Fraud at the Credit Rating AgenciesBy: David Dayen Saturday April 24, 2010 9:46 am
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If we had a media that highlighted events in proportion to their importance to the nation, Carl Levin’s Permanent Subcommittee on Investigations would be plastered across every channel in the nation, including MTV. He has done some spectacular work on the financial crisis in a series of hearings, essentially morphing into the Pecora Commission, the 1930s-era panel which teased out the origins of the Great Depression and devised the recommendations that made banking and finance stable for 50 years and more.
Yesterday, Levin’s committee hosted an incredible hearing on the credit rating agencies, the “independent” analysts who assess various types of securities. During the financial crisis, the rating agencies, who are owned and funded by the very banks who create the securities they rate, simply gave up any pretense of independent assessment, rubber-stamping toxic assets as triple-A and safe, neglecting the very real dangers for investors and creating a false sense of security. “Investors trusted credit rating agencies to issue accurate and impartial credit ratings, but that trust was broken in the recent financial crisis,” said Levin. “A 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. The agencies issued those AAA ratings using inadequate data and outmoded models. When they finally fixed their models, they failed for a year — while delinquencies were climbing — to re-evaluate the existing securities. 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. 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.”
Fund managers needed top ratings to move their investments; in many cases, the entities with which they were doing deals, like pension funds or banks or insurance companies, were legally bound to have a safe AAA rating on the security. So they would basically pitch the rating agencies to give their products the seal of approval. Furthermore, the major raters – Moody’s, Standard and Poor’s and Fitch – competed with one another for business, and downgrading securities didn’t lead to repeat customers. And, the rating agencies didn’t have the resources or the methodology to really investigate things like the housing bubble. So for a variety of reasons, the rating agencies listened to the banksters and buckled under the pressure.
Levin’s committee produced 18 pages of emails from the rating agencies that shows some of the most obvious evidence of culpability that you’ll ever get. Let me just quote from a few of them:
You will get sick reading through these documents. They show that the rating agencies knew about the imminent collapse of the housing market through financial fraud and subprime loans as far back as 2004. And they did nothing about it, and were lured into a game of chicken with the other rating agencies, where they all made money by not blinking and downgrading the securities tied to the loans. The revenue of the rating agencies doubled in this time, from 2002-2007. They essentially were being bribed.
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More: http://news.firedoglake.com/2010/04/24/fraud-at-the-credit-rating-agencies/Levin's pres release:
http://levin.senate.gov/newsroom/release.cfm?id=324129:mad:
:puke:
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