Emails of the Credit Crisis

http://www.huffingtonpost.com/2009/09/14/the-most-damning-internal_n_286420.html

Mathew Tannin and Ralph Cioffi, two ex-hedge fund managers at Bear Stearns, were charged with fraud for misrepresenting the condition of two Bear hedge funds they managed. Here's one damning email discussing the funds' exposure to high-risk debt securities: "The subprime market is pretty damn ugly...If we believe the [CDO report is] ANYWHERE CLOSE to accurate I think we should close the funds now. The reason for this is that if [the CDO report] is correct then the entire subprime market is toast.''


As the WSJ pointed out, last week internal emails surfaced in which UBS employees allegedly referred to some of their complex debt securities as “crap” and “vomit.” The particular toxic assets in question were being reportedly dumped on Pursuit, a Stamford, Connecticut-based hedge fund. Here's more UBS internal email dirt: "Reduce cdos...no need to publicly display this, but if you are close on something, [please] close it...[thanks] for your discretion” and “[P]ursuit has dry gun powder but not tons of it.”


In September 2007 a Moody's employee wrote the following about his employer's tendency to come with rather ad hoc ratings for Wall Street's riskiest securities. From the email: "Seems to me that we had blinders on and never questioned the information we were given...It is our job to think of the worst-case scenarios and model them...Combined, these errors make us look either incompetent at credit analysis, or like we sold our soul to the devil for revenue.''' It's not clear whether CEO Raymond McDaniel ever saw the above email.


Why is the SEC alleging that Mozilo and other former Countrywide execs defrauded investors about the health of the lender's balance sheet? These 2006 internal emails from Mozilo could have something to do with it: "In all my years in the business I have never seen a more toxic prduct [sic]. It's not only subordinated to the first, but the first is subprime. In addition, the FICOs are below 600, below 500 and some below 400[.] With real estate values coming down…the product will become increasingly worse...We have no way, with any reasonable certainty, to assess the real risk of holding these loans on our balance sheet."


This exchange between two employees at S&P, who were considering slapping their stamp of approval on a pool of seemingly shoddy Wall Street assets, speaks for itself:

"Official #1: Btw (by the way) that deal is ridiculous.

Official #2: I know right...model def (definitely) does not capture half the risk.

Official #1: We should not be rating it.

Official #2: We rate every deal. It could be structured by cows and we would rate it."


Back in March 2006, Fannie Mae's chief risk officer Enrico Dallavecchia wrote to Daniel Mudd - who was then Fannie's CEO - with a rather strongly worded warning. “Dan, I have a serious problem with the control process around subprime limits.” (Of course, this didn't stop Fannie's exposure to subprime.) And in 2004, a senior vice president at Fannie wrote to coworker, “we did no-doc lending before, took inordinate losses and generated significant fraud cases...I’m not sure what makes us think we’re so much smarter this time around."


From a 2006 email between S&P employees, which was obtained by Congressional investigators, came this statement: "Let's hope we are all wealthy and retired by the time this house of cards falters."