Credit Rating Agency Execs Get Grilled on the Hill
Wednesday, October 22, 2008PAUL KANGAS: The nation's credit ratings agencies were key players in the financial meltdown. So today, Standard & Poor's, Moody's and Fitch were called on the carpet by Congress to explain why they gave good ratings to bad debt. The firms say that they had no way to foresee the financial crisis. But as Stephanie Dhue reports, the committee on government reform and oversight didn't buy that.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: House investigators uncovered a culture inside the credit rating agencies that put profits ahead of quality ratings. Former Standard & Poor's analyst Frank Raiter left the firm in 2005. He told the committee S&P management refused to invest in the staff and technology needed to keep better tabs on mortgage-backed securities.
FRANK RAITER, FORMER MANAGING DIRECTOR, STANDARD & POOR'S: There was a big breakdown between the people that were trying to maximize profits and the people that were trying to maximize the credit ratings methodology and activities and the people with the profit motive won.
DHUE: That's apparent from internal S&P exchanges from structured finance employees. They read quote, that deal is ridiculous. The model does not capture half the risk. It could be structured by cows and we would rate it. Standard & Poor's President Deven Sharma says the company is now restoring professionalism.
DEVEN SHARMA, PRESIDENT, STANDARD AND POOR'S: The unfortunate and inappropriate language that used in some of these e-mails does not reflect the core values of S&P.
DHUE: S&P is not alone. Committee Chairman Henry Waxman highlighted a Moody's board meeting where the CEO described his dilemma: issuers want high ratings, investors don't want downgrades and bankers try to game the rating agencies.
REP. HENRY WAXMAN (D) CALIF.: Unchecked, competition on this basis can place the entire financial system at risk, end quote.
DHUE: But Moody's CEO Ray McDaniel insists its ratings are not influenced by the issuer.
RAY MCDANIEL, CHAIRMAN & CEO, MOODY'S: Our ratings are the basis of our best opinion based on the available information at the time.
UNIDENTIFIED FEMALE: But that's not what you said to your board members. That's not what you said..
McDANIEL: It is not inconsistent with what I said to my board members. What I said to the board is that it creates a problem. That to maintain the appropriate standards creates a conflict potentially with maintaining market share.
DHUE: One witnessed likened meat inspection to the financial crisis. Sean Egan, founder of independent rating agency Egan Jones suggests rating firms do spot checks on structured finance deals.
SEAN EGAN, FOUNDING PRINCIPAL, EGAN-JONES RATINGS: You want to do what is needed to give the assurance to first of all check that it isn't tainted meat OK and then also so that the users of this product have the comfort that the proper checks have been made.
DHUE: Tomorrow the committee probes the government's role calling former Fed Chairman Alan Greenspan and SEC Chairman Chris Cox to testify. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
