"Let's hope we are all wealthy and retired by the time this house of cards falters"

– S&P internal e-mail from 2006 http://www.bloomberg.com/apps/news?pid=20601087&sid=a2EMlP5s7iM0&refer=worldwide Moody’s, S&P Employees Doubted Ratings, E-Mails Say Oct. 22 (Bloomberg) – Employees at Moody’s Investors Service and Standard & Poor’s privately questioned the value of some mortgage-backed securities that were given creditworthy ratings, saying they created a monster,'' according to e-mails released by a U.S. House panel. Let’s hope we are all wealthy and retired by the time this house of cards falters,’’ one e-mail from an S&P employee said. The message was among documents lawmakers made public today as they criticized the role played by Moody’s, S&P and Fitch Ratings in the global credit freeze. The story of the credit-rating agencies is a story of colossal failure,'' House Oversight and Government Reform Committee Chairman Henry Waxman, a California Democrat, said at the hearing. The result is that our entire financial system is now at risk.’’ The companies in recent months have downgraded thousands of mortgage-backed securities as delinquencies have soared and home values fell. The downgrades have led to the collapse of Bear Stearns Cos. and Lehman Brothers Holdings Inc. and compelled the U.S. government to set up a system to buy $700 billion of distressed debt from financial companies. The Securities and Exchange Commission in a July report found the credit-rating companies improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds. Unprepared Executives The executives of the credit-rating companies said in testimony that they were unprepared for the sharp drop in home prices and were making improvements. Events have demonstrated that the historical data we used and the assumptions we made significantly underestimated the severity of what has actually occurred,'' said Deven Sharma, president of New York-based S&P. The company has improved its ratings process and transparency, Sharma said, and makes its criteria, analytics, and methodologies available to the public. Representative Stephen Lynch, a Massachusetts Democrat, said House Democrats are mulling legislation that would hold credit raters legally liable for losses to investors. There are discussions,’’ he said outside the hearing room. It's a matter of how to do it.'' Committee members are weighing allowing investors to sue credit raters, he said. With Blinders On In the September 2007 e-mail made public today, the Moody's employee said that it seems to me that we had blinders on and never questioned the information we were given,’’ according to the congressional investigators. It is our job to think of the worst-case scenarios and model them.'' The e-mail continued: Combined, these errors make us look either incompetent at credit analysis, or like we sold our soul to the devil for revenue.’’ Waxman also cited a transcript of a September 2007 meeting in which Raymond W. McDaniel, chairman and CEO of Moody’s Corp. described a slippery slope'' of events. What happened in ‘04 and ‘05 with respect to subordinated tranches is that our competition, Fitch and S&P, went nuts. Everything was investment grade,’’ McDaniel said in the meeting. We tried to alert the market. We said we're not rating it. This stuff isn't investment grade. No one cared because the machine just kept going.'' Documents from S&P paint a similar picture, Waxman said. In one document, an S&P employee in the structured finance division wrote: It could be structured by cows and we would rate it.’’ Potential Conflicts McDaniel and the other executives said potential conflicts of interest are inherent in the credit rating business. They said their companies would never boost a rating as a way to win business from borrowers. Our ratings are not influenced by commerical considerations,'' McDaniel said. That is a conflict that has to be identified, managed properly, and controlled.’’ Stephen W. Joynt, president and chief executive officer of Fitch Inc. in New York, said it is clear that many of our structured finance rating opinions have not performed well and have been too volatile.'' We did not foresee the magnitude or velocity of the decline in the U.S. housing market, nor the dramatic shift in borrower behavior brought on by the changing practices in the market,’’ Joynt said in a statement to the committee. Nor did we appreciate the extent of shoddy mortgage origination practices and fraud'' between 2005 and 2007. McDaniel, said his company observed weakening conditions as early as July 2003. `Took Action' We saw and took action to adjust our assumptions for the portions of the residential mortgage-backed securities market that we were asked to rate,’’ McDaniel said in testimony. We did not, however, anticipate the magnitude and speed of the deterioration in mortgage quality or the suddenness of the transition to restrictive lending.'' We have learned important lessons from these fast-changing market conditions,’’ McDaniel said. The company has refined its rating methodologies, increased transparency of its analysis, and adopted new policies to avoid conflicts of interest, he said. From 2005 to the third quarter of 2007, S&P rated approximately $855 billion of AAA subprime, first-lien residential mortgage-backed securities. So far, the company has downgraded about 17.6 percent of those securities. More than 94 percent, however, still hold an investment-grade rating, company Vice President Chris Atkins said. Fitch is a unit of Paris-based Fimalac SA. S&P is a unit of McGraw-Hill Cos. Moody’s fell $2.69, or 11 percent, to $21.61 in New York Stock Exchange composite trading today and McGraw-Hill declined $1.76, or 7.2 percent, to $22.72. Both companies had their biggest drops since Oct. 15.


i was also reading that in shock this morning. regulators need to take a long hard look at ratings agencies in light of events - stakeholders rely on these ratings when they are clearly a farce!

I saw that. Can you believe they had the balls to put it in writing?

the blodget effect!!!

the blodget effect!!!

ratings agencies will be completely overhauled. i would get short moodys stock but it’s already cratered. those guys have totally dropped the ball bigtime

Let’s hope for a quick and deep recession to get this toxic waste out of our system. The problem here has been the boom, not the recession. We need the recession to get back to reality. You cannot depend on rating agencies, simply because the only one you can depend on is yourself. Don’t blame them, blame yourselves.

mcpass Wrote: ------------------------------------------------------- > Let’s hope for a quick and deep recession to get > this toxic waste out of our system. > > The problem here has been the boom, not the > recession. We need the recession to get back to > reality. > > You cannot depend on rating agencies, simply > because the only one you can depend on is > yourself. Don’t blame them, blame yourselves. I agree.

Best solution is to have the government do the ratings, there are too many conflicts of interests involved in this business and too many people depend on these ratings. I have seen a presentation on an MBS issue underwritten by GS, 70% of the mortgages were crap ( no job, no income documentation, zero down, …) and the senior tranche was rated AAA. I feel bad for those who were close to retirement, and now have to work an extra 5 to 10 years to retire.

What floors me is that some guys actually knew what was going on as early as 2003. I suppose the thoery that after the tech meltdown, Wall Street needed a new get rich quick scheme to peddle to main street. A little bit of creative financial modeling later and you have these eloquent models with al sorts of externalities editing out or in the “hide” column format and the whole thing based on the thesis that real estate “never” falls in value. I like the comment about how this bear market isn’t really a bear market because the last 3,000 points on the Dow never should have been their to begin with. Willy