In the lead up to the financial meltdown, Wall Street firms routinely exerted influence on the nation’s largest credit rating companies — which judge the quality and safety of bonds — and the companies often surrendered to the pressure, a Senate panel has found.
The rating companies, Standard & Poor’s and Moody’s, regularly awarded generous grades to thousands of mortgage-related investments that later collapsed and precipitated the financial crisis. Investors rely on the raters’ assessments in deciding what to buy and sell.
But an examination, conducted by the Senate's Permanent Subcommittee on Investigations, uncovered internal e-mails and documents that describe the raters as “beholden” to investment banks — firms the raters referred to as their “clients.”
In an October 2007 e-mail, Moody’s chief risk officer warned the company’s chief executive, Raymond McDaniel, that Moody’s employees are “continually 'pitched' by bankers,” a process that can “color credit judgment, sometimes improving it, other times degrading it (we 'drink the Kool-Aid').” The risk officer said such influence “does constitute a 'risk' to ratings quality."
The subcommittee on Thursday released this e-mail and excerpts from some 500 other documents collected during its probe of the rating companies. In response, Moody’s spokesman Michael Adler said the company has "rigorous and transparent methodologies." S&P spokesman Chris Atkins said the company has "learned some important lessons from the recent crisis" and made "significant enhancements to increase the transparency, governance, and quality of our ratings." In the past, the raters have said their critics are wrong to characterize ordinary discussions about a rating as any kind of collusion.
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