being sued for $100 million dollars because of the idiocy.
Source: http://www.theage.com.au/business/councils-go-after-sp-for-misleading-ratings-20130416-2hxxg.html
The article I read was “Credit Rating Agencies In the Crosshairs” by Martin Mayer. This article is about the flaws found in rating agencies and how they are to blame for the stock market crash of 2008. However, although investors, subprime borrowers, and investment banks are factors of the issue, rating agencies are heavily blamed for not doing their job the way it should’ve been done. According to this article, rating agencies were responsible for the stock market crash because they were acting as advertising copywriters and bad paper and it is similar to The Big Short because according to Lewis not only were rating agencies rating the bonds incorrectly but their copies too including that triple A ratings were going to triple B ratings and that itself creates fraud.
ReplyDeleteThe article I found is credible because it is from Brookings, an American company that conducts research and educational reports in economics, business, global currency, and policy. In addition, this article is also credible because viewers are able to read any article and identify which ones are biased and which ones aren’t. Although the one I read may have some bias it is not completely biased as most factors that led to the crisis are clearly identified and given background that supports how it affected the crash. This article is also credible because it is written by Martin Mayer, an author that has received awards for his non-fiction books about economy and obviously if someone writes about the American economy and how it has changed over time, they must have a clear understanding of the actions and outcomes in a market.
Both Lewis and Mayer would agree that rating agencies were responsible for the deterioration of the stock market in 2008 and I agree that this is true. Based on the article by Mayer, it is evident to me that rating agencies were wasting time and the financers in that department just wanted to make sure that they would keep their clients. This would be helpful so that they could keep their job and continue to have a partnership with the investment banks and this is the part where ignorance is seen. However, according to Mayer investment banks did not “need” rating agencies because they would just serve as an obstacle in the way of gains which means that eventually banks itself would run out of business and have a high rate of debt. I actually would disagree with this part however and just like Lewis argues that the problem with rating agencies is that they did not receive enough economic information from the banks which led them to rate the bonds incorrectly. In addition, they didn’t even have enough information from clients if credit wasn’t asked for during the offering of loans and therefore government intervention is needed. Although in America some businesses may be private, in terms of the economy the government needs to be involved in stocks and to regulate that corporations must make their information public to limit fraud. Overall, rating agencies are responsible for the harm victims are still facing today but they aren’t the only reason that America is still finding its way out of the gutter.
The text I found this week is by David Barboza and Nick Wingfield - it is caled “Pressured by China, Apple Apologizes for Warranty Policies”. In this article, I learned that Apple has not been doing as well as many may think. Not only that, but Apple also had the audacity to cause some trouble in China. It is unfortunate because many individuals rely on this company and cannot afford for it to crash nor make so many mistakes. And this interesting article, actually connects a lot with my final project! For my final project, I have decided to do the investment tracker because although I am not interested in pursuing a career in the business/economics field, I am interested in buying stocks and bonds of companies that are of my interest. but also worth my time and money! So, I have invested in (primarily) companies I know and a few I don’t. Among these companies, is Apple. But the real relevance between my article and the project is the fact that just like Dr. Burry in “The Big Short”, I too anticipated the loss. I saw the graphs and the numbers changing, especially when they went down. I decided to “buy low and sell high”. And in reality, I did this while Apple was going through this mini crisis in China. So, I did the right thing by investing in the stock while however, not knowing the root of the problem.
ReplyDeleteThe evidence that I have that the text I found is credible is that it is written by an individual who focuses on the finances area specifically. Due to this fact, he knows his content well and is able to write about it efficiently. Not only that, but this article is published on a major newspaper organization - the New York Times. The New York Times is a credible source because it has been around for many years now, it is known nationally and it’s content is not biased.
Based on this text, I can infer that Apple is going to have to make some major adjustments. This is not the first time that this occurs and it will probably not be the last. “....underscored the challenges the company is facing as the country becomes an important market for its products”. China is a country that Apple should not be playing with. A lot of customers are from China and there is a high demand for Apple products in China. Honestly, some possible solutions to avoid this issue - would be to really strengthen the supervision of Apple. Laissez faire is being too commonly used among the business industries that we forget the consequences of our actions. With more regulation and intervention from the government, companies like Apple (will for sure) be able to succeed efficiently, while making sure to maintain their customers content as well.