Report: Big Profits Drove Faulty Ratings at Moody's, S&P
WASHINGTON — Analysts who reviewed complex mortgage bonds that ultimately collapsed and ruined the U.S. housing market were threatened with firing if they lost lucrative business, prompting faulty ratings on trillions of dollars worth of junk mortgage bonds, a Senate report said Wednesday.
The 639-page report by the Senate Permanent Subcommittee on Investigations confirms much of what McClatchy first reported about mismanagement by credit ratings agencies in 2009.
Credit rating agencies are supposed to provide independent assessments on the quality of debt being issued by companies or governments. Traditionally, investments rated AAA had a probability of failure of less than 1 percent.
But in collusion with Wall Street investment banks, the Senate report concludes, the top two ratings agencies — Moody's Investors Service and Standard & Poor's — effectively cashed in on the housing boom by ignoring mounting evidence of problems in the housing market.
"Instead of using this information to temper their ratings, the firms continued to issue a high volume of investment-grade ratings for mortgage backed securities," the report said.
Profits at both companies soared, with revenues at market leader Moody's more than tripling in five years. Then the bottom fell out of the housing market, and Moody's stock lost 70 percent of its value; it has yet to fully recover. More than 90 percent of AAA ratings given in 2006 and 2007 to pools of mortgage-backed securities were downgraded to junk status.
Wednesday's report provided greater detail about the behavior of Brian Clarkson, the president of Moody's at the time of his departure in mid-2008, when the financial crisis was in full bloom.
Clarkson rose from the head of Structured Finance, which rated complex bonds backed by U.S. mortgages, to president of the company. His rise paralleled the decline in ratings quality. He has refused to talk to McClatchy or other news organizations, and was scheduled to testify last year before the Financial Crisis Inquiry Commission but was rushed to the hospital with a kidney stone.
Analysts had confided to McClatchy that Clarkson bullied and threatened them as he rose up the ranks, and the Senate report details that in numerous emails. One email dating to 2003 shows Clarkson suggesting the need to "refine our approach" to keep pace with competitors "easing their standards to capture (market) share."
Similarly, an S&P employee in an August 2006 email described his company's cozy relationship with Wall Street banks this way: "They've become so beholden to their top issuers for revenue they have all developed a kind of Stockholm syndrome... ."
Stockholm syndrome is the bond a kidnapping victim feels with captors.