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Blunt Talk about Borrowing Standards

posted by Katie Porter

The August 2007 Smart Money magazine featured a Q&A interview with Terry McGraw, CEO of McGraw-Hill Companies, which owns debt-rating company Standard & Poors. The interview asked him about the potential of the fall-out in the subprime market to hurt Standard & Poors. First, he bluntly admitted that while he "feels badly if somebody lost his home," that Standard & Poors makes money regardless. It's refreshing to see an industry executive being honest on this point. Profits frequently turn on the existence of the transaction, not its ultimate success. Ronald Mann made a similar point in his Sweatbox article about credit card issuers--consumers can struggle and sometimes fail to repay and the industry profits handsomely nonetheless. The bankruptcy debate was sometimes portrayed as a necessary antidote to the problem of consumer default, a characterization that misses the real world reality that profitability does not require a consumer to repay in full and on time. Standard & Poors is an excellent example of an organization that continues to profit, even if consumers suffer. I can think of many others--law firms securitizing receivables, investment banks putting together bond issues, mortgage brokers, real estate agents, and originating lenders every time a consumer buys a home, etc.

McGraw didn't stop his remarks with expressing sympathy for the harms that accompany S&P's profits. 

Asked why Standard & Poors tightened ratings on subprime lenders, McGraw responded by criticizing lenders: "You couldn't watch television without seeing some silly ad that said, 'Have no money, have no credit, defaulted in all your payments? Call us, we'll lend you money!' What the hell is that?"  McGraw's disdain for the business acumen of subprime lenders may prove apt; subprime foreclosures continue to climb and some have argued that the boom in subprime lending will have overall negative effects for homeownership in America. The mortgage market may be drying up, but there are plenty of ads for other types of lenders that actively seek out borrowers in financial distress. McGraw may think those ads are "silly" but for the subprime industry, they are the source of serious profits.

Comments

'McGraw responded by criticizing lenders: "You couldn't watch television without seeing some silly ad that said, 'Have no money, have no credit, defaulted in all your payments? Call us, we'll lend you money!' What the hell is that?"'
Let's be clear, THAT is still standard fare for SoCal. t.v. viewers today.

Pity the poor subprime credit card user the most. He / she pays the freight for all the prime users who ride along just fine, using their credit cards for convenient interest-free 30-day loans.

Only in America.

--Jack Payne
www.sixhrs.com

This post is incoherent. If McGraw's disdain for business acumen of lenders is "apt", then, Mann's speculation that lenders are making money off non-paying debtors is not apt. Subprime lenders cannot at the same time lack business acumen and have supreme business acumen. So, which one is it?

Also, being upset that S&P earns money while poor borrowers suffer is fantastically clueless. S&P is a rating agency. It makes money based on the accuracy of its ratings, not based on business practices or profitability of companies it rates. It's like complaining that the Wall Street Journal will making money off reporting about subprime lending practices, whether or not borrowers lose their homes at the end.

There is no doubt, whoever were/are in that poor situation definitely gonna call those lenders in hope getting some help.

I agree with Anon at 358 am. The post asserts that someone in the financial world has made money at sometime on a financial transaction and that some consumer somewhere in the country later defaulted on a mortgage assigned in that transaction and that's .. bad. To suggest either that that situation constitutes a wrong on its face, or that there could be a world in which it did not happen, is to imply that only a non-profit society should exist and only such a society could be just in handling credit risk. Or maybe the author believes that those who can pay mortgages should pay higher rates to create sufficient incentive to induce lenders to take credit risk on other borrowers but somehow I doubt that is the thought (to the extent there was any thought behind this post). "Fantastically clueless" is an apt characterization, indeed. One might as well complain that internet search engines takes money from lenders for carrying ads for mortgages without assuring themselves that all consumers can repay the loans advertised, or that they carry ads about foreclosures without independently investigating the sites' practices.

I agree with Anon at 358 am. The post asserts that someone in the financial world has made money at sometime on a financial transaction and that some consumer somewhere in the country later defaulted on a mortgage assigned in that transaction and that's .. bad. To suggest either that that situation constitutes a wrong on its face, or that there could be a world in which it did not happen, is to imply that only a non-profit society should exist and only such a society could be just in handling credit risk. Or maybe the author believes that those who can pay mortgages should pay higher rates to create sufficient incentive to induce lenders to take credit risk on other borrowers but somehow I doubt that is the thought (to the extent there was any thought behind this post). "Fantastically clueless" is an apt characterization, indeed. One might as well complain that internet search engines takes money from lenders for carrying ads for mortgages without assuring themselves that all consumers can repay the loans advertised, or that they carry ads about foreclosures without independently investigating the sites' practices.

