Former executives from Standard & Poor's and Moody's Investors Service told lawmakers today that credit raters relied on outdated models in a ``race to the bottom'' to maximize profits.
Jerome Fons, a former managing director of credit policy at New York-based Moody's, told the House Oversight and Government Reform Committee today that originators of structured securities ``typically chose the agency with the lowest standards, engendering a race to the bottom in terms of rating quality.''
Representative Henry Waxman, the committee chairman, said that the recent history of the credit rating companies ``is a story of colossal failure.'' ``The result is that our entire financial system is now at risk,'' Waxman said.
The House panel is reviewing the role played by S&P, Moody's, and Fitch Ratings in the global credit freeze. The Securities and Exchange Commission in a July report found the firms improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds.
The top executives of the credit-rating companies said in written testimony that they were unprepared for the sharp drop in home prices and that their systems failed.
``Events have demonstrated that the historical data we used and the assumptions we made significantly underestimated the severity of what has actually occurred,'' said Devan Sharma, president of New York-based S&P.
And there's more from a different article:
Employees at Moody's Investors Service told executives that issuing dubious creditworthy ratings to mortgage-backed securities made it appear they were incompetent or ``sold our soul to the devil for revenue,'' according to e-mails obtained by U.S. House investigators.
The e-mail was one of several documents made public today at a hearing of the House Oversight and Government Reform Committee in Washington, which is reviewing the role played by Moody's, Standard & Poor's and Fitch Ratings in the global credit freeze.
I place a great deal of the blame for the current mess at the feet of the ratings agencies. They gave crap paper great ratings thereby insuring the largest number of investors would buy the paper. That's one of the primary reasons for the current mess: so long as bonds had an "investment grade" rating everyone was happy. And the testimony above indicates the people/companies seeking a rating knew how to game the system.
If the paper had been properly rated only more speculative investors would have purchased it, thereby limiting the number of people who were exposed to credit issues to people who knew what they were doing (or at least had a better possibility of knowing the real risks they were getting).