When the credit crisis first began to manifest itself in 2007 with the collapse of asset-backed instruments, including those subprime debt laden financial piñatas otherwise known as CDOs, a standard industry practice was exposed a la the naked emperor: Wall Street firms were paying rating agencies in exchange for what amounted to Good Housekeeping seals of approval for the often-toxic securities the banks concocted. In some cases, bankers shopped among the three main rating agencies, Standard & Poor's, Moody's Investors Services and Fitch Ratings, trying to secure the highest possible rating.
Spokespersons at all three firms took issue with the notion that any wrongdoing took place with respect to alleged conflicts, and all of them insist that there have been significant changes to their own various proprietary modeling processes through which securities are analyzed for credit worthiness and ratings determined. The SEC, meanwhile, is now taking steps to eliminate certain requirements for ratings in the first place, presumably to rub some of the shine off their veneer of importance.
Many on Capitol Hill have cried out for rating agency reforms and a slew of institutional investor lawsuits have been filed alleging outright collusion between creators of sketchy securities and the ratings providers. Yet, as of now, the practice of Wall Street paying for ratings continues.
Stanford's Grundfest said a straightforward fix exists, and it could be adopted quickly. He advocates the creation of new industry-owned rating agencies to compete with the Big Three, so as to force investors to "eat their own cooking." In other words, create more incentives for real due diligence, he said.
Despite being named Time magazine's "Person of the Year," Fed Chairman Ben Bernanke is hardly admired by everyone. A growing chorus of voices, even on Wall Street, is questioning the Fed's monetary policy. Rock-bottom interest rates may have staved off an economic depression, but continuously flooding the globe with cheap money is viewed as one of the root causes of the great financial bubble in the first place.
Said Hedgeye Risk Management's Silver: "There's a growing consensus that Chairman Bernanke is playing a risky game, keeping rates effectively at zero. When you look at figures that show the Fed being the world's second-largest buyer of treasuries it makes us look like a drug dealer who is his own largest customer. It's hard to see how this doesn't end very badly."
Financial regulatory reform, which includes numerous measures, has stalled on Capitol Hill. After the Obama administration unveiled an ambitious plan last summer, the House of Representatives – led by House Financial Services Committee Chairman Barney Frank – passed its measure in the fall. But the Senate has yet to get its proposal out of the Banking Committee. With health care reform still taking center stage, it could be months before any meaningful financial reform measures are passed, if not until next year.
As Geithner himself has noted on numerous occasions, including at a House Financial Services Committee hearing in September: "Time is the enemy of reform."
There are many adages concerning time. It slows for no man. You can't turn back its hands. Concerning problems that nearly wrecked the entire financial system and could again, time, most of all, is of the essence.
With reports from ABC News' Alice Gomstyn.