Wall Street Hoped They'd Be "Wealthy And Retired" Before The House of Cards Fell

If you’re wondering why all these supposedly smart people bought bullsh*t securities made up of pools of overpriced mortgages given to broke people with crap credit — it’s time for you to meet the rating agencies. Rating agencies are the folks who decide the “quality” of investments. They’re the ones who decided that these securities deserved a AAA (read: awesome) rating. Did they know that they were passing junk off as gold? Um, yeah, according to reports from Bloomberg and the New York Times. It looks like they sorta did.

In recent months, Moody’s and S&P have been forced to downgrade the ratings of mortgage-backed securities as delinquencies soared and the housing market crashed. But why were they so highly rated in the first place? According to Bloomberg, the SEC found that “credit-rating companies improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds.”

An e-mail that a S&P employee wrote to a co-worker in 2006, obtained by committee investigators, said, “Let’s hope we are all wealthy and retired by the time this house of cards falters.”

The New York Times says that one former S&P executive, with the all-too-perfect name of Mr. Raiter, claimed that old, outdated models were used to rate the bonds and that newer more accurate estimates were avoided due to “budgetary concerns.”

Mr. Raiter said that the residential mortgage rating group at S.& P. had captured the largest market share among its main competitors — 92 percent or better — “and improving the model would not add to S.& P.’s revenues.”

Mr. Waxman’s committee also cited an internal e-mail exchange between Mr. Raiter, who had been asked to rate a collateralized debt obligation called “Pinstripe,” and Richard Gugliada, an S.& P. managing director. Mr. Raiter had requested highly detailed data about each individual loan, known as loan level tapes, to assess the creditworthiness of the loans in the security, but Mr. Gugliada wrote: “Any request for loan level tapes is totally unreasonable!!! It is your responsibility to provide those credit estimates and your responsibility to devise some method for doing so.”

Another former credit-rating company employee told the committee that the companies pushing these mortgage-backed securities “typically chose the agency with the lowest standards, engendering a race to the bottom in terms of rating quality.” Credit ratings are paid for by the companies that are offering the securities — a system that causes a conflict of interest.

Still, others blame the investors for listening to the credit rating companies when they understand the nature of the relationship:

Asked how to fix the problem of potential conflicts among rating agencies, Mr. Egan, of Egan-Jones, said change would come only if institutional investors no longer made investment decisions based on ratings produced by agencies that take money from issuers. “Institutional investors know darn well that ratings are paid for by the issuers,” he said, “so why do they have all their investment guidelines geared to conflicted ratings?”

Credit Rating Agency Heads Grilled by Lawmakers [NYT]
Credit-Rating Companies `Sold Soul,’ Employees Said (Correct) [Bloomberg]
(AP Photo/Lawrence Jackson)