We already know the story of the credit rating agencies being a story of colossal failure. What we didn’t know for sure however, is that these supposedly trustworthy rating agencies contributed to America’s near economic collapse by knowingly giving inflated ratings to securities backed by subprime mortgage loans because of the fees they earned for giving such investment-grade ratings.
According to McClatccy News, a Senate panel investigating the causes of the nation’s financial crisis on Thursday unveiled evidence that credit-rating agencies such as Standard & Poor’s, which is part of The McGraw-Hill Cos. Inc. (MHP), and Moody’s (MCO) were well aware that there was little basis for giving triple-A ratings to an issuer or a security’s financial structure related to increasingly complex mortgage-related securities, but they vouched for them anyway.
Sen. Carl Levin, D-Mich., who chairs The Senate Permanent Subcommittee on Investigations, said he will hold a detailed hearing on Friday, where he will release internal documents and e-mails from executives from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings (all SEC-designated of the Nationally Recognized Statistical Rating Organization), showing the execs acknowledge compromising the integrity of ratings to win business from big Wall Street firms.
One e-mail printed in WaPo’s website suggests that a Moody’s employee explicitly agreed to negotiate ratings for investments based on a promise of future fees. Some fees were as high as $1.4 million.
WaPo: “We have spent significant amount of resource on this deal and it will be difficult for us to continue with this process if we do not have an agreement on the fee issue,” the Moody’s employee wrote to Merrill Lynch in June 2007. “We are agreeing to this under the assumption that this will not be a precedent for any future deals and that you will work with us further on this transaction to try to get to some middle ground with respect to the ratings.”
“They did it for the big fees they got,” Levin told reporters on Thursday. A conveyor belt of high-risk securities, backed by toxic mortgages, got AAA ratings that turned out not to be worth the paper they were printed on.”
Needless to state the obvious here but the sheer fraud and greed of rating agency analysts and executives is just staggering.
For a better understanding of subprime mortgage-backed credit derivatives, and the role played by the ratings agencies, visit:
http://donovanlawgroup.wordpress.com/2010/02/19/how-credit-derivatives-brought-the-u-s-economy-to-the-brink-of-a-second-great-depression/