April 24, 2010 in Business

Raters unapologetic

Moody’s, S&P questioned about role in meltdown
Kevin G. Hall McClatchy
Associated Press photo

Raymond W. McDaniel Jr., chairman and CEO of Moody’s, N.Y., and Kathleen Corbet, former president of Standard & Poor’s, testify Friday before the Senate Permanent Subcommittee on Investigations on Capitol Hill in Washington.
(Full-size photo)

Reining in the rating agencies

 Credit rating agencies would come under greater regulation and scrutiny in both the House-passed financial regulation bill and in legislation pending in the Senate. A glance at what the legislation would do:

Ratings agencies would have to register with the Securities and Exchange Commission. Currently, the SEC is prohibited by law from overseeing credit rating agencies.

Agencies would have to disclose their methodologies, how they used third parties to conduct due diligence on their assessments, as well as their own ratings track record.

Currently, ratings agencies are paid by the banks whose investments they rate. The House bill would require the SEC to issue rules that would either prohibit or require a ratings agency to disclose any conflicts of interest related to its assessments of investments. The Senate bill would require a study of the independence of ratings agencies. The Senate also would require that at least half the members of agency boards be independent, with no financial stake in credit ratings.

Investors could sue ratings agencies on the grounds of reckless failure to analyze an investment.

Associated Press

WASHINGTON – The chairman and chief executive of Moody’s Corp. said Friday that he didn’t know that his company continued to give investment-grade ratings to complex financial instruments backed by shaky subprime mortgages even after it downgraded billions of dollars worth of such deals in the summer of 2007.

His admission came during a daylong hearing by the Senate Permanent Subcommittee on Investigations, which is looking into the origins of the nation’s worst financial crisis since the Great Depression.

Moody’s CEO Raymond McDaniel, under questioning, said that he didn’t think his company had continued to rate complex deals backed by U.S. mortgages after it and competitor Standard & Poor’s jolted the markets in July 2007 with massive downgrades of earlier deals. “I apologize, I do not recall that,” McDaniel said.

The panel’s chairman, Sen. Carl Levin, D-Mich., then presented him with documentation that both Moody’s and S&P gave investment-grade ratings to a Citigroup deal in December 2007, worth almost $400 million, backed by shaky subprime loans that by then clearly were toxic.

The point Levin was making – and made repeatedly – is that credit-rating agencies did whatever was needed to get lucrative fees, some as high as $1.4 million, for rating complex deals.

While other Wall Street executives have expressed contrition when they appeared before Congress, McDaniel and former S&P President Kathleen Corbet were unapologetic on Friday.

But in earlier testimony and in e-mails released by Levin, former Moody’s and S&P officials told how they were pushed out or quit in frustration because managers badgered them to “massage” complex deals until they could land the business.

A McClatchy Newspapers investigation in October documented how top managers from the structured finance division, which rated the complex deals, were moved into the top executive suites at Moody’s and effectively took over the company.

McDaniel and Corbet said they were unaware that their analysts felt pressured to sacrifice the quality of investment-grade ratings to maintain market share and earn the huge accompanying fees.

Investment-grade ratings gave investors the illusion of safe bets, allowing big Wall Street firms such as Goldman Sachs to peddle the securities across the globe. Moody’s and its chief competitors were key players in the prelude to a near meltdown of global finance in September 2008.

Called to appear before the panel, Richard Michalek, a former Moody’s vice president and senior credit officer, described the ratings process as a “must say yes” atmosphere for deals that could bring more than $1 million in fees.

Frank Raiter, a former managing director at S&P and head of the group that rated pools of residential mortgages, told the panel that analysts routinely sought direction from top management about the shaky deals they were being asked to rate.

“The guidance was not forthcoming from the top,” he said, later adding, “I retired because I got tired of the frustration.”

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