The “Man Behind the Curtain”

Posted by Tim Hope on 9/24/08 10:47 am

Everyone must be familiar with the scene from the Wizard of Oz when the wizard is finally discovered behind the curtain only for him to proclaim “pay no attention to that man behind the curtain.” The current financial crisis has at its root a “man behind the curtain” in the form of the major rating agencies.  There are reports that the firms substituted theoretical mathematical assumptions for the opinions of their own analysts in a rush to grade issues for fee income. The result was that securities with coveted AAA ratings were packaged up and sold into the marketplace throughout the world despite the fact that they contain securities that were anything but top rated.  Between 2002 and 2007, rating agencies pumped out top flight ratings on roughly $3.2 TRILLION of mortgage debt pools even though they contained mortgages from homeowners with damaged credit and undocumented incomes.  Without the AAA rating the securities would not have been available for purchase by banks, insurance companies and pension plans.  As subprime borrowers have defaulted many of the securities have been downgraded and fallen in value and in some cases written off entirely (or close to it).  While the Wizard of Oz had a happy ending, it remains to be seen how the present story will unfold.  Click here for an excellent article on the topic . 

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