(One) lawmaker read from a series of instant messages, sent by employees of S&P, in which one analyst said they would rate a deal even if it were “structured by cows.” In many cases, these ratings agencies assigned super-safe, triple-A ratings to structured products that later turned out to be extremely risky, and in some case, worthless. Full Story »
Posted by Walter Cox
This summary of the committee hearing is a 'must read' for those who didn't watch the whole thing on C-SPAN. What we learn is that the very agencies charged with accurately assessing the worth of investment products failed to live up to their responsibilities. Add this negligence--at best--to highly suspect practices, legislative support through removal of liability to financial firms, and you have the ideal formula for colossal collapse.
Henry Waxman, the California Democrat who is chairman of the committee, said Wednesday morning that the rating agencies began assessing complex securities without fully investigating the underlying risks associated with them in order to gain more business from issuers of the securities. This allowed the rating agencies to become cash machines, he said in a live Webcast of the hearing. “Total revenues for the three firms doubled from $3 billion in 2002 to over $6 billion in 2007,” Mr. Waxman said. “Moody’s had the highest profit margin of any company in the S&P 500 for five years in row.” In some cases, analysts were forced to rate products without full access to loan data needed to make an accurate assessment. … John A. Yarmuth, a Democrat from Kentucky, chose to read aloud from an instant-message conversation between two S&P employees in the firm’s structured product division. Official 1: By the way, that deal is ridiculous Official 2: I know, right. The model definitely doesn’t capture half the risk. Official 1: We should not be rating it Official 2: We rate every deal. It could be structured by cows and we would rate it Official 1: There is a lot of risk associated with it. I personally don’t feel comfy signing off as a committee member. “What they say is extremely disturbing,” Mr. Yarmuth said at the hearing. “Their attitude seems to be casual acceptance that they rate deals that they should not be rating — deals that are too risky.”
OK…let’s review: The the raters gave “good” ratings to bad investments, so financial institutions would buy them and sell them off to other buyers. And their practices led to a catastrophic collapse with repercussions to be felt around the world. And, as we try to figure out how this happened, we are asked to trust the Treasury Secretary and the Fed Chairman to dispense $700 billion as they see fit, without restrictions or oversight. Does this make sense?
Kudos to Congressman Waxman and the Committee for pursuing their investigation of this issue. Would that they had been able to conduct this hearing, say, 10 years ago, so this entire mess could have been prevented through responsible policy and zealous oversight.