The Senate Permanent Subcommittee on Investigations, headed by Sen. Carl Levin (D-Mich.), held its third hearing on the financial crisis today, and up to bat were the credit ratings agencies. These companies — just three players, Moody’s, Fitch and Standard & Poor’s, dominate the market — take financial products issued by banks and other financial firms, perform thorough investigations and assign a rating to them based on the chance that the product will default. Or, at least, that’s how it’s supposed to work.<\/p>\n
In practice, “[the] agencies allowed Wall Street to impact their analysis, their independence and their reputation for reliability,” Levin said this morning. “They did it for the money.” In short: The banks gamed the ratings agencies, and did it well. Here’s from the summary<\/a> of the Levin report:<\/span><\/p>\n \u201cInvestors trusted credit rating agencies to issue accurate and impartial credit ratings, but that trust was broken in the recent financial crisis,\u201d said Levin. \u201cA conveyor belt of high risk securities, backed by toxic mortgages, got AAA ratings that turned out not to be worth the paper they were printed on.\u00a0 The agencies issued those AAA ratings using inadequate data and outmoded models.\u00a0 When they finally fixed their models, they failed for a year — while delinquencies were climbing — to re-evaluate the existing securities.\u00a0 Then, in July 2007, the credit rating agencies instituted a mass downgrade of hundreds of mortgage backed securities, sent shockwaves through the economy, and the financial crisis was on.\u00a0 By first instilling unwarranted confidence in high risk securities and then failing to downgrade them in a responsible manner, the credit rating agencies share blame for the massive economic damage that followed.\u201d<\/p>\n From 2002 to 2007, the credit rating agencies earned record profits, reporting $6 billion in gross revenues in 2007.\u00a0 They also allowed the drive for profits and market share to affect ratings.\u00a0 Knowing that Wall Street firms might take their business elsewhere if they didn\u2019t get investment-grade ratings for their products, the agencies were vulnerable to pressure from issuers and investment bankers.\u00a0 As one Moody\u2019s executive wrote in October 2007: \u201cIt turns out that ratings quality has surprisingly few friends: issuers want high ratings; investors don\u2019t want rating downgrades; short-sighted bankers labor \u2026 to game the rating agencies.\u201d<\/p>\n<\/blockquote>\n The credit rating agencies still, three years into the crisis, have a conflict of interest at the heart of their business. The financial firms that produce <\/em>the financial products, not the financial firms that buy<\/em> them, pay for the supposedly independent ratings. In a released<\/a> email, one S&P employee describes colleagues in the company’s mortgage unit: “They\u2019ve become so beholden to their top issuers for revenue they have all developed a kind of Stockholm syndrome which they mistakenly tag as Customer Value creation.” The Dodd bill creates an office of credit ratings within the Security and Exchange Commission, and increases oversight. But it does little to change the underlying problem.<\/p>\n","protected":false},"excerpt":{"rendered":" The Senate Permanent Subcommittee on Investigations, headed by Sen. Carl Levin (D-Mich.), held its third hearing on the financial crisis today, and up to bat were the credit ratings agencies. These companies — just three players, Moody’s, Fitch and Standard & Poor’s, dominate the market — take financial products issued by banks and other financial […]<\/p>\n","protected":false},"author":6662,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-542061","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/542061","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/6662"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=542061"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/542061\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=542061"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=542061"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=542061"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n