Credit rating agencies flunk in investor trust as they come under fire in government investigation.
The staffs of the major U.S. credit rating agencies (CRA’s) were already feeling the jitters of a possible mortgage crisis when they released high ratings they knew did not reflect the actual characteristics of mortgage-backed bonds, according to a probe by The House Oversight and Government Reform Committee (HOGRC).
The government agency investigated credit rating agencies Standard & Poor, Moody’s and Fitch, Inc. for negligence and breach of public trust and found the agencies upgraded mortgage-backed bonds from 2005 to 2007. Intra-office communication proved the over-rating. Although no company admitted in having acted irresponsibly to avert any cause of the economic slowdown, they did expect that one day the housing bubble would burst.
The House Committee also investigated the long-running problem between credit rating agencies and investors. Since bond issuers pay the CRAs to come up with ratings, a conflict of interest existed every time the numbers were released. This does not also discount the fact that the agencies’ top officials have developed close personal ties to the companies that were subject to grading. Clearly, they have violated Section 2-2.1 of the “Code of Conduct Fundamentals for Credit Rating Agencies” by the International Association of Securities Commissions:
“The CRA should not forbear or refrain from taking a rating action based on the potential effect (economic, political, or otherwise) of the action on the CRA, an issuer, an investor, or other market participant.”
According to an earlier report by “BusinessWeek”, banks have also taken part in defying regulatory measures of the federal government. They were found to have lobbied against oversight by state authorities during the housing bubble. What’s worse is that there are cases when the federal regulators backed their requests for further deregulation. All these could have been enough for the CRAs to degrade the bonds in question.
When the inquisition on who’s to blame for the financial mess started in the second quarter by the media, only a few pointed their fingers to the CRAs. All eyes were on the mortgage banks and borrowers who, in one way or another, have advertently committed their share in excessive sales or buying of subprime mortgages. It’s about time the credit rating agencies face the consequences of their greed.