Ratings Agencies “Put System at Risk,” CEO Says: “Kool-Aid Drinking Lapdogs” |
http://www.marketwatch.com/news/story/ratings-agencies-put-system-risk/story.aspx?guid={6A0F18B2-1DB3-4D77-89C7-B5EE7C1829D2}
By Rex Nutting, MarketWatch
WASHINGTON (MarketWatch) –
Credit rating agencies put the global financial system at risk because they had to be lapdogs, not watchdogs, to survive, a top CEO testified Wednesday.
The three major agencies – Moody’s, Standard & Poor’s and Fitch — were caught in a race to bottom, forced to lower their standards in an attempt to maintain their market share, said Raymond McDaniel, chief executive officer of Moody’s, who testified on Capitol Hill on Wednesday.
“We drank the ‘Kool-Aid,’” McDaniel wrote in an internal memo released Wednesday.
That race to the bottom was very lucrative in the short-run for the companies, but disastrous for the global economy in the long haul, said Rep. Henry Waxman, D-Calif., chairman of the House Oversight and Government Reform Committee. Waxman said revenues at the three ratings agencies doubled between 2002 and 2007 to $6 billion, while Moody’s had the highest profit margin of any company in the S&P 500 for five years running.
The three agencies rate financial securities on the risk that they won’t be paid off.
Between 2002 and 2007, the agencies rated a flood of mortgage-related securities issued by Wall Street firms, giving many of the securities a coveted AAA rating at the time, only to downgrade most of them as house prices tanked and defaults spiked. The subsequent collapse in the value of those securities has taken the global financial system to the “brink of the abyss,” in the words of the head of the IMF.
“The story of the credit rating agencies is a story of colossal failure,” Waxman said. “Millions of investors rely on them for independent, objective assessments.”
Tags: Fitch, Moody's, Standard & Poor's