Here's the comment that I think some of the previous posts are reacting to:

"The bankruptcy debate was sometimes portrayed as a necessary antidote to the problem of consumer default, a characterization that misses the real world reality that profitability does not require a consumer to repay in full and on time. Standard & Poors is an excellent example of an organization that continues to profit, even if consumers suffer. I can think of many others--law firms securitizing receivables, investment banks putting together bond issues, mortgage brokers, real estate agents, and originating lenders every time a consumer buys a home, etc."

I don't think the observation is "fantastically clueless." Nor does it embody some sort of internal contradiction. Prof. Porter is underscoring the irony that bankruptcy reform was sold on the premise that bankruptcy was inflicting large losses on credit issuers, and that something had to be done about it, yet the "magic" of securitization of receivables generated from consumer debt make it possible to realize handsome profits off of even shaky portfolios. Those profits come in a variety of forms, including fees for assembling and servicing the portfolio, fees for grading the debt, fees for marketing the portfolio, and fees for true sale opinion letters.

In addition, Prof. Mann's work has highlighted the degree to which the holders of credit card receivables can enhance their profits by prolonging the time between the point when a borrower enters distress and the time the borrower finally defaults. The profit comes from higher default interest rates, late fees, and related charges not realized on portfolios of high-quality performing debt.

Collateralized debt obligations, secured by high-risk mortgage debt, have also generated handsome returns for a number of players, and their popularity has generated income opportunities for rating agencies like S&P. That is, until the music stops and everyone tries to find a chair.

So I wouldn't read anything more into Prof. Porter's musings than her seeing the irony in it all.

lmclark said:
"Prof. Porter is underscoring the irony that bankruptcy reform was sold on the premise that bankruptcy was inflicting large losses on credit issuers, and that something had to be done about it, yet the "magic" of securitization of receivables generated from consumer debt make it possible to realize handsome profits off of even shaky portfolios."

Once again, S&P is not a "credit issuer." It's a credit rating agency. It has nothing to do with profits of credit issuers, or losses of credit issuers, or business practices of credit issuers.

S&P is not a credit issuer, but the quote in the original post is about its ratings of those who do issue credit. Therefore, lmclark's point is very much on point.

Also, note it was the S&P CEO who commented on the fact that S&P made money regardless of the suffering of the persons who agreed to these subprime loans. Was he the one who was "fantastically clueless?"

McGraw's comments are typical of the self-absorbed baby-boomer generation (read between the lines): I got mine, that is all I really care about, the rest of you can kill each other for the scraps. I can just imagine him now - some 60-year old, fake wannabe intellect – who measures his self worth by his six or seven-figure income…the number of gold-cards he carries…the name plate of his foreigner car…or the number of bathrooms in his McMansion. He is like the shark in the movie “Jaws” - only his food is the weak, uniformed, or desperate. He hurts or impunes without morality or compassion, he is a taker, he lives to consume and exploit everyone and everything. He leaves nothing. He is purely a modern -American creation: The fake, totally self-centered human being. He is the Baby-Boomer.

For this 35-year old Gen-X er – if the lord will bestow one favor upon my debit ridden, wretched life - that beyond the health of my wife and child that I pray for each night – I live to see the day when the baby-boomer generation is dead, buried - and rotting away.

Perhaps then, and only then - will another great generation rise. A generation as great as the silent generation who fought the World Wars and lived through the Depression. Generation that will be think more about helping his fellow man, than ways to exploit him.

Here is the prayer and old Generation X proverb - always warning each other about the greedy, immoral baby-boomer….

Beware the baby-boomer, for he is the devil’s pawn - he will take your money, your dreams, and your hope. For it is he, and he alone, among God’s livings creatures - that hunt’s and kill’s for sport or greed, and though he will kill his own brother to occupy his land or consume his resources - he will only move on to another green field shortly. He consumes for consuming sake, do not let him live or breed in great numbers – for he will make a desert of his home and yours.

You know, not all us baby-boomer got ours. Many of us have a lot less than our parents did at our age. And we are called the sandwich generation for good reason. We are often taking care of our children and our parents at the same time. There are the "I got mine, screw you" folks in every generation, and they are a small percentage.
Right now I have a secured credit card. I made a couple of "late" payments because I am on disability, only get paid once a month, and live Social Security payment to payment. Their due date wasn't lined up with my pay period, and so I was "late." And now, even though my credit card is backed by a savings account, for which I get a munificent 0.1% per annum, I am paying 32% interest. How the hell is that fair when people carrying large balances get their rates lowered if they manage to be perfect in paying all their bills on time?

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