Economy & Trade, Financial Crisis, Headlines, North America

ECONOMY-US: From the Guys Who Brought You Enron…

Adrianne Appel

BOSTON, Oct 23 2008 (IPS) - The global credit agencies Moody’s, Standard and Poor’s and Fitch propelled the financial meltdown by giving high marks to failing financial companies and their risky, sub-prime investments, lawmakers said Wednesday.

“The story of the credit rating agencies is a story of colossal failure,” said Rep. Henry Waxman, chairman of the House Oversight and Government Affairs Committee.

“Millions of investors rely on them for independent, objective assessments. The rating agencies broke this bond of trust, and federal regulators ignored the warning signs and did nothing to protect the public,” Waxman said.

Credit agencies began in the early 1900s and have grown to rate a vast array of institutions, businesses, individual investments and even cities, states and nations, as to their credit worthiness. The credit rating agencies have been criticised in the past for the power they yield over nations that have entered the global bond market in search of cash. Any downgrade in ratings can wreak havoc for a nation seeking cash.

In the U.S., “a triple-A rating became the stamp of approval that said this investment is safe. And for Wall Street’s investment banks, a triple-A rating became the independent validation that turned a pool of risky home loans into a financial goldmine,” Waxman said.

The credit agencies are paid by the very firms seeking a rating, a direct conflict of interest that influenced the agencies to inflate the ratings of troubled firms and risky investments, lawmakers said.

Rep. Stephen Lynch described a “shopping around” scenario, in which a firm seeking a rating takes its business away from a credit agency if there is a chance it will not be granted a good rating. This influences the credit agencies to give high ratings or risk losing business, lawmakers said.

“How are we supposed to trust these ratings when junk bonds based on mortgages received a triple-A rating? If they have no meaning, what really is their use?” said Rep. Diane Watson.

The credit agencies’ revenue nearly doubled between 2002-2007 with the frenzied investment in risky, mortgage-related assets. Standard and Poor’s went from under 3 billion dollars in revenue in 2002, to over 6 billion dollars in 2007, Waxman said.

Moody’s and Standard and Poor’s and Fitch together hold more than 95 percent of the global ratings business.

The credit agencies’ CEO’s were on the hot seat as irritated lawmakers questioned them during a hearing of the committee.

“It seems everybody is passing the buck and no one seems to want to take responsibility for this phenomenal fiasco,” said Rep. Elijah Cummings. Cummings then pointed to a Dec. 16, 2006 email obtained by the committee, in which a Standard and Poor’s employee expresses concerns about giving a strong rating to a weak investment.

“Let’s hope we are all wealthy and retired by the time this house of cards falls,” the email says.

“People in America and across the globe knew what triple-A meant. Moody’s and [Standard and Poor’s] were trusted,” Lynch said.

“Families in my district have had their retirement earnings and savings wiped out. I’ve got retirees coming to me for help in finding a job,” he said.

“I have a lot of people in my district who feel they were defrauded. They feel someone ought to go to jail. And the more I hear and read I am inclined to agree,” Lynch said.

“Our ratings are not influenced by commercial interests,” Raymond McDaniel, CEO of Moody’s, said in defence of his firm. “It is a conflict that must be identified and managed and controlled,” McDaniel said.

Recently, the credit agencies have had to backtrack. Standard and Poor’s has downgraded more than two-thirds of the investments it rated. Moody’s has downgraded more than 5,000 mortgage-backed securities, Waxman said.

“We didn’t anticipate housing price declines,” said Deven Sharma, president of Standard & Poor’s, about the inflated ratings his agency assigned to firms and risky mortgage assets.

“Profits were running the show,” explained Frank Raiter, a former executive of Standard and Poor’s. “The business management wanted to get as much profit as they could into their coffers.”

Standard and Poor’s gave a high rating to Enron days before it collapsed. “The same people who brought us Enron are still in charge of the henhouse,” Raiter said.

Lawmakers held the hearing in preparation for possibly seeking better oversight of the credit agencies in 2009. The Securities and Exchange Commission, which regulates the credit agencies, has proposed reforms but these may be revamped after a new U.S. president takes office in January.

Groups on the front lines of foreclosures know what changes they want from the Securities and Exchange Commission (SEC).

The National Community Reinvestment Coalition, an organisation of 600 housing advocates, has formally asked the SEC to toughen its oversight of the credit agencies, and called for investigations.

“The rating agencies knowingly issued false and inflated ratings for securities backed by problematic high-cost loans that have created a financial nightmare for millions of families whose homes are now in foreclosure,” the coalition says in an August letter to the SEC.

“Credit ratings agencies should be held accountable for their pivotal role in the mortgage crisis and guidelines should be put in place to ensure that these abuses cannot happen again,” the coalition says.