Credit Ratings Agencies Corrupt

A Senate panel investigating the causes of the nation's financial crisis on Thursday unveiled evidence that credit-ratings agencies knowingly gave inflated ratings to complex deals backed by shaky U.S. mortgages in exchange for lucrative fees. - McClatchy News Reporting

There will be a Senate hearing, Wall Street and the Financial Crisis: The Role of Credit Rating Agencies by the Permanent Subcommittee on Investigations today on the credit ratings agencies. From the Press Release:

From 2002 to 2007, the credit rating agencies earned record profits, reporting $6 billion in gross revenues in 2007. They also allowed the drive for profits and market share to affect ratings. Knowing that Wall Street firms might take their business elsewhere if they didn’t get investment-grade ratings for their products, the agencies were vulnerable to pressure from issuers and investment bankers. As one Moody’s executive wrote in October 2007: “It turns out that ratings quality has surprisingly few friends: issuers want high ratings; investors don’t want rating downgrades; short-sighted bankers labor … to game the rating agencies.”

No surprise for readers of this site, but the hearing will prove credit ratings agencies knowingly gave AAA ratings to toxic assets and they did so for the fees from the banks.

McClathy News (h/t Calculated Risk) has the story.

A Senate panel investigating the causes of the nation's financial crisis on Thursday unveiled evidence that credit-ratings agencies knowingly gave inflated ratings to complex deals backed by shaky U.S. mortgages in exchange for lucrative fees.

The Senate Permanent Subcommittee on Investigations will hold a detailed hearing on Friday, where its chairman, Sen. Carl Levin, D-Mich., will introduce e-mail records in which executives from Standard & Poor's and Moody's Investors Service acknowledge compromising the integrity of ratings to win business from big Wall Street firms.

"They did it for the big fees they got," Levin told reporters on Thursday.

Some of the emails we've already seen. See this post on a 2008 Congressional hearing, which documented many.

Barry Ritholtz especially blamed the credit ratings agencies for peddling junk.

We're getting a lot of recycled news and details from the Financial Meltdown as of late. But that's ok, because currently, nothing has happened to the credit rating agencies and the current Senate reform bill does little to rein them in.

The documents to be released Friday confirm what a McClatchy investigation revealed in October _ that pressure from top ratings-agency executives to retain market share and the fees that it brought meant that ratings on complex deals were malleable. Some fees were as high as $1.4 million.

Investors trusted ratings to give them guides to the quality of financial products such as bonds, but many of the bonds rated as top-quality in the recent crisis turned out to be junk. The fallout was a housing collapse that triggered a global financial crisis.

In one example obtained by the committee, Yvonne Fu, a Moody's employee, sent an e-mail to a banker at Merrill Lynch in June 2007, pressuring the investment bank to lock down a big fee in exchange for a positive rating.

"We have spent significant amount of resource on this deal and it will be difficult for us to continue with this process if we do not have an agreement on the fee issue," Fu wrote.

We'll find out more tomorrow but the big question is will this hearing result in criminal or civil charges?

Will this hearing result in the credit rating agencies being forced into an objective position, no longer to take glorified kickbacks from those whose products they are rating, a true independent group?

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Speaking of corruption...

The only place I've seen this story published was in England.

A former leading lawyer for the US Securities and Exchange Commission blocked several investigations of Allen Stanford, the financier charged with defrauding investors of $7 billion (£4.5 billion), before going on to work for him, according to investigators.
Spencer Barasch, the former head of enforcement for the SEC in Fort Worth, Texas, “repeatedly attempted to represent Mr Stanford in connection with the investigation he had blocked for seven years”, a report by the SEC’s inspector-general says.
The report has revealed a damning picture of failure and inertia at the SEC, despite widely held suspicions within the agency dating back to 1997 that Mr Stanford was running a Ponzi, or pyramid, scheme. He was not charged until last year.
It has found that the SEC’s Fort Worth examination group conducted investigations of Mr Stanford in 1997, 1998, 2002 and 2004, concluding in each case that he was likely to be operating a Ponzi scheme or something similar. As early as 1997, one official said that the purported above-market returns on the certificates of deposit sold by Stanford companies were “absolutely ludicrous”.

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Ugh, supposedly they are "watering down" the Dodd Dud.

Sanders lost by 2? votes an amendment to break up the big banks and then there is nothig about audit the Fed, highly desired by the House, the majority of the American people.

So, we're looking at another ramrod and probably lucky to get Lincoln's derivatives bill passed out of committee so far.

I'll be updating my new post later, as I can locate the pertinent video clips.

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rating agency

So when is someone going to investigate rating agencies , and what is the punishment going to be if they are found to be the problem of the finanical system.

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credit agencies

First off, thanks Robert for the great piece! Wish there was more reporting of this kind of stuff in the "main stream" media.

Credit agencies bug the crap out of me. After graduating from college, I had racked up a substantial amount of debt and was looking for a way to dig myself out of the hole. I found this site, Credit Repair, which offered a few helpful hints for free and many other sites selling their credit repair services, which if you do 5 minutes of reading, realize are totally a waste of money! Anyway, back to my story. I ordered my credit report from the federally mandated Annual Credit Report website only to find LOTS of inaccurate information in my report, some of which had been affecting my credit score for years! Now I admit, I was at fault for racking up the debt on eating on campus between classes and god knows whatever else I thought I needed, but I didn't realize that these inaccuracies were keeping me from getting a good rate for my used car loan I took out during my senior year (other car got stolen and when found was totaled... hurrah). So I contacted the bureaus at fault and had them fixed and my score jumped up pretty dramatically. Long story short, I don't trust any of the credit agencies after that and I make sure to check my reports periodically. Glad to know these crooks had their hand in causing the economic meltdown that prevents my educated mind from obtaining gainful employment for 17 months!

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Hi, I'm Ed. Nice to meatchew.