Washington
23 October 2008
U.S. lawmakers have accused major credit rating agencies of serious failures in how they assessed mortgage-backed securities and other investments. Executives of major firms, and former employees testified at a congressional hearing, the latest to examine factors contributing to the U.S. financial system collapse. VOA's Dan Robinson reports.
Bond rating companies assign grades to a range of investments, including mortgage-backed securities at the heart of the current financial mess.
The role of such firms in financial markets has increased sharply in recent years, along with their profits.
House Oversight and Government Reform Committee chairman, Democratic Congressman Henry Waxman, accuses the firms of colossal failures asserting they became focused more on profits at the expense of investor security. "Million of investors rely on them for independent, objective assessments. The rating agencies broke this bond of trust and federal regulators ignored the warning signs and did nothing to protect the public. The result is that our entire financial system is now at risk," he said.
Criticisms by former employees of two large firms, Standard & Poor's and Moody's, and recommendations for change are resonating on Capitol Hill.
Jerome Fons, a former Moody's managing director of credit policy, says the firms badly missed the impact of falling house prices and declining standards linked to sub-prime mortgages, and he described the atmosphere he says prevailed at Moody's. "In my view, the focus of Moody's shifted from protecting investors to marketing ratings. The company began to emphasize customer service and commissioned detailed surveys of client attitudes. I believe the first evidence of this shift manifested itself in flawed ratings on large telecommunications firms during that industry's crisis in 2001." he said.
Calling reforms undertaken so far by rating firms inadequate, Fons urges what he calls sweeping management changes, firing of those associated with issuing faulty ratings, and more transparency and simplicity.
"We were all relatively well-educated and intelligent people and if you couldn't explain it to us, we were real curious how this [mortgage-based] product was enjoying such tremendous success. /// OPT /// And unfortunately anecdotally we were told it was enjoying a lot success because they were selling these bonds in Europe and Asia, and not in the U.S, particularly the lower rated pieces," said Frank Raiter, who was involved in rating mortgage-backed securities with Standard & Poor's until 2005.
Sean Egan, Managing Director of the Egan-Jones credit ranging agency, asserts that major credit agencies knowingly issued grossly inflated and possibly fraudulent ratings. "Issuers paid huge amounts to these rating companies for not just significant rating fees, but in many cases very significant consulting fees for advising the issuers on how to structure the bonds to achieve maximum AAA ratings. This egregious conflict of interest may be the single greatest cause of the present global economic crisis," he said.
Current executives blame the deterioration of the U.S. housing market mainly on a loosening of under-writing standards for sub-prime mortgages.
One after another acknowledged having observed negative trends, but added that they failed to appreciate the size of the problem.
Raymond McDaniel of Moody's, and Steven Joynt of Fitch Ratings:
MCDANIEL: We did not, however, anticipate the magnitude and speed of deterioration in mortgage quality or the suddenness of the transition to restrictive lending [the impact on the credit markets].
JOYNT: We did not foresee the magnitude or the velocity of the decline in the U.S. housing market, nor the dramatic shift in borrowed behavior brought on by the changing practices in the market, nor did we appreciate the extent of shoddy mortgage origination practices and fraud in the 2005 and 2007 period."
Along with Deven Sharma of Standard & Poor's, all expressed regret at the impact inaccurate ratings have had on American's investments.
With two weeks to go before the U.S. presidential and election on November 4th, the financial and credit system collapse remains a dominant issue for Republican John McCain and Democrat Barack Obama, and has lawmakers seeking re-election worried.
At Wednesday's hearing, Democrat Stephen Lynch and Republican Christopher Shays voiced their disgust:
"LYNCH: I have a lot of people in my district who feel that they have been de-defrauded and they're mad as hell and they think that in light of what has happened to them, someone ought to go to jail, and the more I hear in these hearings I am inclined to agree.
SHAYS: When the referee is being paid by the players, no one should be surprised when the game spins out of control."
House Republicans called Wednesday for a bipartisan commission to supplement investigations by Democratic-controlled committees and the Justice Department. "The financial crisis continues, and it cannot wait until the next Congress [for us] to begin action," said California Republican Darrell Issa.
Republicans plan to formally introduce legislation for such a commission when lawmakers return for more legislative work on the economy following the presidential election, although it is unclear what traction the proposal will have with majority Democrats.
Republicans also want a special counsel appointed to investigate what they call fraud and mismanagement at two large mortgage firms [Fannie Mae and Freddie Mac] the federal government took control of before the financial market collapse.