Michael
Oct 18th 2009, 01:20 PM
How Moody's sold its ratings -- and sold out investors
WASHINGTON -- As the housing market collapsed in late 2007, Moody's Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression.
A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.
Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. Such products have another name now: "toxic assets."
Source (http://www.mcclatchydc.com/227/story/77244.html)
Here's the heart of the story...
Moody's was spun off from Dun & Bradstreet in 2000, and the first company shares began trading on Oct. 31 that year at $12.57. Executives set out to erase a conservative corporate culture.
To promote competition, in the 1970s ratings agencies were allowed to switch from having investors pay for ratings to having the issuers of debt pay for them. That led the ratings agencies to compete for business by currying favor with investment banks that would pay handsomely for the ratings they wanted.
Wall Street paid as much as $1 million for some ratings, and ratings agency profits soared. This new revenue stream swamped earnings from ordinary ratings.
"In 2001, Moody's had revenues of $800.7 million; in 2005, they were up to $1.73 billion; and in 2006, $2.037 billion. The exploding profits were fees from packaging . . . and for granting the top-class AAA ratings, which were supposed to mean they were as safe as U.S. government securities,"
That pretty much sums up the tale of Wall Street Ratings Agencies in a nutshell.
Why regulators permitted Ratings Agencies to switch over from charging the investors to charging the issuers of debt vehicles for ratings is beyond me. I suppose it would be reasonable to state that this decision marks the beginning of Wall Street's capture of financial regulation in the USA - putting the foxes in charge of the henhouse. From there, it is a direct line to the market collapse of 2008 (and beyond).
The really scary part comes in the very last paragraph...
Experts such as Columbia University's Coffee think that Congress must impose some legal liability on credit rating agencies. Otherwise, they'll remain "just one more conflicted gatekeeper," and the process of pooling loans — essential to the flow of credit — will remain paralyzed and economic recovery restrained.
"If (credit) remains paralyzed, small banks cannot finance the housing demand. They have to take them (investment banks) these mortgages and move them to a global audience," said Coffee. "That can't happen unless the world trusts the gatekeeper."
You see? Nothing has changed. They are still obsessed with securitization.
Just about every feature and facet of this process has been shown to be filled with fraud, yet the securitization for global resale is still the goal.
As far as I see the issue, so long as 'securitization' is the gaol, 2008-style crisis will be the result - again and again. The short-term profits are just too massive for Wall Street to ignore. Since Uncle Sam is going to pay for the losses, Wall Street has no serious risk against doing exactly the same thing again.
And corrupted ratings agencies are a necessary part of the game.
WASHINGTON -- As the housing market collapsed in late 2007, Moody's Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression.
A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.
Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. Such products have another name now: "toxic assets."
Source (http://www.mcclatchydc.com/227/story/77244.html)
Here's the heart of the story...
Moody's was spun off from Dun & Bradstreet in 2000, and the first company shares began trading on Oct. 31 that year at $12.57. Executives set out to erase a conservative corporate culture.
To promote competition, in the 1970s ratings agencies were allowed to switch from having investors pay for ratings to having the issuers of debt pay for them. That led the ratings agencies to compete for business by currying favor with investment banks that would pay handsomely for the ratings they wanted.
Wall Street paid as much as $1 million for some ratings, and ratings agency profits soared. This new revenue stream swamped earnings from ordinary ratings.
"In 2001, Moody's had revenues of $800.7 million; in 2005, they were up to $1.73 billion; and in 2006, $2.037 billion. The exploding profits were fees from packaging . . . and for granting the top-class AAA ratings, which were supposed to mean they were as safe as U.S. government securities,"
That pretty much sums up the tale of Wall Street Ratings Agencies in a nutshell.
Why regulators permitted Ratings Agencies to switch over from charging the investors to charging the issuers of debt vehicles for ratings is beyond me. I suppose it would be reasonable to state that this decision marks the beginning of Wall Street's capture of financial regulation in the USA - putting the foxes in charge of the henhouse. From there, it is a direct line to the market collapse of 2008 (and beyond).
The really scary part comes in the very last paragraph...
Experts such as Columbia University's Coffee think that Congress must impose some legal liability on credit rating agencies. Otherwise, they'll remain "just one more conflicted gatekeeper," and the process of pooling loans — essential to the flow of credit — will remain paralyzed and economic recovery restrained.
"If (credit) remains paralyzed, small banks cannot finance the housing demand. They have to take them (investment banks) these mortgages and move them to a global audience," said Coffee. "That can't happen unless the world trusts the gatekeeper."
You see? Nothing has changed. They are still obsessed with securitization.
Just about every feature and facet of this process has been shown to be filled with fraud, yet the securitization for global resale is still the goal.
As far as I see the issue, so long as 'securitization' is the gaol, 2008-style crisis will be the result - again and again. The short-term profits are just too massive for Wall Street to ignore. Since Uncle Sam is going to pay for the losses, Wall Street has no serious risk against doing exactly the same thing again.
And corrupted ratings agencies are a necessary part of the game.