Posted on 23 Apr 2010
A probe of the credit-rating industry by the Senate Permanent Subcommittee on Investigations found that firms used outdated models, were influenced by their clients and waited too long to downgrade investments as the collapse in the housing market intensified in the year before the financial crisis.
The probe shows that some employees at the credit-rating companies were hungry for fees and apparently willing to compromise objective analysis of the quality of investments, according to material released Thursday.
One e-mail suggests that a Moody's employee explicitly agreed to negotiate ratings for investments based on a promise of future fees.
"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," the Moody's employee wrote to Merrill Lynch in June 2007. "We are agreeing to this under the assumption that this will not be a precedent for any future deals and that you will work with us further on this transaction to try to get to some middle ground with respect to the ratings."
The committee is holding a hearing Friday and has invited top executives from Moody's, Standard & Poors and Fitch Ratings.
"Investors trusted credit-rating agencies to issue accurate and impartial credit ratings, but that trust was broken in the recent financial crisis," said Carl M. Levin (D-Mich.), chairman of the subcommittee. "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 investigation touches on complex securities issued by Goldman Sachs, finding that the firm sometimes pushed back when rating agencies cast doubt on the investments.
A Moody's analyst wrote in April 2006 about getting "serious pushback from Goldman on a deal that they want to go to market with today." An S&P analyst in May 2006 referenced "a known flaw . . . in pretty much all Abacus trades." Abacus, a complex mortgage-related investment, is the subject of a federal fraud suit against Goldman Sachs.
S&P spokesman Chris Atkins said the firm has "learned some important lessons from the recent crisis and . . . made a number of significant enhancements to increase the transparency, governance and quality of our ratings."