Rating Agencies Were Part Of The Disaster On Wall Street

Rating Agencies Were Part Of The Disaster On Wall Street

If the rating agencies were key players in the financial mismanagement that destroyed eight million jobs and threatened the world’s economy, why are they not included in the financial reform bill now before the Senate? Alain Sherter wants to know why. So do I.

This is a report from “Now” – a PBS program. In this particular episode an insider from a credit rating agency explains what happened.

Here is Alain Sherter explaining more about this ratings disaster –

The ratings agencies business model is based on a flagrant conflict of interest — they’re paid by the firms whose credit they evaluate. That makes them vulnerable to pressure from investment banks and securities issuers, which naturally want a bullet-proof rating in order to attract investors.

In the years leading up to the housing bust, Moody’s, S&P and Fitch passed out AAA ratings like candy bars at Halloween. In mid-2007 and early 2008, with the real estate market in free-fall and mortgage delinquencies soaring, they suddenly started downgrading scads of formerly top-rated securities. In January of ‘08, for instance, S&P lowered ratings on more than 6,300 and 1,900 CDOs — in a single day. Then, the deluge. The bottom fell out of the secondary market for subprime loans, and the rest is history.

Without the credit rating industry giving triple A ratings to these risky investments, the tragedy that has engulfed and continues to damage the lives of so many Americans would not have been possible.

What are these people not being called on the carpet or prosecuted for conduct that seems to many observers to look very similar to fraud?

James Pilant

Should Virtue Be Rewarded?

Should Virtue Be Rewarded?

This is another one of those stories. I am always reading them. Another company discarded ethics, fired those who would practice it and promoted those who “aggressively sought profit.”

According to McClatchy, Moody’s Investor Services, fired employees who warned the company of problems with their ratings of mortgage based investments and actively promoted those who helped create the second largest economic crisis in American history after the great depression.

When the company went public in 2000 it granted its middle managers stock options. This had a corrosive effect on the integrity of the rating process. To quote from the article:

“It didn’t force you into a corrupt decision, but none of us thought we were going to make money working there, and suddenly you look at a statement online and it’s (worth) hundreds and hundreds of thousands (of dollars). And it’s beyond your wildest dreams working there that you could make that kind of money,” said one former mid-level manager, who requested anonymity to protect his current Wall Street job.

Now, what do you say? As a teacher of business ethics, this is one of those real life examples, it might be best your students never heard about. After all, when the hero in the white hat is unceremoniously dumped and those who have damaged the economic fabric of modern civilization are promoted and enriched(from what I can tell, apparently very enriched). Given the example, you have to wonder why anyone would take business ethics seriously.

The article indicates that if you were willing to give investments whatever their actual value a good rating, in many cases a triple A rating, you were promoted and given more money. Thousand of people relied on these ratings to determine what to invest in. Those unfortunate enough to rely on these credit rating agencies lost large sums of money. We are talking about minimally billions of dollars. These are inconsequential investors like retirements funds, endowments for educational institutions, and charitable organizations.

Can you doubt for a moment that our civilization is damaged by this kind of behavior. Can you doubt that those who did these things and profited should be punished so that others might be deterred? I see an investigation in progress by the Securities and Exchange Commission but aren’t they the ones who didn’t see a problem in the first place?

Unless these people are punished, do jail time, have their profits taken from them and be socially stigmatized, there is no reason for my students and the rest of the public to say the right things to me and other do-gooders; and then take the money. After all, isn’t that what the “real world” says to do?

This is the link to the McClatchy story: http://www.mcclatchydc.com/economy/story/77244.html?storylink=MI_emailed

This is the link to the book, A Colossal Failure of Common Sense, by Lawrence McDonald.


I recommend you visit Lawrence McDonald’s web site at: