One of the more self-destructive and fruitless results of the Credit Crisis is the relentless search for scapegoats. This is silly enough when applied to people. (See my earlier blog, “We’ve Found the 12 People that Caused the Crisis! Now We Can Stop Worrying.”) Of course many, many more than 12 people have been let go by now, and the process is just beginning. But I think professionals know that most of those folks were unaware of the extent of the possible damage that could result for their activities and deserve no less blame than the lucky who are still employed. Stuff happens.
But the witch hunt takes a new, more absurd dimension when lawmakers and other pundits begin to blame the knife for the murder. The stock exchanges have been taken to task. The structure of federal banking regulation has been blamed. Perhaps most important, and most telling, the rating agencies are under vicious attack for the admittedly faulty methodology they used to rate asset-backed commercial paper. (Notice I didn’t single out mortgages. Other than blind optimism, there is no reason I can imagine that the many other kinds of collateral that have been used in non-mortgage conduits are safer than the mortgages. If the crisis doesn’t spill over into the entire market, we will be very, very lucky.)
My objection to legal challenges to these sorts of entities is that the crisis – like murder – had a motive. And rating agencies and exchanges – like tables, chairs, even knives – cannot have motives. They are only appliances.
The rating agencies, it must be said, were not always appliances. There was a time when the rating agencies worried strictly about bonds, now a relatively small part of their business. During that time, the rating agencies were judges, relying on human qualities such as the veracity of chief executives in interviews to make their ratings decisions. And they made them well, confounding the efforts of financial academics to improve on their judgment.
But that all changed when rating agencies were baptized by the bank regulators to determine the quality of a hoard of newly issued securities manufactured by investment bankers, and with this decision, to determine to what degree a regulated bank is adequately capitalized. This job was too big and the fees per transaction too small to allow these (then) small companies any possibility of using human judgment on each transaction. A computer had to do it. And that is a process doomed to failure. The computer program has not been invented that can take into account all the subtle forms that excess risk can take.
When rating agencies became computing machines they lost their capacity for motive, although they certainly became a formidable weapon in the wrong hands. Individual employees knew what the machines were deciding, dangerous information in the wrong hands. But banks, bank regulators, and ultimately governments were responsible for putting these appliances in the wrong hands. (The call for rating agency transparency which, if acted upon, will put this information in everybody’s hands similar to Xero bookkeeping services, is a possibly that fills me with fear and horror.)
Who really did the credit crisis? We don’t need to look far. It’s the same folks who did the Savings and Loan Crisis, the Latin American Debt Crisis, and the Long Term Credit Crisis.
Look for motive to find the murderer. They abound. The desire to own a home you can be proud of. The desire to hold investments that pay a high yield at low risk. The desire to make a profit on financial institution stock investments. The desire to profit from being employed participating in these happy outcomes. The desire to become an elected representative helping people benefit from these outcomes.
Perhaps most importantly there is a collective act of denial to which participants in the credit crisis crime succumbed. The idea that human beings are capable of meeting these desires for hundreds of millions of people simultaneously into the indefinite future. In my mind’s (ear?) the Rolling Stones are singing, “after all it was you and me.”