All the Devils Are Here [70]
A year earlier, the president had signed a law that repealed Glass-Steagall, which had split commercial from investment banking so many years before. Gramm-Leach-Bliley, as the new law was called, also had Summers’s strong support. One of its nods to modern finance was a provision that “expressly recognized and preserved this authority for national banks to engage directly in asset-backed securitization activities,” as Comptroller of the Currency John Dugan would note many years later.
In most respects, though, the repeal of Glass-Steagall was largely symbolic, a recognition of changes that had already taken place. By 1999 all the big banks had investment banks and trading desks. And in any case, the real problem was not that the wall that had long separated commercial and investment banks had been torn down. Nor was it that the CFTC was not allowed to regulate derivatives. No, the core problem was that even as the old regulatory firmament was disappearing, nothing was being created to replace it. If Rubin and Summers deemed the CFTC as not the right agency to regulate derivatives, they should have given the task to some other agency they felt could handle it. Their defenders point out that the Republicans had firm control of both houses of Congress, and that is certainly true. But that wasn’t the only reason nothing was done to shore up the nation’s financial system. The other reason was that Bill Clinton’s Treasury was every bit as complacent as Alan Greenspan’s Fed.
After the financial crisis, one man who had worked closely with Rubin at Treasury would exclaim: “My God, I wish I had done more.”
8
Why Everyone Loved Moody’s
In September 2000, Dun & Bradstreet, a sleepy, 160-year-old business information company, spun off a sleepy subsidiary. The subsidiary was Moody’s, the credit rating agency, which Dun & Bradstreet had owned since 1962 and which had just hit the century mark itself.
Along with its two competitors, Standard & Poor’s and Fitch Ratings, Moody’s was in the business of gauging the possibility that a bond would be repaid on time and in full. It did so by using a series of letter grades known as ratings. Its highest “investment-grade” rating, triple-A, meant that the bond had the same risk of default as a Treasury bond: almost none. Bonds rated double-A to triple-B minus were also investment grade—riskier than triple-As, but still safe enough for widows and orphans. Anything below a triple-B minus was a “junk” bond, considered too risky to be bought by pension funds and other institutional investors that were legally bound to hold only safe investments.
The business of rating bonds was as steady as a thing could be. Everybody used the three rating agencies, and everybody understood what those letter grades represented on the risk spectrum. In the prospectus it issued prior to becoming a public company, Moody’s boasted that it rated $30 trillion of the world’s debt across one hundred countries.
“Steady,” however, is not the same as “fast growing.” Though it was immensely profitable, Moody’s 1999 revenues of $564 million would have barely dented the Fortune 2000, much less the Fortune 500. When its stock began trading, most investors yawned. Warren Buffett, who always liked to buy stocks others overlooked, took a 15 percent stake in Moody’s, but that was mainly because he liked the company’s impregnable market position and its steady cash flow.
As events would prove, though, Moody’s was poised to start growing faster—a lot faster. In addition to corporate and government