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Senate Subcommittee Grades Rating Agencies

by Vicky Ku
Eyes On Wall Street |

In a recent hearing, the Senate Permanent Subcommittee on Investigations lambasted credit ratings agencies for their role in the financial crisis. During an April 23 hearing, the Senate Subcommittee found that the credit rating agencies were "too influenced by investment bankers," and had used credit ratings models with inaccurate and inadequate data. The findings came on the heels of an 18-month long investigation into some of the causes and consequences of the financial crisis.

The Subcommittee released several damning email messages, one from a Standard & Poor (S&P) employee who explained that it was necessary to "discuss adjusting criteria" for assessing housing-backed securities "because of the ongoing threat of losing deals." Another email complained of having to use resources "to massage the sub-prime and alt-A numbers to preserve market share."

Former executives at both Moody's and S&P testified that competitive pressures and conflicts of interest were allowed to consistently undermine accurate, fair and unbiased ratings of complex securities that Wall Street sold to investors. Eric Kolchinsky, a former managing director at Moody's who oversaw the ratings of collateralized debt obligations backed by subprime mortgages, testified that "[i]t was an unspoken understanding that loss of market share would cause a manager to lose his or her job."

The results of the agencies' conflicts of interest are all too apparent. From 2002 to 2007, the credit rating agencies earned record profits, reporting $6 billion in gross revenues in 2007. However, 93% of all AAA-rated subprime-mortgage-backed securities issued in 2006 have now been downgraded to junk status. In a recent hearing, the Senate Permanent Subcommittee on Investigations lambasted credit ratings agencies for their role in the financial crisis. During an April 23 hearing, the Senate Subcommittee found that the credit rating agencies were "too influenced by investment bankers," and had used credit ratings models with inaccurate and inadequate data.