Enron Analyst Echo

There is a eerily familiar echo in the mortgage credit markets: Analysts saying one thing while others at the same firm claim the opposite?

If you have lived for at least six years, you will recall that Credit Suisse First Boston, Citigroup, Lehman Brothers and JP Morgan Chase all touted Enron stock up until a month or so before it collapsed. The analysts claimed they were misled by the bad data being fed by, and the hard ball that was being played by, Enron. To no one's surprise this was happening at the same time Enron was apportionioning their investment banking business and rich fees among these and other friendly Wall Street firms.

You may also remember telecom analyst Jack Grubman at Salomon Smith Barney (Citicorp,) who pumped Worldcom and Global Crossing stock up until the last days pre-bankruptcy. He, with others, was responsible for billions in investor losses by advocating these risky stocks long after their due date.

Now we have the sub-prime circus and subsequent illiquidity and risk uncertainty associated with mortgage backed securities.

Surprise, there has been no big difference in the behavior of the institutional analysts with one glaring difference: Standard and Poor, Moody’s and Fitch fund and bond rating services had been giving these MBS funds high ratings, while other analysts at these firms have been “crying wolf” on the housing market for at least a couple of years. These rating services depend on happy customers (investment banks) to keep their credit and rating practices alive. Concurrently their economic and housing analysis have both assured MBS fund investors with solid credit ratings while warning of dire consequences in the housing market. Head economist Mark Landi has been issuing warnings about the housing market for years while they rated sub-prime stuffed MBS with stellar ratings.

If Merrill’s Stan O’Neal and Citicorp’s Chuck Prince have paid the ultimate career price for inattentive risk management, why are the professional analytics firms being allowed to lie quietly in the weeds? They have been complicit by “pumping MBS credit value” while “dumping on” the housing market simultaneously. Their generalized and average numbers have been their undoing and have resulted the generalized rout of the MBS trading and the destruction of paper value. The actual negative effect on residential real estate value has been less than 10 percent, dumb buys in remote neighborhoods and/or ill-advised financing excepted.

And the good news: Good neighborhoods remain unaffected. If you are a homeowner or real estate investor who is not forced to sell, wait awhile and this will all blow over with a passing slowdown in your real estate asset’s historic appreciation rate of 5 percent.

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