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.
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?