We asked a few of the financial clairvoyants who predicted the market's mortgage tribulations to tell us what happens next.
The ratings gadfly
"The market just came to the realization that values in credit assessments were far from the mark. Now, we're rapidly adjusting to that reality--and there's a lot more pain coming down the pipe."
Sean Egan, CEO, Egan-Jones Ratings
While Standard & Poor's, Moody's Investors Services, and Fitch Ratings drew heavy criticism after overrating mortgage securities, Egan-Jones Ratings, a small credit ratings agency based in Los Angeles, was lauded for its foresight. Sean Egan was an early critic of bonds backed by sub-prime mortgages.
"The core problem behind the current crisis was a false belief in inflated credit ratings," says Egan. According to the CEO, his competitors are still placing too much faith in a number of companies. Egan's main targets: the media, airline, auto and insurance industries, amongst others. For example, while the S&P gives MBIA, a major bond insurer, an A rating, Egan dropped a C-bomb on the firm--and projects a D rating
The regulator
"Low rates won't do anything to handle the real issue for these companies, which is solvency."
William Poole, former president, St. Louis Federal Reserve
After predicting in 2002 that Fannie and Freddie couldn't handle the strains of a credit crisis, Poole saw his prophecies come true on Sept. 7 when the government stepped in to bail out the lenders. According to Poole, that bailout, coupled with the Bear Stearns rescue, made a Lehman save all the more difficult. "Barclay and Bank of America asking for federal assistance--that never would have happened before," he says. "But the Fed made the right decision this time."
Poole is less pleased with the Fed's strategy of keeping rates low. "I don't understand the case for it," he says. "It's not good federal policy to simply respond to declines in the stock market, and I'm concerned about inflation in the long run."
The investor
"Complex transactions and trades are going to be more difficult to do and to keep."
Thomas Atteberry, co-manager, First Pacific Advisors New Income fund
The managers at First Pacific Advisors in Los Angeles started shifting stock mutual funds to cash four years ago, and ditched Alt-A mortgage funds in 2005--well before many perceived the sector to be at risk. Atteberry predicts that the credit problem will continue to flow into every corner of the financial system. "People though it was just a sub-prime mortgage problem, but it's much broader--it's a matter of solvency, not liquidity," he says.
Over the next three to six months, says Attebury, more investors are going to try to withdraw their money from levered options such as hedge funds and credit default swap contracts. And pensions will be less likely to commit their funds to such outlets.
He won't predict when the crisis will let up, but he does offer a clue: "I'm still not buying stocks."
The politician
The more the taxpayer is on the line and the more systemic the risk is, the stronger the regulatory hand needs to be."
Richard Baker, Managed Funds Association
Back when he was a Louisiana state representative, Baker, who left the House in February to lobby for hedge funds, tried to push a bill asking for stricter regulations on Fannie and Freddie. Now that the companies need to get back on track, he wants the government to ease restrictions on the types of products that the lenders can sell, in hopes that they will become more profitable. "In essence, it's time to make them private companies," he says. According to Baker, a massive regulatory review for all sectors is around the corner.
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