Cows come home to roost for rating agencies
After errant bankers and humbled insurers, the turn came on Wednesday for ratings agency bosses to receive a verbal lashing from US lawmakers investigating the meltdown of the financial system.
By Agencies |
WASHINGTON: After errant bankers and humbled insurers, the turn came on Wednesday for ratings agency bosses to receive a verbal lashing from US lawmakers investigating the meltdown of the financial system.
They were accused by a House of Representatives committee of ignoring warnings signs, following the "delirious mob" on Wall Street and failing to find "the icebergs always waiting in the world's financial sea lanes."
At one point, a panel member produced a message from an employee of leading agency Standard & Poors in the structured finance division who complained that deals "could be structured by cows and we would rate it."
S&P President Deven Sharma called the bovine reference "inappropriate," but said it showed that the company encouraged its analysts to raise concerns.
Ratings agencies are in the line of fire and are blamed for failing to raise concerns about securities backed with subprime mortgages that are the source of the financial crisis.
Ratings agencies have a key role in the financial system, assigning ratings to securities to reflect their inherent risk for investors.
In the subprime debacle, ratings agencies stand accused of failing to identify the danger of complicated mortgage- and other asset-backed securities created by investment banks whose value derived from questionable underlying assets.
"Let me state up front that we recognize that many of the forecasts we used in our ratings analysis of certain structured finance securities have not borne out," Sharma told the committee.
Among other evidence produced by House of Representatives panel was a transcript of a meeting for Moody's executives in September 2007.
The chief executive of the firm, Raymond McDaniel, was said to have warned that competitors at Fitch and S&P "went nuts" in giving high-quality investment-grade ratings to risky securities.
They were accused by a House of Representatives committee of ignoring warnings signs, following the "delirious mob" on Wall Street and failing to find "the icebergs always waiting in the world's financial sea lanes."
At one point, a panel member produced a message from an employee of leading agency Standard & Poors in the structured finance division who complained that deals "could be structured by cows and we would rate it."
S&P President Deven Sharma called the bovine reference "inappropriate," but said it showed that the company encouraged its analysts to raise concerns.
Ratings agencies are in the line of fire and are blamed for failing to raise concerns about securities backed with subprime mortgages that are the source of the financial crisis.
Ratings agencies have a key role in the financial system, assigning ratings to securities to reflect their inherent risk for investors.
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In the subprime debacle, ratings agencies stand accused of failing to identify the danger of complicated mortgage- and other asset-backed securities created by investment banks whose value derived from questionable underlying assets.
"Let me state up front that we recognize that many of the forecasts we used in our ratings analysis of certain structured finance securities have not borne out," Sharma told the committee.
Among other evidence produced by House of Representatives panel was a transcript of a meeting for Moody's executives in September 2007.
The chief executive of the firm, Raymond McDaniel, was said to have warned that competitors at Fitch and S&P "went nuts" in giving high-quality investment-grade ratings to risky securities.
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"What I was discussing ... was the need during this period to be raising credit protection enhancement levels," he replied when asked to comment.
The committee also quoted a Moody's manager as saying said the firm's explanations for its mistakes "make us look either incompetent at credit analysis or like we sold our soul to the devil for revenue."
The committee, chaired by Democrat Henry Waxman, dwelt considerably on the conflict of interest at the heart of the ratings industry in which agencies are paid by clients for their services while also rating their debt.
This led to reluctance to downgrade securities, lawmakers heard.
Jerome Fons, a former managing director for credit policy at Moody's, in his testimony said "wholesale changes" were needed in how rating firms were governed and managed.
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Sean Egan, managing director of Egan-Jones Ratings, assailed large rating firms, saying they are trying to serve investors and issuers but "the most important master is the one who pays the freight." The committee, called the House Committee on Oversight and Government Reform, also raised the issue of "rating shopping" wherein investment banks would shop around the agencies trying to find the best rating for their securities.
Committee Republican Christopher Shays said he had now lost all faith in them after seeing their involvement in the Enron collapse, where they were also criticized for failing to alert investors.
"I happen to think the rating agencies are useless now," he said. "They have no brand. I wouldn't trust them if I had money to invest."
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The House committee had previously called the head of failed bank Lehman Brothers, Dick Fuld, and exposed his 300-million-dollar salary since 2000. It also called the boss of rescued insurer AIG and lambasted the company for spending more than $440,000 for an executive getaway in California just days after the group was rescued by an $85 billion US government loan.
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