America has to be awarded kudos – the transparency of its system is exposing the two faced crookedness of Wall Street leaving it without a fig leaf to stand on. The Financial Crisis Inquiry Commission and the US Senate Sub-committee Investigating Financial Crisis are hard at work ruthlessly calling the players on stage to face battery of questions. Many also wonder about the foreclosure crisis and the situation of the real estate market.

April has been a cruel month for Wall Street. On 7th April the FCIC raked up the issue of the mess in securitization that started with former Federal Reserve chairperson testifying.

On 13th April the Senate Sub-committee kicked the first of other four important investigations aiming to examine “how US financial institutions turned to high risk lending strategies to earn quick profits, dumping hundreds of billions of dollars in toxic mortgages into the financial system, like polluters dumping poison upstream in a river.”

On the same day (13th April) Goldman Sachs was charged by SEC for indulging in fraud.
On 16th April, the day of the second hearing regarding the part played by the regulators, the Sub-Committee “showed how regulators saw what was going on, understood the risk, but sat on their hands or fought each other rather than stand up to the banks profiting from the pollution. Those toxic mortgages were scooped up by Wall Street firms that bottled them in complex financial instruments, and turned to the credit rating agencies to get a label declaring them to be safe, low-risk, investment grade securities.”
On 23rd April, the day of the 3rd hearing the part played by credit rating bodies and on 27th April, the day of the 4th hearing the part played by the investment entities were being looked into.
As the drama unfolds stripping Wall Street of all pretences, it is surprising that the financial lobby failed to gauge the depth of public anger against them and how vulnerable they were to it. The politicians had to bow to public pressure.
Most illuminating was the session of the credit rating agencies. The majority of the international credit rating affairs are handled by only three rating agencies – Moody’s Fitch and Standard & Poor. Generally the investors depend on these rating agencies to calculate the value of the investments – in particular the bonds. The regulators of the banks also use the ratings by the agencies to find out if the risks they are taking with the bank’s capital are appropriate since the introduction of Basle bank supervision rules in the 80s.

 

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