Inman

Government’s suit against S and P could help revive lending

Long-term rates slid back a bit this week, the 10-year T-note holding 2 percent, mortgages near 3.75 percent, higher than 2012’s second half, but nothing dramatic.

It was a thin week for data, but two reports were startling.

First, the U.S. trade deficit in December arrived 20 percent lower than forecast because of a surge in exports of … oil.        

Second, consumer credit continued its rise: a $15.9 billion jump in November, and $14.6 billion in December.

The usual suspects have seized on this run as a sign of normal, cyclical recovery ahead. It is not.

The only two components growing: student loans and car paper, one crushing the next generation, the other available only because it’s the only consumer collateral that’s easy to repossess. All other categories of consumer credit are falling, from credit cards to mortgages.

The best news in a long while, maybe since the financial crisis began in 2007: The Justice Department’s suit against Standard & Poor’s. Here we are, eight years after the subprime peak early in 2006, five years after the government put Fannie and Freddie in conservatorship, and we still have no national consensus on "who shot John."

Absent that consensus, everyone from government to regulators to civilians to bankers to markets has struggled to function, swinging wildly at each other, punishing for the sake of punishing, and artfully shifting blame for political reasons, score-settling, or to take cover.

The two worst actors in the recent years: Big Lie people on the Right insisting that the whole credit disaster was the fault of government, especially its lending agencies; and second, the perps themselves — who can hardly be blamed for failure to confess but have thus far escaped by obfuscation, muddying evidence.

The perps were the investment bankers. Never doubt it.

There were hangers-on, and the fantastic personal failure of Alan Greenspan. But the investment bankers, drunk on cash, each one with supreme faith that he and he alone would get out before the crash, operating entirely in private markets … ruined them.

One damning datum has been in plain sight like the booze in "Untouchables": Private-label mortgage-backed securities (vehicles for subprime lending not backed by Fannie and Freddie) were $543 billion in 2002, and $2.2 trillion four years later. Today, more than half that is a dead loss.

The investment bankers have claimed throughout, "How were we to know that housing would crash? And those awful mortgage brokers tricked us."

These guys were — and are — the best analysts of credit in the world. That’s the job. But when they went Dark Side, they needed one small group of enablers. And they bought them.

The two dominant credit-rating agencies, Standard & Poor’s and Moody’s (the latter controlled by that nice man in Omaha), have operated in bizarre space ever since the Depression. Everyone uses their ratings, often commanded to do so by law (legal investments by broad classes of institutions and agencies). Yet they cannot be held liable for mistakes, protected by free speech, and they are paid by the investment bank issuers who make more money the higher the rating.

For the Department of Justice to prove fraud, it must show that the raters knowingly uprated bad paper. That’s a tough case. However, authorities long after the Depression used iffy lawsuits like this to bring daylight, and to see who, under enough pressure, might turn state’s evidence.

If we can at last agree on the story — the real story — then we can begin to relax this Keystone Kops episode of beating hell out of the honest because there used to be bad guys in the neighborhood. If every regulator shut down today, you still wouldn’t be able to get a subprime loan out of securitization for a generation. There would be no buyers.

We could begin to discuss banks and banking in adult fashion, acknowledging their proclivity to fail in heaps, the need for government and social backstops, and the impossibility of turning them into independent bomb-proofs, large or small.

Then we can get around to the essential: Make clear what we expect of each individual banker, and the personal consequences of failure, even by the accident-prone.

There is no other way back to an adequate supply of credit, and a sound one. Maybe, just maybe, this Standard & Poor’s case will bring the light to begin the process.