Are Credit Ratings Agencies Just a Bunch of Bull?
Congressional inquiries into the credit ratings issued by Standard & Poor's, Moody's and Fitch, Inc., the leading credit rating agencies, revealed the same kind of corruption that brought stock market analysts under the microscope just seven short years ago, suggesting that Wall Street firms do not learn any lessons and are, in effect, ungovernable. In an internal email that came to light during hearings on the Hill, one S&P analyst admitted that their credit ratings were inflated and unsupported, saying, "it could be structured by cows and we would rate it." In other words, the credit ratings were a bunch of bull.
In another internal exchange, a different analyst told a co-worker, "let's hope we are all wealthy and retired by the time this house of cards falters."
Millions of investors relied upon the rating agencies to issue unbiased, objective evaluations of the credit worthiness of the sub-prime securities. As in the case of the stock analysts like Jack Grubman, Henry Blodgett, Mary Meeker and others, who fell from grace earlier this decade, the firms had an inherent conflict of interest because their firms were paid by the bond issuers who sought favorable ratings instead of by investors who intended to rely upon the ratings in making investment decisions. The internal S&P memos are reminiscent of Blodgett's famous emails in which he privately admitted that some of the stocks he touted were "dogs" or were "going to zero."
The Securities and Exchange Commission recognized only too late, as usual, that the credit ratings were problematic, noting in July that the ratings agencies "conflicts of interest were not always managed appropriately." The SEC abdicated, for all practice purposes, any real ability to hold the rating agencies accountable in 2005, when they allowed the brokerage firms to police their own capital requirements. By so doing, they signaled that the regulators would not second-guess the market value of any securities held in the brokers' inventories. This allowed the brokerage firm to inflate the value of the sub-prime securities based, in part, upon the painted ratings issued by the rating agencies.
