Phillip Cannella warns investors to be cautious of investment rating agencies.
Just five short years after Wall Street and ratings agencies worked together to defraud American investors, the U.S. government is finally getting around to doing something about it. The government announced it will be suing the parent company of ratings agency Standard and Poor’s for fraud, a charge they absolutely deserve.
You see, in 2008, Wall Street firms were working hard developing subprime mortgage products like Collateralized Debt Obligations. These subprime products packaged risky mortgages in neat little bundles and employed their best marketing tactics to make them look attractive to investors. In reality, these firms knew the subprime products were better suited for the trash can than an investor’s portfolio, but that didn’t stop them from trying to unload them on the unsuspecting public. Part of their strategy was to work with ratings agencies like Moody’s, Standard and Poor’s, and Fitch to give these products AAA ratings (the highest rating available for financial products).
Well as investors Phil Cannella has warned about time and time again, these securities investments were not all they were cracked up to be. The products that financial advisors told investors were a slam dunk were actually destined to fail from the beginning. Subprime mortgage products are created when mortgages are bundled together, based on their risk of default. Some mortgage bundles were actually somewhat prudent investments because the borrowers were likely to pay them back. But subprimes were different because they were packages of the worst mortgages out there, mortgages that were very likely to go into default, resulting in a huge decline in value.
The subprimes were given AAA ratings despite the fact that both the ratings agencies and the firms selling them knew they were bogus. Now the U.S. government is finally taking a ratings agency to task for this very obvious case of fraud. In the past, lawsuits involving financial crimes have resulted in weak punishments. Goldman Sachs was fined 550 $million by the SEC for crimes that possibly netted the firm billions. Other banks around the world have been handed down similarly lenient punishments at the hands of government regulators, so will this case be any different?
At this point, we can only speculate. But as I’ve said on my radio program, The Crash Proof Retirement Show, many times, Wall Street is rigged and this is just another example of how firms and ratings agencies work together to stack the deck against you, the American investor. As this case develops, I can only hope that the crooked people who devised these schemes finally get what’s coming to them, and that American retirees finally get some justice for the crimes that wiped out their retirement accounts overnight.
Phil Cannella is the founder and CEO of Retirement Media, Inc.
For more information about this case, click here to read the story on Huffington Post
