Emails from Moody’s, S&P Show ‘Monster’ in the Making
According to e-mails released by a U.S. House panel, employees at Moody's Investors Service and Standard & Poor's privately questioned the value of some mortgage-backed securities that were given creditworthy ratings, saying they created a "monster.''
"Let's hope we are all wealthy and retired by the time this house of cards falters,'' one e-mail from an S&P employee said.
The message was among documents lawmakers made public today as they criticized the role played by Moody's, S&P and Fitch Ratings in the global credit freeze.
"The story of the credit-rating agencies is a story of colossal failure,'' House Oversight and Government Reform Committee Chairman Henry Waxman, a California Democrat, said at the hearing. "The result is that our entire financial system is now at risk.''
The companies in recent months have downgraded thousands of mortgage-backed securities as delinquencies have soared and home values fell. The downgrades have led to the collapse of Bear Stearns Cos. and Lehman Brothers Holdings Inc. and compelled the U.S. government to set up a system to buy $700 billion of distressed debt from financial companies.
The Securities and Exchange Commission in a July report found the credit-rating companies improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds.
The executives of the credit-rating companies said in testimony that they were unprepared for the sharp drop in home prices and were making improvements.
"Events have demonstrated that the historical data we used and the assumptions we made significantly underestimated the severity of what has actually occurred,'' said Deven Sharma, president of New York-based S&P.
The company has improved its ratings process and transparency, Sharma said, and makes its criteria, analytics, and methodologies available to the public.
Representative Stephen Lynch, a Massachusetts Democrat, said House Democrats are mulling legislation that would hold credit raters legally liable for losses to investors.
"There are discussions,'' he said outside the hearing room. "It's a matter of how to do it.'' Committee members are weighing allowing investors to sue credit raters, he said.
In the September 2007 e-mail made public today, the Moody's employee said that it "seems to me that we had blinders on and never questioned the information we were given,'' according to the congressional investigators. "It is our job to think of the worst-case scenarios and model them.''
The e-mail continued: "Combined, these errors make us look either incompetent at credit analysis, or like we sold our soul to the devil for revenue.''
Published on October 23, 2008
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