Women at Work panel discusses economy

WEST WHITELAND — There is plenty of blame to go around when it comes to the plummeting economy, according to a panel of financial experts at the first in a "Women at Work" series on Thursday.

The panel included Kimberly J. Brumbaugh, founder of Brumbaugh Wealth Management Group, a Uwchlan financial service firm; Ann Duke, of Knapp McConomy Merlie, a West Pikeland law practice, and Sophia Koropeckyj, managing director at Moody's Economy.com of West Chester, an economic and financial- industry research group.

"It all started with the wonderful idea that risk could disappear," Koropeckyj said to the gathering of women at the Whitford Country Club.

The banks sold mortgages (both sub-prime and conventional) to investment banks, they made pools of the mortgages, cut those pools into pieces and resold them, Koropeckyj explained.

"My company rated (those pools)," Koropeckyj said. Rating companies made more money if the investment was well rated, otherwise the investor, who was debt-rating the company's customer, goes to a competitor, she explained.

There are now regulations in place to halt that practice.

In June, the debt-rating company Moody's Investors Service, plus competitors Standard & Poor's and Fitch Ratings, adopted a new fee structure designed to reduce their incentive to give favorable ratings on securities backed by sub-prime mortgages.

The agreement came under an accord with New York Attorney Gen. Andrew Cuomo, who has been investigating the roots of the sub-prime crisis, including how the value of some mortgage bonds could plunge a year or two after they received triple-A ratings.

Until the agreement, investment banks looking to issue mortgage

bonds could typically approach all three rating companies for an initial review at no charge. That enabled the banks to hire the rating firm offering the best grade.

The rating companies now charge for their initial reviews and will require investment banks to provide more detailed data on packaged loans before a rating can be issued.

The changes have six months to be implemented.

The investment bank had no idea of what type of mortgages were in the pools until the mortgages started to default, she said. Even today, those investment banks don't know how many mortgages in those pools are ready to default.

Another factor in the increase in defaults was adjustable rates resetting higher, Koropeckyj said. And it's not over yet, Koropeckyj said, predicting recovery by 2010. That means "four more bad quarters."

Brumbaugh, a financial adviser, said over the last two weeks, the business has been getting phone calls from concerned clients. When the Dow Jones dropped 20 percent, the phone calls escalated.

Brumbaugh wanted to make it clear that this is not another Great Depression. She said she "bristles" when people her ask her that.

In the early 1900s, the financial industry did not have government intervention, people didn't have Social Security and there was no technology to secure information, Brumbaugh noted.

The panel was asked about the upcoming election. Which candidate will steer the economy in the right direction?

Economy.com's Koropeckyj said she was not terribly optimistic about either one. Neither has really addressed the problem or come up with a specific plan, she said.

Brumbaugh agreed.

"I don't think it makes any difference who we get in office," Brumbaugh said. "We have to be patient and keep our wits about us."

Duke, whose firm specializes in business law, said there is lending in the ongoing credit crunch if the borrower goes to a small bank and is not looking for a multimillion-dollar loan.

The model for small banks is simplistic: They bring in money, they lend it out, Duke said.

"If you want to expand your business, you'll be OK," Duke said.

As for mortgages, "we're going back to the old days," Duke said, with borrowers expected to put 20 to 25 percent down on a house. And the buyers' credit will be scrutinized.

To contact staff writer Gretchen Metz, send an e-mail to gmetz@dailylocal.com.