U.S. regulator finds questionable practices at ratings firms
(Herald Tribune) -- The analyst at the credit ratings agency was blunt: "Let's hope we are all wealthy and retired by the time this house of cards falters."
That candid assessment, e-mailed to a colleague in December 2006, referred to the market for certain investments linked to subprime mortgages - investments that were assigned top, AAA ratings from major agencies, only to later plummet in value.
That e-mail message and dozens like it were disclosed Tuesday in a blistering 37-page report issued by the Securities and Exchange Commission, which confirmed what many on Wall Street had long suspected: The major ratings firms, including Fitch, Moody's and Standard & Poor's, flouted conflict of interest guidelines and considered their own profits when rating securities, among other suspect practices.
The report represented a definitive dent in the aura of objectivity that has been cultivated for decades by ratings firms, considered the ivory towers of Wall Street. Investors, public and private alike, often gamble billions of dollars on securities the agencies deem reliable. The assumption was that the firms' analysts - ostensibly disinterested types who assess the financial health of everything from states and cities to complex mortgages - offered a bias-free view of potential investments.
Instead, the SEC found that the agencies became overwhelmed by an increase in the volume and sophistication of the securities they were asked to review.
Analysts, faced with less time to perform the due diligence expected of them, began to cut corners.
"It could be structured by cows and we would rate it," an analyst wrote in April 2007, noting that she had only been able to measure "half" of a deal's risk before providing a rating.
The agencies continued to issue ratings despite frequent complaints from managers that they had neither the time nor manpower to sufficiently measure the safety of investments.
"We do not have the resources to support what we are doing now," a managing analyst wrote in an e-mail message in February 2007.
The trust in the ratings firms plays a vital role in the modern financial system. To ensure their bonds are rated AAA, many states and cities buy specialized insurance policies that are themselves dependent on premium ratings.
The agencies appear to be taking steps to address the problems; Moody's has ousted two high-ranking executives in the last two months.
The report was the result of a 10-month investigation into practices at Fitch, Moody's and S&P. None of the e-mail messages or findings were attributed to an individual firm, according to standard commission practice, a spokesman said.
The report also turned up evidence that ratings firms ran afoul of basic guidelines intended to avoid conflicts of interest. It is common practice for investment banks and other financial outfits to pay agencies to rate assets they will later sell. Agency regulations often require analysts - the people actually rating the securities - to remain unaware of any business interests involved with the products whose safety they are gauging.
The SEC found that this was not always the case. "There does not appear to be any internal effort to shield analysts from e-mails and other communications that discuss fees and revenue from individual issuers," the report said.
CFTC - take note - Nogger
That candid assessment, e-mailed to a colleague in December 2006, referred to the market for certain investments linked to subprime mortgages - investments that were assigned top, AAA ratings from major agencies, only to later plummet in value.
That e-mail message and dozens like it were disclosed Tuesday in a blistering 37-page report issued by the Securities and Exchange Commission, which confirmed what many on Wall Street had long suspected: The major ratings firms, including Fitch, Moody's and Standard & Poor's, flouted conflict of interest guidelines and considered their own profits when rating securities, among other suspect practices.
The report represented a definitive dent in the aura of objectivity that has been cultivated for decades by ratings firms, considered the ivory towers of Wall Street. Investors, public and private alike, often gamble billions of dollars on securities the agencies deem reliable. The assumption was that the firms' analysts - ostensibly disinterested types who assess the financial health of everything from states and cities to complex mortgages - offered a bias-free view of potential investments.
Instead, the SEC found that the agencies became overwhelmed by an increase in the volume and sophistication of the securities they were asked to review.
Analysts, faced with less time to perform the due diligence expected of them, began to cut corners.
"It could be structured by cows and we would rate it," an analyst wrote in April 2007, noting that she had only been able to measure "half" of a deal's risk before providing a rating.
The agencies continued to issue ratings despite frequent complaints from managers that they had neither the time nor manpower to sufficiently measure the safety of investments.
"We do not have the resources to support what we are doing now," a managing analyst wrote in an e-mail message in February 2007.
The trust in the ratings firms plays a vital role in the modern financial system. To ensure their bonds are rated AAA, many states and cities buy specialized insurance policies that are themselves dependent on premium ratings.
The agencies appear to be taking steps to address the problems; Moody's has ousted two high-ranking executives in the last two months.
The report was the result of a 10-month investigation into practices at Fitch, Moody's and S&P. None of the e-mail messages or findings were attributed to an individual firm, according to standard commission practice, a spokesman said.
The report also turned up evidence that ratings firms ran afoul of basic guidelines intended to avoid conflicts of interest. It is common practice for investment banks and other financial outfits to pay agencies to rate assets they will later sell. Agency regulations often require analysts - the people actually rating the securities - to remain unaware of any business interests involved with the products whose safety they are gauging.
The SEC found that this was not always the case. "There does not appear to be any internal effort to shield analysts from e-mails and other communications that discuss fees and revenue from individual issuers," the report said.
CFTC - take note - Nogger
