Senate Report on Financial Crisis Criticizes Ratings Agencies

 

Moody’s Investors Service and Standard & Poor’s colluded with Wall Street investment banks to profit at the expense of investors by giving faulty AAA ratings to pools of mortgage-backed securities that should have been rated as junk, according to Kevin G. Hall’s article in McClatchey Newspapers entitled “Report: Big profits drove faulty ratings at Moody’s, S&P.”

Analysts who reviewed mortgage-backed securities were threatened with firing if they lost lucrative business, prompting faulty ratings on trillions of dollars worth of junk mortgage bonds, the Senate Permanent Subcommittee on Investigations reportedly found.

Credit rating agencies are charged with providing independent and honest ratings. AAA-rated investments were regarded as having a probability of failure of less than 1 percent.

Moody’s Investors Service and Standard & Poor’s ignored mounting evidence of problems in the housing market according to the Senate Report: “Instead of using this information to temper their ratings, the firms continued to issue a high volume of investment-grade ratings for mortgage backed securities.”

Profits at both companies soared with revenues at Moody’s more than tripling in five years. More than 90 percent of AAA ratings given in 2006 and 2007 to pools of mortgage-backed securities were downgraded to junk status, according to the article.

Brian Clarkson, the president of Moody’s at the time of his departure in mid-2008 in the midst of the financial crisis, reportedly bullied and threatened analysts. In one 2003 email, Clarkson suggested the need to “refine our approach” to keep pace with competitors “easing their standards to capture (market) share,” according to the article.

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