We’ve seen this movie before. Research firms paid by the folks whose securities they research. As in the last research scandal, this fact has been known and discussed publicly for decades, but now that mortgage bonds are collapsing, Congress is outraged. Moody’s stock is getting clobbered. McGraw Hill and Fitch are also under the gun. Email proctology exams, no doubt, are coming soon.
(A helpful hint for Moody’s employees: Want to go straight to jail? Delete old emails. Sure, those irrelevant heat-of-the-moment blurts will cause all kinds of problems, but destroying evidence is like sending prosecutors a note saying “Please convict me.”)
WaPo’s Alec Klein has more:
“The rating agencies themselves for a year were putting out warning signs . . . significant reports highlighting the risks, and yet they weren’t downgrading,” said Joshua Rosner, managing director of Graham Fisher & Co., a New York financial research firm for institutional investors. He said the raters, in effect, were “wearing blinders.”
Rosner said that part of the problem is that the raters were acutely aware of their power in the capital markets and hesitated to downgrade securities backed by subprime loans. “They were afraid their actions themselves could roil already weak markets,” he said. The other problem, he said, is that the big three credit raters are paid by the very firms they rate. Scholars in the field have frequently noted what they consider this inherent conflict of interest in the raters’ business model. After decades of inaction, Congress last year passed a credit rater law to foster competition and enhance regulatory oversight.