Marketplace Scratch Pad

Morning Reading

Scott Jagow Jun 5, 2009

Yes, the unemployment rate is now 9.4%, the highest in a quarter-century. But the number of layoffs last month was the lowest total since September. So, maybe there’s room for some glass half-full thinking. GM’s making some progress on slimming down. Word is that former race car driver Roger Penske’s company plans to buy Saturn. Elsewhere:

Let’s start with NPR’s story this morning on the credit rating agencies. It’s a preview of this weekend’s This American Life, which is airing another episode about the economy. This time the focus is regulators, like the rating agencies:

Mabel Yu analyzed bonds for Vanguard, which manages $400 billion in bond investments. The new deals would land on her desk, with their AAA ratings. She says she could never get a straight answer about what the worst-case scenario really was.

“I got names of the rating agency analysts, and I asked them lots of questions,” she says. “In the beginning, the questions would be 15 minutes to half an hour. But then it turned into hours, and many hours.” She asked them about the possibility of house prices falling, of interest rates rising, of people not being able to refinance their mortgages. “If all of those things happen at same time, what would happen to our investment? I could not get a straight answer.”

Yu says she was told repeatedly that she worried too much. “I felt so dumb,” she says, adding that she was told, “Don’t worry about it. Have a life.”

Sounds like another can’t-miss episode.

Barron’s talks to long-time short seller Doug Kass. Kass actually predicted the stock market’s recent surge, but now he’s getting back to his true bearish nature. I thought this was a particularly credible idea:

As for the market, Kass sees an uncomfortable rise in optimism. The latest readings from Investors Intelligence found the lowest level of bears among advisors since January 2008, he notes. “The same talking heads who were scared witless in March have turned back into perma-bulls,” he adds.

The Wall Street Journal has an editorial from Richard Neiman, superintendent of banks for the state of New York and a member of the TARP Congressional oversight panel. Neiman argues against the federal government taking over regulation of the banking system and pushing the states aside:

A move toward complete centralization would be a serious mistake. In an increasingly complex financial-services landscape, we need the local perspective for early detection of emerging risks. States like New York and North Carolina sounded the first alarm on predatory lending issues more than 10 years ago. Unfortunately, instead of cooperating, the primary federal regulators — the Comptroller of the Currency and the Office of Thrift Supervision — thwarted state efforts as far back as 2003 by aggressively asserting that federal law pre-empts state law. This exacerbated the subprime crisis by allowing federal banks and thrifts to avoid state antipredatory lending laws.

Speaking of predatory lending, the SEC has filed a civil fraud suit against former Countrywide CEO, Anthony Mozilo. Perhaps the most interesting thing in the filing was the revelation that Mozilo might’ve coined the word “toxic” to describe certain subprime loans. From the LA Times:

In March 2006, Mozilo wrote that the lender’s program of granting subprime loans for 100% of the value of a borrower’s home was “the most dangerous product in existence and there can be nothing more toxic and therefore requires that no deviation from [underwriting] guidelines be permitted irrespective of the circumstances.”

In April 2006, Mozilo wrote about those loans, “In all my years in the business I have never seen a more toxic” product.

But he loaned the money anyway.

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