Rating Agencies Ignored Risk

February 16, 2011 by · Leave a Comment
Filed under: FCIC, FDIC, The Rating Agencies 

Keith Johnson, the former president and chief operating officer of Clayton Holdings, testified before the Financial Crisis Inquiry Commission (FCIC) that Moody’s Investors Services, Standard & Poor’s and Fitch Ratings all ignored his company’s discovery that many mortgages that were being combined into securities during 2006 and 2007 were substandard.

Clayton reviewed more than 911,000 mortgages during 2006 and 2007 for large investment bankers who sold them as mortgage-backed securities.

Johnson told the FCIC that approximately 46% were “bad loans” based on unverified borrower information. He testified that, “We took this to the credit rating agencies and said, ‘Wouldn’t this information be great for you to have as you assign tranche levels of risk?'”

“While most said they loved it, none of them would have adopted it at that time. If anyone at that time had adopted they would have probably lost market share,” Johnson explained. “The issuers would have gone through the easier channel.”