Ratings Agencies “Sold Their Soul” . . . Joining Wall Street and the Government

A Congressional committee is holding a hearing today on the credit rating agencies and their role in the financial crisis.

Specifically, the big 3 ratings agencies – S&P, Moody’s and Fitch – kept companies’ credit ratings high for years after they should have been slashed due to inadequate capital, overstated assets, over-exposure to derivatives and other risky investments, and other chronic problems.

Indeed, emails show that the rating service employees knew they were acting fraudulently

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 Securities and Exchange Commission in a July report found the credit-rating companies improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds.

An e-mail that a S&P employee wrote to a co-worker in 2006, obtained by committee investigators, said, “Let’s hope we are all wealthy and retired by the time this house of cards falters.”

As CNBC points out:

This instant message exchange between two unidentified Standard & Poor’s officials about a mortgage-backed security deal … :

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.”

The credit rating agencies deserve the heat they are taking.

However, those agencies shouldn’t be set up as the sole “fall guy”.

Remember, the government de-regulated derivatives and many other important areas of finance (and see this), and failed to exercise any oversight.

And don’t forget that:

“President George W. Bush has bestowed on his intelligence czar … broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations.”

(Business Week, May 23, 2006). Why isn’t anyone investigating these questions:

How many times did [the] next intelligence czar nod and wink in this way? Which companies did they give a pass to? What “national security” crisis prompted them to exercise these extraordinary powers? And who in the White House and Congress ordered, signed off on, or who knew of, their actions?

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