Moody’s and the Credit Crunch #
Over the last few months, I’ve seen a lot of articles that claim they’ll explain the origins of the recent financial turmoil to you in a way you can understand. I’ve never seen one succeed so well as Roger Lowenstein’s piece in the forthcoming New York Times Magazine does. A snippet:
The magic consisted of turning risky mortgages into investments that would be suitable for investors who would know nothing about the underlying loans. To get why this is impressive, you have to think about all that determines whether a mortgage is safe. Who owns the property? What is his or her income? Bundle hundreds of mortgages into a single security and the questions multiply; no investor could begin to answer them. But suppose the security had a rating. If it were rated triple-A by a firm like Moody’s, then the investor could forget about the underlying mortgages. He wouldn’t need to know what properties were in the pool, only that the pool was triple-A — it was just as safe, in theory, as other triple-A securities.