USA: Discrediting the Credit Rating Agencies, A Beginning

Friday, October 24, 2008

The compromised rating agencies are finally being discredited. See my earlier post on the Independent Agencies. The unholy nexus is being exposed; credit rating agencies certified by government and dependent for their livelihood on the companies they rate. If these rating agencies were paid by the Investor upfront (the investor pays eventually anyway) the we would have a paradigm shift in Rating securities. We have a beginning...let us now start on the Regulators and Auditors next...stay tuned.

S&P: "We's do a deal structured by cows" And Other Rating Agency Dirty Linen
Yves Smith (Naked Capitalism)

Most eyes were on the plunging equity markets today, and the rating agencies must be plenty glad for the air cover. The House Oversight Committee unearthed some real dirt today. From CNBC (hat tip reader Michael):

In a hearing today before the House Oversight Committee, the credit rating agencies are being portrayed as profit-hungry institutions that would give any deal their blessing for the right price.

Case in point: this instant message exchange between two unidentified Standard & Poor's officials about a mortgage-backed security deal on 4/5/2007:

Official #1: Btw (by the way) that deal is ridiculous.

Official #2: I know right...model def (definitely) does not capture half the risk.

Official #1: We should not be rating it.

Official #2: We rate every deal. It could be structured by cows and we would rate it.

A former executive of Moody's says conflicts of interest got in the way of rating agencies properly valuing mortgage backed securities.

Former Managing Director Jerome Fons, who worked at Moody's until August of 2007, says Moody's was focused on "maxmizing revenues," leading it to make the firm more "issuer friendly."

Bloomberg gives Moody's top billing in this sorry affair:
Employees at Moody's Investors Service told executives that issuing dubious creditworthy ratings to mortgage-backed securities made it appear they were incompetent or ``sold our soul to the devil for revenue,'' according to e-mails obtained by U.S. House investigators.

The e-mail was one of several documents made public today at a hearing of the House Oversight and Government Reform Committee in Washington, which is reviewing the role played by Moody's, Standard & Poor's and Fitch Ratings in the global credit freeze.

``The story of the credit rating agencies is a story of colossal failure,'' Committee Chairman Henry Waxman, a California Democrat, said at the hearing. ``The result is that our entire financial system is now at risk.''...

Former executives from S&P and Moody's told lawmakers today that credit raters relied on outdated models in a ``race to the bottom'' to maximize profits.

Jerome Fons, a former managing director of credit policy at New York-based Moody's, told lawmakers that originators of structured securities ``typically chose the agency with the lowest standards, engendering a race to the bottom in terms of rating quality.''

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