Wednesday, October 03, 2007

pay attention
"In August, when fallout from America’s popping housing bubble began to hit the market, trust in America cracked—and with it, so too did confidence in the global economic system.

Hamid Varzi, writing for the International Herald Tribune, summarized world opinion this way: “The U.S. economy, once the envy of the world, is now viewed across the globe with suspicion” (August 17).

He continued: “The ongoing subprime mortgage crisis … presages far deeper problems in a U.S. economy that is beginning to resemble a giant smoke-and-mirrors Ponzi scheme. And this has not been lost on the rest of the world.”

Trust in America is quickly disappearing. Why? Because America single-handedly brought the international financial system virtually to its knees by foisting off fraud-ridden subprime debt on an unsuspecting world, which resulted in the ensuing credit crunch."


So American banks sliced and bundled their subprime mortgages together into packages. Using complex computer models, and by geographically and otherwise diversifying the bundled mortgages, American banks convinced world-renowned and trusted American investment-rating agencies like Moody’s and Standard & Poor’s to give the mortgage securities higher valuations than regular subprimes would typically rate.

Later it became public knowledge that these same ratings agencies, which foreign investors were relying on for impartial advice, were being paid by the very banks and lenders that were bundling and selling the subprime mortgages—a huge conflict of interest that produced some terribly misleading data for foreign investors.

It has also emerged, at least in Moody’s case, that the agency knew for years that the mortgages securities they rated as safe were more than 10 times as risky as other similarly rated bonds (Daily Reckoning, September 3).

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