The Last Mystery of the Financial Crisis." As reported repeatedly on the Corporate Justice Blog, and Taibbi's investigative report buttresses the posts, significant blame for the mortgage crisis lays at the feet of the corrupted credit rating agencies, Moody's, Standard & Poor's and Fitch. Based on recent court documents made public following the rating agencies $255 million settlement for their roles in knowingly mis-rating mortgage backed security investment vehicles in the run-up to the mortgage meltdown, a pitiful story is revealed of full blown rating agency head-bowed acquiescence to the demands of mega-banks (like Morgan Stanely) simply for the money - pay us enough and we will give you the rating that you want, science and integrity be damned.
From Rolling Stone and Taibbi: "Thanks to a mountain of evidence gathered for a pair of major
lawsuits by the San Diego-based law firm Robbins Geller Rudman &
Dowd, documents that for the most part have never been seen by the
general public, we now know that the nation's two top ratings companies,
Moody's and S&P, have for many years been shameless tools for the
banks, willing to give just about anything a high rating in exchange for
cash. In incriminating e-mail after incriminating e-mail, executives and
analysts from these companies are caught admitting their entire business
model is crooked. . . .
[The rating agency's] primary function is to help define what's safe to buy, and what
isn't. A triple-A rating is to the financial world what the USDA seal
of approval is to a meat-eater . . . It's
supposed to be sacrosanct, inviolable: According to Moody's own reports,
AAA investments "should survive the equivalent of the U.S. Great
Depression. It's not a stretch to say the whole financial industry revolves
around the compass point of the absolutely safe AAA rating. But the
financial crisis happened because AAA ratings stopped being something
that had to be earned and turned into something that could be paid for."
The story is worth the read, as the incest amongst Wall Street Banks and the Credit Rating Agencies in the period prior to the market collapse is simply unbelievable. More unbelievable still, the credit rating agencies remain in business and very little has changed.
Again, from Taibbi: "2008 was to the American economy what 9/11 was to national security.
Yet while 9/11 prompted the U.S. government to tear up half the
Constitution in the name of public safety, after 2008, authorities went
in the other direction [with the credit rating agency process]. If you can imagine a post-9/11 scenario where
there were no metal detectors at airports and people could walk on
carrying chain saws and meat cleavers, you get a rough idea of what was
done to reform the ratings process. Specifically, very little was done to change the way AAA ratings are
created – the "issuer pays" model still exists, and the "Big Three"
retain roughly the same market share. An effort by Minnesota Sen. Al
Franken to change the compensation model through a new approach under
which agencies would be assigned to rate new issues through a government
agency passed overwhelmingly in the Senate, but in the House it was
relegated to a study by the SEC – which released its findings last year,
calling for . . . more study. "The conflict of interest still exists in
the exact same way," says a frustrated Franken."
Corruption rewarded? Wouldn't the most efficient response be to blow up Moody's, S&P's and Fitch and begin from scratch, where integrity is the most important outcome?