Credit rating agencies came under fire for their role in the global financial crisis, as US investigators on Wednesday grilled senior industry figures, including mega-investor Warren Buffett.
Answering allegations that rating firms helped propel the sale of risky investments that poisoned the global financial system, senior officials from Moody’s admitted mistakes were made, but denied any wrongdoing.
Buffett, who holds a major stake in Moody’s, said the agency had “made the wrong call” in assessing some complex financial products, but firms that failed after buying dubious products should shoulder most blame.
“Financial institutions that have failed and have required the assistance of the federal government ... the CEOs should basically go away broke, and I have said I think his spouse should go away broke,” he said.
The powerful “big three” raters — Moody’s, Standard & Poor’s and Fitch — have been accused of blithely awarding mortgage-backed securities their lucrative “AAA” investment ratings simply to net more business.
These top ratings are often seen as a seal of approval by investors and a sign that a company, country or debtor will pay back borrowed cash on time and in full.
“The picture is not pretty,” said Phil Angelides, chairman of the Congress-appointed Financial Crisis Inquiry Commission.
“From 2000 through 2007, Moody’s slapped its coveted triple-A rating on 42,625 residential mortgage-backed securities,” he said. “Moody’s was a triple-A factory.”
Moody’s CEO Raymond McDaniel told the commission it was “deeply disappointing” that the firm misjudged how risky mortgage-backed investments were, but said steps had been taken to improve the system.
“Moody’s is certainly not satisfied with the performance of these ratings,” he said, facing questions about why he had not resigned.
“There has been an intense level of self-evaluation within our organization,” he said.
Buffett said he owned a 13 percent stake in Moody’s but did not use credit agencies to assess investments at his Berkshire Hathaway firms.
The rating firms have faced growing ire from US lawmakers who are putting the final touches to financial reforms that would set stiffer curbs on how they do business.
Criticism has focused on the fact that agencies are paid by the same firms they rate.
Eric Kolchinsky, a whistleblower who once worked for Moody’s, said the industry was largely unregulated and “given a blank check” to pursue profits over sound assessments.
“Rating agencies faced the age-old and pedestrian conflict between long-term product quality and short-term profits. They chose the latter,” Kolchinsky told lawmakers.
He accused Moody’s of lying about the influence that banks — which packaged and sold the securities — had over the ratings process.
“Banker requests to keep certain analysts off their deals were granted,” he said.
Kolchinsky also accused banks of concealing the worst-performing parts of bonds that banded together mortgage debt.
“I have had cases where bankers were, I believe, lying to me about where those were being placed and there’s nothing that I could do about it. You know, there’s no penalty for lying to a rating agency analyst,” he said.
Rating agencies have returned to the spotlight in recent weeks as a string of European countries have seen their credit ratings downgraded, pushing the cost of borrowing ever-higher.
EU officials earlier called for centralized monitoring of rating agencies, accusing them of sparking “attacks” by speculators.
European Commission President Jose Manuel Barroso said the debt crisis afflicting the eurozone was not the rationale behind the move, detailed by financial services commissioner Michel Barnier, and that the problems were well known beforehand.
“Is it normal to have only three relevant actors,” he asked in reference to Fitch, Moody’s and Standard & Poor’s, “where there is such a great probability of a conflict of interest?
“Is it normal that all come from the same country?” he said, meaning the US.
“[And] is it normal that all are escaping fundamental regulation or supervision when they act in such an important area?” he added.
“I think that matter deserves some analysis,” he said, adding that the commission was “considering” the idea of setting up a European rating agency — backed by Barnier and some member states.
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