U.S. Securities Watchdog Slams Credit Agencies

According to the Wall Street Journal, the big three ratings firms of Moody’s, Standard & Poor’s and Fitch improperly inflated their ratings of mortgage-backed securities because of possible conflicts of interest and inadequate staffing.

An investigation by the U.S. Securities and Exchange Commission, launched 10 months ago and released Wednesday, says credit rating firms have not analyzed mortgage-backed securities consistently and followed guidelines in order to earn commissions.

According to the report, an unnamed analyst complained that her agency’s methodology "didn’t capture half of the risk" of a particular security. In its investigation, the commission found some cases in which the three agencies did not disclose the reasons even when they lowered the expected amount of loss of subprime mortgages.

Moreover, the commission said it was also possible for the three agencies to have known about the upcoming subprime mortgage crisis, which sent a shockwave across the world, in advance, but failed to reflect the possibility into their assessment.

According to the daily, two analysts exchanged e-mails in December 2006, saying, “The Securities and Exchange Commission is creating an even bigger monster, the CDO market. Let’s hope we are all retired and wealthy before this house of cards falters.” But, the report did not disclose to which the two analysts belong.

However, Josh Rosner, managing director at research firm Graham Fisher, said, “The report did neither disclose names of interviewees nor reveal what mistakes each agency has made. Markets and investors depend on the agencies. The report does not contribute to improving transparency.”

According to the daily, the three major ratings firms have already announced that they would improve their practice to evaluate credit ratings, but that they would be seriously damaged by the report.

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