Standard & Poor's and Moody's criticised over financial crisis
Friday, 23 April 2010 | 
Finance - Banki...
The behaviour of two credit rating agencies in the run-up to the financial crisis has been criticised by US senators following an investigation.
The Senate committee said Moody's and Standard & Poor's instilled "unwarranted high confidence" in certain risky financial products. It also said that they were influenced by the banks that paid their fees. The committee will hear testimony from current and ex-officials of Standard & Poor's and Moody's later on Friday.
'Massive economic damage'
The Permanent Subcommittee on Investigations committee said the agencies must share some of the blame for the severity of the financial crisis. It also said firms let their drive for profits affect the ratings they issued. The panel's chairman, Democrat senator Carl Levin, said the agencies had let banks "sell high-risk securities in bottles with low-risk labels". Senator Levin said once the crisis emerged rating agencies had failed to acknowledge the problems fast enough. That, he said, led to mass downgrades of billions in investments, rocking the financial system and triggering the crisis. "By first instilling unwarranted confidence in high risk securities and then failing to downgrade them in a responsible manner, the credit rating agencies share blame for the massive economic damage that followed," said Mr Levin.
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Moody’s chief admits failure over crisis
The chief executive of Moody’s admitted to a Senate panel on Friday that the US credit rating agency failed to anticipate the severe deterioration in the US housing market that led to the financial crisis and was “not satisfied” with its performance.
However, Raymond McDaniel defended the the credit agencies’ dependence on fees paid by Wall Street firms, claiming that “potential conflicts exist regardless of who pays”.
But evidence presented at a hearing before the Senate detailed how some senior managers at Moody’s and Standard & Poor’s suppressed internal concerns about the securities they rated due to pressure from the banks that paid their fees.
Eric Kolchinsky, a former managing director of a Moody’s unit, believed that he had saved the agency from committing fraud in 2007 when he insisted that it change the way it rated the instruments because of deterioration in the housing market.
When it emerged that Moody’s had seen a slight drop in market share, Mr Kolchinsky was berated by a manager.
Friday’s hearing before the Senate subcommittee on investigations, as well as a hearing on Tuesday that will centre on Goldman Sachs, are being held as senators negotiate a bill to reform financial regulation. Senators are expected to vote on Monday to begin formal debate on the controversial measure.
On Moody’s ratings of Goldman’s Abacus product, at the centre of allegations against the bank, Mr Kolchinsky said that he would have wanted to know that hedge fund manager Paulson & Co was making bets against the security.
He said neither he nor his staff had been aware of Paulson’s involvement in their rating of the transaction. “It just changes the whole dynamic – if the person choosing it, wants it to blow up,” he said.
Staff at Moody’s and S&P described a fraught relationship with investment banks, which put pressure on the agencies to deliver triple A ratings.
“There has always been pressure from banks, and it is quite common for banks to ask for analysts to be removed,” said Yuri Yoshizawa, a senior managing director at Moody’s.
However, she denied that pressure from banks influenced ratings in the run-up to the financial crisis. Carl Levin, the Democratic senator who chairs the panel said: “In the end, the banks got their way.”