Lack of staffing, conflicts of interest and poor business practices are among the reasons the SEC has found caused the three largest credit-rating agencies (Moody’s, S&P and Fitch) to award high credit ratings to questionable structured finance securities. Due to an unprecedented increase in mortgage-backed and structured finance securities between 2002-2007, the big three fought to keep up with volume while maximizing their own market share. In this environment, all three ended up compromising their standards and integrity.
The ratings agencies did not hire enough people when their workload began increasing in 2002. As a result, the SEC concluded that they did not have enough staff, and “sometimes cut corners.” The firms also did not document their processes or decisions in awarding “AAA” ratings (the highest rating) for questionable securities. In certain situations, there was no evidence that any surveillance work was done by the agency.
Conflicts of interests also affected how these companies rated securities. The ratings agencies would give high ratings to certain securities because they did not want to lose clients or lose market share by giving a bad rating. The agencies also gave “AAA” ratings to certain securities because they knew that the ratings would help their clients sell the securities. For example, one e-mail written by an unnamed analyst said, “It could be structured by cows, and we would rate it.” Another internal email written by an analyst stated ” Let’s hope we are all wealthy and retired by the time this house of cards falters.”
In certain instances, the ratings agencies were also found to have ignored their own internal policies and procedures when issuing ratings.
Unfortunately, the SEC’s report was general in nature and failed to give any specifics regarding particular firms. By withholding this information from the public, the SEC has frustrated the ability of public investors to evaluate the full nature and extent of each firm’s transgressions.