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Prophets of the credit crisis

A trio of economists are talking to packed houses about the grim future of Fannie Mae and Freddie Mac, the causes of the credit crisis, and the failings of ratings agencies.

By Katie Benner, writer-reporter
July 11, 2008: 11:05 AM EDT

Deals on the rocks
Corporate M&A used to be a straightforward affair - but lately even amicable pairings have been turning sour with the markets. Some recent deals in jeopardy:
Hexion/Apollo and Huntsman
Apollo and chemical company Hexion are backing out of a $10.6 billion deal to merge with chemical giant Huntsman, alleging in a lawsuit that the combined companies would be insolvent. Huntsman has countersued, claiming fraud.
Blockbuster and Circuit City
The movie-rental giant pulled its bid for the electronics retailer, citing "market conditions."
Fortress Investment Group/Centerbridge Partners and Penn National Gaming
Fortress and Centerbridge scrapped their $6.1 billion takeover of the casino and racetrack operator after the parties couldn't agree on a reduced price to reflect a slowing economy.

(Fortune) -- Sylvain Raynes, Joshua Rosner, and Christopher Whalen are the power trio that has come to personify today's collapsing capital markets.

Raynes (an expert at decoding the value of complex structured securities), Rosner (who advises policymakers and regulators scrambling to deal with the housing and credit blowups), and Whalen (whom accounting firms hire to find skeletons lurking in investment bank closets) started appearing together on economic panels several years ago. Once obscure, they have graduated from giving small group talks to packing venues like Washington's American Enterprise Institute and the New York Athletic Club in Manhattan. At the latter locale, 200-plus dark-suited regulators, risk managers, and analysts recently filled a wood-paneled room to groove on some insights about distressed assets. Among the gems tossed out to the crowd: "People say we're in the final innings of the credit crisis," said Rosner. "We're in the late innings of the first game, and this is the World Series."

Raynes, Rosner, and Whalen weren't always so popular. Since 2005 they have been telling anyone who would listen that banks don't generate real returns, Fannie Mae and Freddie Mac will crumble, and rating agencies aren't equipped to evaluate structured bonds. Like many an alternative act, they were ahead of their time. "People said it was easy for us to scream, because we had nothing to lose," says Raynes. "Of course, it should have been much easier for [rating agencies and risk committees] to scream, because they had everything to lose."

The three have serious day jobs. Raynes, a 51-year-old former Moody's employee, formed R&R Consulting with his partner, Ann Rutledge, in 2000 to do what Moody's and other rating agencies seemingly cannot: Decode the creditworthiness of structured securities. Boyishly handsome and a smooth talker, he received a Ph.D. in aeronautical engineering from Princeton before working in risk management at Credit Suisse and Citibank.

Tall, bespectacled, and bitingly sarcastic, Whalen, 49, is a former Bear Stearns fixed-income analyst who co-founded Institutional Risk Analytics with Dennis Santiago. And Rosner, a 41-year-old managing director at independent research firm Graham Fisher & Co., was one of the first to question the lax lending standards in mortgage origination.

In his 2001 paper "Housing in the New Millennium: A Home Without Equity Is Just a Rental With Debt," he pointed out that historically, 65% of households owned houses, and suddenly that had jumped to 70%. "There were no economic justifications for that increase, which could never be sustained," he says.

When not performing, these masters of disaster have more work than they can handle. Investment banks, rating agencies, and Fannie and Freddie may not be fans of their work, but one thing is undeniable: The music of RR&W has become the soundtrack for our meltdown.  To top of page

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