And do ratings agencies still collect fees from the companies whose deals they rate? Have these conflicts of interest been addressed yet?
Moody's, S&P Caved In to Ratings Pressure From Goldman, UBS Over Mortgages
By Zeke Faux - Bloomberg
Moody’s Investors Service and Standard & Poor’s adjusted the way they graded securities after Goldman Sachs Group Inc., UBS AG and at least six more banks pressured them, according to a U.S. Senate report.
The world’s two largest bond-ranking companies, both based in New York, made exceptions to rules when bankers asked for better safety ratings on complex mortgage-backed securities, the Senate Permanent Subcommittee on Investigations said yesterday. When Moody’s and S&P changed their assessments of hundreds of those bonds in July 2007, it helped trigger the financial crisis, the panel said.
“The ratings agencies weakened their standards as each competed to provide the most favorable rating to win business and greater market share,” according to the report. “The result was a race to the bottom.”
The conclusions cap a two-year investigation into the financial crisis during which senators questioned executives about the failings of Wall Street banks, regulators and mortgage companies. In a televised hearing last year, lawmakers compared Goldman Sachs bankers to bookies and subcommittee Chairman Carl M. Levin grilled them about marketing securities. Levin’s committee wants regulators to eliminate rules shielding Moody’s and S&P from being sued over flawed ratings and publish accuracy rankings for the companies.
Levin and Republican Senator Tom A. Coburn of Oklahoma held four public hearings in 2010. The Financial Crisis Inquiry Commission also looked into the role of ratings companies, calling them “key enablers of the financial meltdown” in its January report.
Relying on mathematical models, Moody’s and S&P awarded AAA ratings to mortgage securities packaged during the five-year housing boom, deeming them as safe as government bonds. About 90 percent of AAA securities backed by subprime mortgages from 2006 and 2007 were later downgraded to junk status, Levin’s committee said.
Such revisions forced banks, pension funds and insurance companies to sell holdings, contributing to $2 trillion in losses and asset-writedowns worldwide.
S&P Rejects Responsibility
Lower ratings “reflected the unprecedented deterioration in credit quality, but were not a cause of it,” Catherine Mathis, an S&P spokeswoman, said in an e-mail response to Levin’s findings. “We regret that, like many others, we did not foresee the speed and extent of the housing downturn, which was the steepest decline since the Great Depression.”
Michael Adler, a Moody’s spokesman who hadn’t seen the Levin report, declined to comment.
Moody’s gross revenue from rating the complex products quadrupled to $260 million in 2006 from $61 million in 2002, according to the congressional report. For S&P, the number also quadrupled to $265 million in 2006 from $64 million in 2002.
“Investment bankers who complained about rating methodologies, criteria, or decisions were often able to obtain exceptions or other favorable treatment,” according to the Levin report. The decisions appeared to be “concessions made to prevent the loss of business.”
Eight Banks Cited
The subcommittee released e-mails showing UBS, Lehman Brothers Holdings Inc., Citigroup Inc., Bear Stearns Cos., Morgan Stanley, Goldman Sachs, JPMorgan Chase & Co. and Nomura Holdings Inc. all pressured the ratings companies to loosen standards for assessing certain securities or make exceptions.
UBS told S&P that grading securities the bank was selling more conservatively might shift business to Moody’s and competitor Fitch Ratings, according to Levin’s findings.
In another case, a Goldman Sachs banker objected to a rating decision S&P made on a collateralized-debt obligation called Abacus 2006-12, according to an e-mail released by the panel.S&P director Chris Meyer at first “pushed back” then “suggested an exception could be made if it were limited to the CDO at hand,” the committee said.
Read the entire article here