Comments on: Bear Stearns & Enron http://www.coyoteblog.com/coyote_blog/2008/03/bear-stearns-en.html Dispatches from a Small Business Mon, 22 Mar 2010 09:52:38 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Marcus http://www.coyoteblog.com/coyote_blog/2008/03/bear-stearns-en.html/comment-page-1#comment-10228 Marcus Wed, 19 Mar 2008 12:10:15 +0000 http://coyote-blog.com/wordpress/2008/03/bear-stearns-en.html #comment-10228 <p>I certainly don't think the analogy is stretched in as far as leverage is concerned but the similarities end there. Enron leveraged themselves on the basis their stock price would remain high. If it did they would have been fine. It was a gamble that didn't pay off.</p> <p>Banks and the related SIVs didn't take any such gamble. They simply assumed the risk was appropriately priced based on the ratings from S&P and Moody's. The ratings turned out to be wrong which meant the risk had been mis-priced.</p> <p>It's not clear to me how much government pressure was placed on the ratings firms to rubber stamp bonds with higher ratings than they should have but I think it is clear there was quite a bit. Combine that with the mandates the administration put on Fannie Mae and Freddie Mac to push loans to low income people and that investors have no place to turn to except the government anointed rating firms (S&P and Moody's) and you end up with a boatload of MBS that aren't worth the paper they're printed on.<br /> </p> I certainly don’t think the analogy is stretched in as far as leverage is concerned but the similarities end there. Enron leveraged themselves on the basis their stock price would remain high. If it did they would have been fine. It was a gamble that didn’t pay off.

Banks and the related SIVs didn’t take any such gamble. They simply assumed the risk was appropriately priced based on the ratings from S&P and Moody’s. The ratings turned out to be wrong which meant the risk had been mis-priced.

It’s not clear to me how much government pressure was placed on the ratings firms to rubber stamp bonds with higher ratings than they should have but I think it is clear there was quite a bit. Combine that with the mandates the administration put on Fannie Mae and Freddie Mac to push loans to low income people and that investors have no place to turn to except the government anointed rating firms (S&P and Moody’s) and you end up with a boatload of MBS that aren’t worth the paper they’re printed on.

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