Credit Scoring for Wall Street Investments

The recent Goldman Sachs revelations are to say the least troublesome. The position taken by the Wall Street Investment Banks that the trader’s duped, were sophisticated buyers that ought to have done their own due diligence, exposes an unacceptable arrogance. The sale of the Mortgage Backed Securities that brought the financial world to its knees was based on that very same premise… caveat emptor. You make your own investment decision, but we are going to hide and disguise the facts. Further, with each passing day, and revelation, it is becoming clearer that my charge of a vast conspiracy or at the very least misrepresentation by the Wall Street banks in cobbling together and passing off as investment grade, these fraudulent and extremely dangerous products; “guaranteed” by the equally bogus Credit Default Swap (CDS) A.I.G mortgage insurance policies.

In this mid-term election season, congress is going through its usual and customary charade of asking “tough” questions for the media and electorate, and then turning around and asking the Walls Street bankers for their advice on future regulations of their industry! We had Senator Levin asking soft ball questions of Lloyd Blankfein, Goldman Sachs Chairman, and then seeking his advice on crafting legislation!… Does the coyote want the chicken coop gate to swing in, or out!

We need, and want our investment banks, and Wall Street brokerages to offer products that will generate income. Yes, these will always be risk based offerings. By their very nature this will be the case. However, in this computer age, but there MUST be openness, and without the subterfuge that has been the usual and customary business practice of the markets. Had the markets implemented the exact same underwriting criteria that are used in approving real estate loans, this entire economic meltdown probably could not have occurred?

Some 20 plus years ago Fair Isaac's created FICO risk/credit scoring. Each of us has a credit report derived from a scoring model and maintained by the three credit repositories. Borrower’s who have demonstrated strong credit worthiness are rewarded with the highest credit scores, and receive interest rate “bonuses.” EVERY mortgage originator hangs their hat on these scores; and then factor in loan to value as the deciding factor in approving each loan. History has proven that the default rate is directly related to higher the credit scores, and the lower the loan to value. The higher the score, the lower the loan to value, the lower the defaults rate. The converse is true, credit scores under 680 and loan to values exceeding 90%, yield a greater default rate.

A Mortgage Backed Security is, in effect a mutual fund comprised of real estate mortgage loans. The MBS must have an AAA or higher rating to qualify as investment grade sufficient to be offered to pension plans. Insofar as every loan placed in the pools already has credit scoring and a loan to value, the mathematical formula to arrive at a credit score for each MBS is quite simple to achieve.

Originators would be required to enter every credit score and loan to value for each loan into a data base… PRIOR to selling any loan into the secondary markets. Every new entry will result in a new score for the pool. Set a minimum “Investment FICO” score, say 800, to be a minimum for an AAA+ rating, 790 for AAA, 780 for AAA- and so on. Further, an MBS cannot be comprised of loans originated from any single source, further eliminating the chance for collusion. As an additional safeguard, originators MUST be required to either retain a position in every loan sold, or provide lender paid mortgage insurance in every loan sold into the markets. The originator made the loan,and must be required to retain a level of risk. Full transparency as to the quality of the loans in each pool would be guaranteed. This method would still allow a Wall Street bank to cobble together whatever garbage it chooses into lower grade loans into a below investment grade marketable security. No regulations for the Wall Street Banks, no looking over their shoulders, winking at a worthless, inept SEC.

My method would far more open… caveat emptor would still be the name of the game… however, the buyer, with proper advance “warning” would then be in the position to make an informed business decision. Congress has proven to be both incapable and unwilling to implement meaningful Wall Street regulation. The SEC has proven to be nothing more than a federal bureau designed to pay lip service to the public.

The A.I.G. Bonuses ..Get Over It...

I note with great interest that the people screaming for the most blood are the very same members of congress who could not take the time to read and understand just what they were voting for... They admitted that they were surprised that this issue of executive compensation and bonuses was not covered in the bill that they just voted for! I note too, that the silence from Speaker Pelosi and Senator Reid is quite deafening... could it be that they know that in forcing the vote on what is most probably the single most important piece of economic legislation in our history, in less than the promised five days, they are directly responsible for yet another screw up...

Get over it, the damage has been done, the bonuses, that is if they are in fact bonuses and not commissions, have been legally paid; and, if enacted, this latest waste of our time and money by congress will most likely be proven unconstitutional... Hopefully the president will have the will power to use his veto powers, saving us the cost of taking it to the Supreme Court... Let's see now, "you" work for XYZ Widget Company, have done a great job, "you" have an employment contract calling for incentive pay whenever you meet or exceed your quotas and the company paid you a handsome bonus... but then the company files for bankruptcy... the creditor's ask the bankruptcy judge to invalidate your contract and order that you return the bonus... do you believe that you ought to be compelled to return it?... I didn't think so, you have a valid contract, right...

I note too that the public, which in 60% of the case is too damned lazy... too taken up with American Idol and Survivor... too busy Twittering and “Facebooking” to put down the remote or cell phone and vote... even too damned lazy and disengaged to pick up a pencil and fill in an absentee ballot... to damned lazy to write to their members of congress (it's OK folks, Word has spell check)... and then, when the media tells them too, they wake up and start screaming... please, either start paying attention... get involved... see to it that this sort of gross negligence on the part of congress doesn't happen again... or else do as YOUR member of congress fully expects you to do... sit down, shut up, go back to your reality television programs and enjoy this "E Ticket" ride that they have placed us on...

A dolt is a person who consistently screws things up... now, think of congress... but in continually returning these mostly inept people to their seats in the capitol, without any real scrutiny on our part, are we not doing the same thing, screwing up!... In failing to participate in the electoral process... in failing to do our jobs as citizens and provide oversight of our elected officials (at every level) we are getting just what “we the people” asked for... the finest government that the Sierra Club, NRA, Oil, Farm, Wall Street, Banking, Insurance, Union, "Widget" or any other special interest lobby can buy… even a three year old learns not to put its hand in the fire twice...