Rating agencies gave AAA ratings for junk financial instruments, out of financial conflict of interest. Still they remain unpunished. The stupidity here is a system where greedy incompetence is rewarded and not kept in check by law.
The sheer fraud and greed of rating agency analysts and executives is staggering. That no one has gone to jail, and none of the agencies have been shut down is a travesty of justice on an infinitely larger scale than Bernie Madoff’s Ponzi scheme. Until depositors, bankers and investors regain confidence in the quality of ratings we rely upon to measure financial stability and creditworthiness, the tremors that underlie the credit crisis will drag on indefinitely. […]
The problem with the business of rating the issuers of securities, and rating the securities they issue – such as mortgage-backed securities and collateralized mortgage-backed obligations – is that the rating agencies are paid by the issuers to rate them. Objectivity aside, ratings firms are in business not to rate but to make money for themselves by rating issuers and their securities. It’s like all the contestants in the Miss World pageant paying the judges with country funds … who’s not going to be judged beautiful?
What was even more problematic in the scheme of the ratings business model was that analysts didn’t understand how to analyze and rate the very complex cash flow structures of these new collateralized mortgage-backed securities. Not wanting to lose business to their competitors, who were all in the same boat, they used the same rating model structures that they used to rate corporate bonds , though the two different securities had nothing in common.
It was like asking your local car mechanic to certify your Citation V jet – just before you take off for a transatlantic flight to London. God help you if there’s a problem.
And there were problems. Lots of them. According to a Feb. 15 “Review & Outlook” piece in The Wall Street Journal , Joseph Mason, professor of finance at Drexel University, studied collateralized debt obligations rated “Baa” by Moody’s and determined that they were 10 times more likely to default than equivalently rated corporate bonds. The article went on to say that an S&P spokesperson, when asked if they actually examined the underlying mortgages in the pools, answered: “We are not auditors; we are not accounting firms.”
Even the Congress was of the same opinion, but still the rating agencies are not punished, neither criminally or in civil court.
“The story of the credit rating agencies is a story of colossal failure,” according to Representative Henry Waxman (D-CA), chairman of the House Oversight and Government Reform Committee in a statement released on Wednesday.
Rep. Waxman’s committee is investigating the credit crisis and put much of the blame on those agencies such as Standard & Poor’s (S&P) and Moody’s for giving top ratings to securities backed by subprime mortgage loans. The committee held the first of two days hearings on the crisis Wednesday titled “Credit Rating Agencies and the Financial Crisis.” The second hearing on Thursday will deal with the role of federal regulators in the crisis.
According to Andrew Taylor, writing for the Associated Press, the committee released internal documents showing that executives of the rating agencies were “well aware that there was little basis for giving AAA ratings to thousands of increasingly complex mortgage-related securities but the companies often vouched for them anyway.”
The three biggest ratings agencies, S&P, Moody’s and Fitch, Inc.; made huge profits for giving top ratings to the securities. The agencies apparently relied on ever increasing home prices for the confidence they placed in the mortgages. Two of the agencies, S&P and Moody’s, have now downgraded thousands of their previous top ratings.
Rep. Waxman blamed the rating agencies and federal regulators for putting the entire financial system at risk and betraying the public trust.