Open Question: rating agencies were paid off by wall street ,how can we stop this madness in the future?
April 23 (Bloomberg) — Former Moody’s Investors Service and Standard & Poor’s employees said they were excluded from assessing mortgage bonds if they questioned Wall Street’s conclusions and that credit-rating companies focused on protecting business at the expense of accurate grading.
Richard Michalek, a former managing director in Moody’s structured products derivatives group, told the Senate Permanent Subcommittee on Investigations at a hearing today that managers said he was “not welcome on deals” involving certain banks.
Eric Kolchinsky, who led the Moody’s group that rated collateralized debt obligations made up of mortgage bonds, said he was berated by his boss when the company lost business after implementing more conservative ratings.
S&P wrongly concluded that its increasing profits amid an inflated U.S. housing market was based on “superior management skill and insight,” said Frank Raiter, a former managing director at the company. In reality, regulators had made the firm part of “an oligopoly” by requiring investors to hold assets it rated, Raiter said.
Public pension funds blame Moody’s and S&P for helping cause the global financial crisis by giving top rankings to mortgage-linked securities that blew up when the U.S. housing market collapsed in 2007.
The Senate panel concluded after an 18-month probe that the firms were too influenced by Wall Street, had insufficient resources and used outdated models to grade mortgage securities.
Michalek, testifying at a hearing called to discuss the committee’s findings, said banks that requested he not work on their transactions included Goldman Sachs Group Inc., UBS AG and Merrill Lynch & Co.
‘Cannot Remember’
Moody’s Managing Director Yuri Yoshizawa testified that she “cannot remember” an instance in which she removed an employee who had been picked to rate a security.
Moody’s did prevent analysts from working on new deals involving certain banks, Yoshizawa said. Such decisions were made to protect employees, not to satisfy client demands that Moody’s assign less aggressive analysts, she said.
“We felt that our analysts were being abused,” Yoshizawa said. “We did not want that to happen.”
Moody’s cared more about protecting its market share than potentially committing “securities fraud,” said Kolchinsky, who headed the company’s mortgage bond CDO group, testified.
Moody’s in September 2007 implemented a plan for assessing CDOs filled with mortgage bonds that included the assumption rankings on the underlying securities were inaccurate.
Market Share
In October 2007, Kolchinsky said his boss responded to an internal e-mail showing that the firm’s CDO market share had fallen to 94 percent from typically more than 98 percent by demanding “an accounting of the missing deals.”
“Despite the massive manifest errors in the ratings assigned to structured finance securities and the market implosion we were witnessing, it appeared to me that my manager was more concerned about losing a few points of market share than about violating the law,” Kolchinsky said.
It was “the most disturbing e-mail I had ever received in my professional career,” he said.
E-mails released by the Senate committee show Moody’s and S&P deferring to investment banks that were paying them to assign ratings to securities composed of pooled mortgages.
S&P’s residential mortgage-backed securities group had “become so beholden to their top issuers for revenue they have all developed Stockholm syndrome which they mistakenly tag as customer value creation,” an unidentified S&P employee wrote in an August 2006 e-mail. Stockholm syndrome describes hostages who’ve developed positive feelings for their captors.
‘For the Money’
Senator Carl Levin, the Michigan Democrat who leads the investigative panel, said Moody’s and S&P “allowed Wall Street to impact their analysis, their independence and their reputation for reliability.” The firms “did it for the money,” he said.
Moody’s Corp. Chief Executive Officer Raymond McDaniel said his company, market participants and regulators failed to anticipate how quickly the housing market was deteriorating. The company is updating its risk models more frequently and making sure broad signs of economic distress get incorporated into ratings analysis for individual securities, he said.
Peter D’Erchia, managing director of U.S. public finance at S&P, said the company has “always been committed to doing the best we can to develop and maintain appropriate ratings.”
Senate Debate
The Senate may begin debating legislation next week to overhaul financial rules after the credit crunch cost financial companies worldwide more than $1.78 trillion and spurred a U.S. bailout of banks including Citigroup Inc. and Bank of America Corp.
The measure would authorize the SEC to evaluate and set standards for what models S&P and Moody’s can use to assess credit risk.
The bill would also restrict judges from di
i wonder when those same rating agencies will give an accurate rating on British and American debt loads(bond ratings) .