The NYT’s start reporter Louise Story breaks the news today that New York AG Andrew Cuomo is investigating the relationship between Wall Street banks and the ratings agencies prior to the crisis.
In particular, Cuomo wants to know the extent to which banks improperly finagled AAA ratings from the credit raters. Last month, Louise Story and Gretchen Morgenson wrote about the incestuous relationship between the two sides (banks and the raters) and the fact that the raters had provided banks with the formulas they were using to rate debt, possibly allowing Wall Street to tailor the data they provided to the raters in order to get that coveted top rating.
Now to back up, there’s no good excuse for the buyer of any debt to rely solely on ratings agency scores in buying decisions. If you bought into some CDOs without doing your own research merely because Moody’s had slapped it with a AAA rating, you’re a fool and you deserved to lose a lot of money.
That being said, this issue isn’t nothing, because if there’s a clear pattern of providing improper data to the raters — and again, this is just an early-stage investigation — then the banks begin to look like they were specifically trying to deceive customers on behalf of their own trading desks or special clients (like John Paulson).
Suddenly, this looks less like hedging or market making, and more like putting your finger on the scale.
New details are sill scarce, but subpoenas were apparently issued last night to eight banks: Goldman Sachs (GS), Morgan Stanley (MS), UBS (UBS), Citigroup (C), Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is now owned by Bank of America (BAC).