Just who is responsible for the current economy?

Back in September, I had to opportunity to attend a hearing held by the House Oversight Committee as they attempted to find an answer to this very complex question. During the hearing, members of Congress grilled current and former employees of the credit rating agencies that some have blamed for the credit crash.

This story proved to be a huge challenge for me. My strengths do not lie in economics, so I had to do research in the hopes that I could understand what the issue was about. I am proud that I was able to inform myself enough to write a clear and hopefully informative story about a topic that was completely new to me.

What role did credit rating agencies play in the economic downturn?

Nearly a year after it first started looking into credit rating agencies’ part in the economic meltdown, the House Oversight Committee found that the causes of last year’s crash have not gone away.

During his testimony at Wednesday’s hearing, Eric Kolchinsky, former managing director at Moody’s, used the fact that Moody’s is again rating securities that are composed of possibly risky assets as proof that the company is not changing its ways.

“These are the same products which are responsible for hundreds or billions of dollars of losses at major financial institutions . . .,” said Kolinsky, who was suspended because he wrote a letter to the Security and Exchange Commission warning about the company’s lack of oversight. “The ‘new’ methodologies used to rate ABS CDOs have not improved their poor credit performance – many of the recent deals have been downgraded or have had to resort to restructuring to maintain their ratings.”

Ohio Democrat Dennis Kucinich pointed out that the problem of toxic debt is still being bought and sold under a new name, Re-remics, which stands for resecuritizations of real estate mortgage investment conduits. According to Bloomberg, this is another name for mortgage bonds.

Investors rely on credit ratings issued by companies like Moody’s, Standard and Poor’s, and Fitch in order to determine whether it is safe to buy bonds and other debt.

Committee Chairman Rep. Edolphus Towns explained the importance of these credit ratings in the investment market.

“The main mission of credit rating agencies is to tell investors how risky bonds and other debt securities are,” the New York Democrat said. “Pension plans, banks, insurance companies, and other investors depend on these ratings to help them decide where to invest their funds.”

Richard Cantor, the agency’s chief risk officer explained how Moody’s determines its ratings.

He said, “Moody’s credit rating opinions are determined through rating committees, by a majority vote of the committee’s members and not by an individual analyst.”

Despite Cantor’s defense of the agency, many committee members focused on the conflict of interest they saw as inherent in the credit rating industry. Rep. Paul Kanjorski (D–Pa) compared the fact that the groups requesting the ratings pay Moody’s for its services to a hypothetical situation where a judge’s salary is paid by contributions from attorneys who won their cases.

Kolchinsky explained that because an issuer can go from one agency to another in an attempt to get a rating, there is not much incentive for the agency to turn it down.

“Senior management still favors revenue generation over ratings quality and is willing to dismiss or silence employees who disagree with these unwritten policies,” he said.

While admitting that he “would not give a high rating” to Moody’s performance over the last two years, Cantor defended the rating system saying that they did not expect the housing market to fall as quickly as it did.

Many lawmakers suggested instituting some way to regulate the credit rating industry – one way that was recommended would be to impose the same standards on all companies.

Kolchinsky ended his testimony with an endorsement of added oversight of the industry.

“If I were a doctor, I would diagnose the rating agency patient as very curable,” he said “. . . Rating agencies can once again be productive members of the financial community, but they cannot do this by themselves. They need a helping hand to get back on track.”

Covering California Politics in D.C.

When I decided to go to American to receive my master’s in journalism, I assumed that much of my time would be spent covering national politics. Little did I know that despite being 3,000 miles away from my home state, California politics would never be very far away.

For my Reporting on Public Affairs course, I received the opportunity to attend an event at the American Enterprise Institute, a conservative think tank here in D.C. where Steve Poizner, California’s current Insurance Commissioner and a Republican candidate for governor, gave a speech outlining his plan for the state. I must admit that I was a bit surprised that there was so much focus on a gubernatorial race that was still a year away.

Here is the news story I produced after that event:

West meets East

California Insurance Commissioner and Republican gubernatorial candidate Steve Poizner called Wednesday for lower taxes and spending cuts to turn around his state’s budget woes.

“The only was to repair California’s broken economy is to make California’s tax structure competitive again,” he told the crowd of 60 people at the American Enterprise Institute.

California’s budget problems have forced steep cuts in essential services and even forced public officials to issue IOUs to contractors and tax payers to avoid running out of money to keep the state running.

Both Poizner and Henry Olsen, vice president and director of the National Research Institute at the AEI summarized the challenges that have contributed to the economic crises plaguing the state. Olsen cited statistics showing that “hundreds of thousands native Californians leave the state” while Poizner cited advertisements being run in California newspapers trying to entice businesses to cross the border into Nevada.

In order to make California more business friendly and encourage them to “start and grow” in the state, Poizner is running on a plan in which he cuts income tax rates, the state sales tax and the corporation tax rate by 10 percent while also cutting the capital gains tax by 50 percent.

While creating a business-friendly atmosphere in California appeared to be his priority, the California Republican expressed his desire to improve the public education system saying, “I don’t see how you can fix California’s economy until you repair California’s broken public education system.”

The insurance commissioner, who spent a year volunteering as a teacher in a San Jose high school described the decline of the state’s schools from being the best in the nation to today, where “about 50 percent of the fourth graders . . . in the state of California cannot pass basic reading proficiency tests.”

Poizner placed the blame solely on the shoulders of the state’s politicians, who he claimed took control away at the local level and enforced mandates “uniformly to all 5,000 schools at the same time.

In addition to cutting taxes, another key part of the gubernatorial candidate’s plan is a decrease in government spending. Poizner used a chart to illustrate how quickly government spending in California has grown – his data showed that it has doubled over the past 10 years, outstripping even federal spending. Olsen said the state’s budget deficit “exceeds in its size, the size of most other state budgets in total.”

When talking about cutting government spending, Poizner said he is not “a big fan of taking out a big axe and starting to slice;” instead favoring “a top-down review of every dollar, every person; you need to take programs that really don’t help anybody any more and just stop doing them completely.”

Although Schwarzenegger and the state legislators have been attempting to solve the budget deficits with steep cuts in areas like education and health care, the governor, in a speech in March explained why he had to go against his promise not to raise taxes.

“If we had tried to solve the deficit by spending cuts alone, we would’ve had to close our entire state university system, cut off all welfare assistance and shut down all mental health services,” the governor said.

According to the Los Angeles Times’ Evan Halper, much of California’s spending goes towards programs like Medi-Cal, which provides health care for low-income residents and receives more than $14 billion annually or programs aimed at providing services for the disabled, which receive $2.4 billion per year.