Senate Subcommittee focuses on Moody’s and Standard & Poor’s

July 14, 2010 by · Leave a Comment
Filed under: General, The Rating Agencies 

The Senate’s Permanent Subcommittee on Investigations has uncovered Moody’s and Standard & Poor’s employee emails that call into question the legitimacy of their AAA ratings that were given to hundreds of billions of dollars’ worth of subprime mortgage-backed securities that have now been downgraded to junk status.

Paul Krugman, writing in The New York Times, believes that those emails reveal a deeply corrupt system.

In one email, a Standard & Poor’s employee explains that they needed to “discuss adjusting criteria” used to evaluate housing-backed securities “because of the ongoing threat of losing deals.”  Another regrets needing “to massage the sub-prime and alt-A numbers to preserve market share.”

The emails leave little doubt that the inherent conflict of interest in the rating agencies’ business model impacted risk assessments. Consequently, the financial system unknowingly took on more risk than it could responsibly handle.

No legislation is currently being considered to regulate this activity.

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