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The report on the financial crisis put together by the Senate’s Subcommittee on Investigations looks at a number of financial firms and events in the lead up to the implosion of 2008, and has an entire section on the ratings agencies.Ratings agencies are accused of beefing up CDO ratings so that their clients, the banks who wanted to market them to “CDO fools,” wouldn’t leave them for their competitors.
And now hundreds of pages, and hundreds of damning emails, show Moody’s and Standard & Poors did pretty much exactly that.
When the bankers who work with them hounded the ratings analysts, the ratings agencies changed their tune. In other words, they knew a CDO deserved a BBB rating, but gave it a AAA rating so that banks could sell it to pension funds and other institutional investors who only invest in the highest rated assets.
Here’s an example of how ratings agency traders knew the CDO market was a mess.
One email circulated between a number of S&P workers in 2006, had an article attached, titled: “The Mortgage Mess Spreads.” One of the recipients had added:
This is like watching a hurricane from FL [Florida] moving up the coast slowly towards us. Not sure if we will get hit in full or get trounced a bit or escape without severe damage…
Here’s an email showing the bankers warned the ratings agency to rate it high anyway.
In a 2006 email from a UBS banker to an S&P senior manager, the banker warns the S&P staffer he’s going to go “Ratings Shopping” if he continues with the current line:
The type of blatant pressure exerted by some investment bankers is captured in a 2006 email in which a UBS banker warned an S&P senior manager not to use a new, more conservative rating model for CDOs. He wrote:
“[H]eard you guys are revising your residential mbs [mortgage backed security] rating methodology – getting very punitive on silent seconds. [H]eard your ratings could be 5 notches back of [Moody’s] equivalent.;[G]onna kill your resi[dential] biz.;[M]ay force us to do moodyfitch only cdos!”
And here’s an example of how the ratings agencies reacted to the bankers’s threats.
According to the report,
Numerous internal emails illustrate not only S&P’s drive to maintain or increase market share, but also how that pressure negatively impacted the ratings process, placing revenue concerns ahead of ratings quality.
For example, in a 2004 email, S&P management discussed the possibility of changing its CDO ratings criteria in response to an “ongoing threat of losing deals”: “We are meeting with your group this week to discuss adjusting criteria for rating CDOs of real estate assets this week because of the ongoing threat of losing deals.”
Ratings agency analysts acknowledged this was dangerous.
In response to a 2005 email stating that S&P’s ratings model needed to be adjusted to account for the higher risks associated with subprime loans, a director in RMBS research, Frank Parisi, wrote that S&P could have released a different ratings model, LEVELS 6.0, months ago “if we didn’t have to massage the sub-prime and Alt-A numbers to preserve market share.”
This same director wrote in an email a month later: “Screwing with criteria to ‘get the deal’ is putting the entire S&P franchise at risk – it’s a bad idea.”
But they did it anyway.
The scary thing? Apparently it’s still going on.