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<TABLE border=0 cellSpacing=0 cellPadding=0 width=452><TBODY><TR><TD vAlign=top width=452 colSpan=2>Published April 24, 2010
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Documents show qualms at rating firms
(Washington)
IN 2004, well before the risks embedded in Wall Street's bets on sub-prime mortgages became widely known, employees at Standard & Poor's (S&P), the credit rating agency, were feeling pressure to expand the business.
One employee warned in internal e-mail that the company would lose business if it failed to give high enough ratings to collateralised debt obligations (CDOs), the investments that later emerged at the heart of the financial crisis.
'We are meeting with your group this week to discuss adjusting criteria for rating CDOs of real estate assets this week because of the ongoing threat of losing deals,' the e-mail said. 'Lose the CDO and lose the base business - a self-reinforcing loop.'
In June 2005, an S&P employee warned that tampering 'with criteria to 'get the deal' is putting the entire S&P franchise at risk - it's a bad idea.' A Senate panel was to release 550 pages of exhibits yesterday - including these and other internal messages - at a hearing scrutinising the role S&P and the ratings agency Moody's Investors Service played in the 2008 financial crisis. The panel, the Permanent Subcommittee on Investigations, released excerpts of the messages on Thursday.
'I don't think either of these companies have served their shareholders or the nation well,' said Senator Carl Levin, the subcommittee's chairman.
In response to the Senate findings, Moody's said it had 'rigorous and transparent methodologies, policies and processes', and S&P said it had 'learned some important lessons from the recent crisis' and taken steps 'to increase the transparency, governance, and quality of our ratings'.
The investigation, which began in November 2008, found that S&P and Moody's used inaccurate rating models in 2004-7 that failed to predict how high-risk residential mortgages would perform; allowed competitive pressures to affect their ratings; and failed to reassess past ratings after improving their models in 2006.
The companies failed to assign adequate staff to examine new and exotic investments, and neglected to take mortgage fraud, lax underwriting and 'unsustainable home price appreciation' into account in their models, the inquiry found.
By 2007, when the companies, under pressure, admitted their failures and downgraded the ratings to reflect the true risks, it was too late.
Large-scale downgrades over the summer and fall of that year 'shocked the financial markets, helped cause the collapse of the sub-prime secondary market, triggered sales of assets that had lost investment-grade status and damaged holdings of financial firms worldwide', according to a memo summarising the panel's findings.
While many of the rating agencies' failures have been documented, the Senate investigation provides perhaps the most thorough and vivid accounting of the failures to date.
A sweeping financial overhaul being debated in the Senate would subject the credit rating agencies to comprehensive regulation and examination by the Securities and Exchange Commission for the first time. The legislation also contains provisions that would open the agencies to private lawsuits charging securities fraud, giving investors a chance to hold the companies accountable.
Mr Levin said he supported those measures, but said the Senate bill, and a companion measure the House adopted in December, did not go far enough.
'What they don't do, and I think they should do, is find a way where we can avoid this inherent conflict of interest where the rating companies are paid by the people they are rating,' he said. 'We've got to either find a way - or direct the regulatory bodies to find a way - to end that inherent conflict of interest.'
Although the agencies were supposed to offer objective and independent analysis of the securities they rated, the documents by Mr Levin's panel showed the pressures the companies faced from their clients, the same banks that were assembling and selling the investments. -- NYT
</TD></TR></TBODY></TABLE>
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Documents show qualms at rating firms
(Washington)
IN 2004, well before the risks embedded in Wall Street's bets on sub-prime mortgages became widely known, employees at Standard & Poor's (S&P), the credit rating agency, were feeling pressure to expand the business.
One employee warned in internal e-mail that the company would lose business if it failed to give high enough ratings to collateralised debt obligations (CDOs), the investments that later emerged at the heart of the financial crisis.
'We are meeting with your group this week to discuss adjusting criteria for rating CDOs of real estate assets this week because of the ongoing threat of losing deals,' the e-mail said. 'Lose the CDO and lose the base business - a self-reinforcing loop.'
In June 2005, an S&P employee warned that tampering 'with criteria to 'get the deal' is putting the entire S&P franchise at risk - it's a bad idea.' A Senate panel was to release 550 pages of exhibits yesterday - including these and other internal messages - at a hearing scrutinising the role S&P and the ratings agency Moody's Investors Service played in the 2008 financial crisis. The panel, the Permanent Subcommittee on Investigations, released excerpts of the messages on Thursday.
'I don't think either of these companies have served their shareholders or the nation well,' said Senator Carl Levin, the subcommittee's chairman.
In response to the Senate findings, Moody's said it had 'rigorous and transparent methodologies, policies and processes', and S&P said it had 'learned some important lessons from the recent crisis' and taken steps 'to increase the transparency, governance, and quality of our ratings'.
The investigation, which began in November 2008, found that S&P and Moody's used inaccurate rating models in 2004-7 that failed to predict how high-risk residential mortgages would perform; allowed competitive pressures to affect their ratings; and failed to reassess past ratings after improving their models in 2006.
The companies failed to assign adequate staff to examine new and exotic investments, and neglected to take mortgage fraud, lax underwriting and 'unsustainable home price appreciation' into account in their models, the inquiry found.
By 2007, when the companies, under pressure, admitted their failures and downgraded the ratings to reflect the true risks, it was too late.
Large-scale downgrades over the summer and fall of that year 'shocked the financial markets, helped cause the collapse of the sub-prime secondary market, triggered sales of assets that had lost investment-grade status and damaged holdings of financial firms worldwide', according to a memo summarising the panel's findings.
While many of the rating agencies' failures have been documented, the Senate investigation provides perhaps the most thorough and vivid accounting of the failures to date.
A sweeping financial overhaul being debated in the Senate would subject the credit rating agencies to comprehensive regulation and examination by the Securities and Exchange Commission for the first time. The legislation also contains provisions that would open the agencies to private lawsuits charging securities fraud, giving investors a chance to hold the companies accountable.
Mr Levin said he supported those measures, but said the Senate bill, and a companion measure the House adopted in December, did not go far enough.
'What they don't do, and I think they should do, is find a way where we can avoid this inherent conflict of interest where the rating companies are paid by the people they are rating,' he said. 'We've got to either find a way - or direct the regulatory bodies to find a way - to end that inherent conflict of interest.'
Although the agencies were supposed to offer objective and independent analysis of the securities they rated, the documents by Mr Levin's panel showed the pressures the companies faced from their clients, the same banks that were assembling and selling the investments. -- NYT
</TD></TR></TBODY></TABLE>
