ANOTHER FAILURE OF THE FREE MARKET FAIRY

The ratings agencies have admitted that they had an important role in the economic collapse. The fact that the top executives were complicit in this fraud is more proof that we need a complete overhaul of Wall Street.

Executives testify: Bond-rating agencies corrupted themselves
Posted on Friday, April 23, 2010
By Kevin G. Hall | McClatchy Newspapers

WASHINGTON — Executives from credit-rating agencies Moody's Investors Service and Standard & Poor's presented additional evidence Friday that management pressure to maintain their market share eroded the quality of investment-grade ratings and amplified the nation's financial crisis.

Testifying under oath before the Senate Permanent Subcommittee on Investigations, officials who were closely involved in giving investment-grade ratings to complex financial instruments backed by shaky U.S. mortgages described how they were pressured to give Wall Street what it wanted.

Called to appear before the panel, Richard Michalek, a former Moody's vice president and senior credit officer, described the ratings process for deals that could bring more than $1 million in fees as a "must say yes" atmosphere.

Frank Raiter, a former managing director at S&P and head of the group that rated pools of residential mortgages, told the panel that analysts routinely sought direction from top management about the shaky deals they were being asked to rate.

"The guidance was not forthcoming from the top," he said, later adding, "I retired because I got tired of the frustration."

Eric Kolchinsky, a Moody's managing director who in 2007 was in charge of the division that rated the complex deals called collateralized debt obligations. CDOs are securities backed by pools of U.S. mortgages that have been packaged together into bonds and sold to investors.

Kolchinsky recounted how in the first two quarters of 2007, his group generated more than $200 million in revenue for Moody's by giving complex deals investment-grade ratings _ which told investors that they were safe bets. In the late summer of 2007, however, Kolchinsky was informed by superiors that bonds issued a year earlier were about to be severely downgraded.

That should have required a new methodology for ratings on deals that were still pending, but when he tried to do that, he was told not to. It amounted to securities fraud, in his opinion.

Less than two months after challenging the integrity of the ratings, Kolchinsky was removed from his post and given a lower-paying job elsewhere in the company with far less responsibility. Later, he was pushed out altogether.

In one e-mail presented by Levin, an S&P employee inquiring about evidence that the subprime lender Fremont General was showing clear problems with poor underwriting was told not to worry about it.

...the highest-level employees from Moody's and S&P were unapologetic on Friday.

In written remarks, former S&P President Kathleen Corbet gave no ground. She said all deals were rated by teams of analysts, who were supervised by individual managers. Her role as president, Corbet said, was simply to set overall strategy and work with her parent company, McGraw-Hill.

Moody's chief Ray McDaniel, in prepared remarks, also offered no apology. Instead, he said that his company took steps to remedy what was going wrong as information became available.