Payments to the credit rating agencies – Moody’s, Standard & Poor’s and Fitch – doubled in the five years of s subprime boom, totalling $6 billion by 2007. Unfortunately the efficiency of those agencies did not keep pace with their earnings.
In July 2007, the US financial watchdog published a damning account of the ratings agencies. Not one of them could provide adequate documentation for their methods of calculating the risk on CDOs. After 2002 they had become overwhelmed by the sale of new business they were doing. the conflict of interest – bond issuers paying for their own products to be rated – was never properly managed. Emails seized by a 2008 Congressional inquiry shows the depth of collusion.
One instant message exchange sums it up. Analysts Rahul Shah and Shannon Mooney of Standard & Poor’s are exchanging views on a CDO the company has just rated. ‘By the way,’ says Rahul, ‘that deal is ridiculous.’ ‘I know, right,’ Shannon replies, ‘[the] model def[initely] does not capture half of the risk.’ ‘We should not be rating it,’ Rahul chips in, prompting Shannon to type – on a system that is flashing constant reminders that they are being recorded – the immortal line: ‘We rate every deal. It could be structured by cows and we would rate it.’
Another analyst email exchange at S&P concluded: ‘Rating agencies continue to create an even bigger monster – the CDO market. Let’s hope we are all wealthy and retired by the time this house of cards falters :o)’
Paul Mason, Meltdown, Pg 94
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