Bloomberg’s Eliot Blair Smith has just broken an important story that gets to the root of the current financial crisis.
In August 2004, Moody’s Corp.unveiled a new credit-rating model that Wall Street banks used to sow the seeds of their own demise. The formula allowed securities firms to sell more top-rated, subprime mortgage-backed bonds than ever before.
A week later, Standard & Poor’s moved to revise its own methods. An S&P executive urged colleagues to adjust rating requirements for securities backed by commercial properties because of the “threat of losing deals.”
The world’s two largest bond-analysis providers repeatedly eased their standards as they pursued profits from structured investment pools sold by their clients, according to company documents, e-mails and interviews with more than 50 Wall Street professionals. It amounted to a “market-share war where criteria were relaxed,” says former S&P Managing Director Richard Gugliada.
So anxious were the two ratings agencies to get market share that they gave the AAA rating to packages of sub-prime mortgages with unheard of leverage put on top of a pile of liar loans.
In December 2006, a U.S. arm of the Zurich investment bank Credit Suisse Group AG issued the $1.5 billion McKinley Funding III Ltd. CDO. The manager, New York-based Vertical Capital LLC, borrowed 84 times investors’ equity, and junior investors were backed by a narrower cushion of assets equal to 100.98 percent of their stake, the prospectus shows.
$17 million equity in a $1.5 billion security! OMG
Meanwhile Bush’s SEC was obviously asleep at the wheel while this swindle was going on. Not a single executive of either Moodys or S & P has been prosecuted.
Gugliada says that when the subject came up of tightening S&P’s criteria, the co-director of CDO ratings, David Tesher, said: “Don’t kill the golden goose.”
S&P declined to make Tesher available for comment.
In the SEC’s July 8 report examining the role of the credit rating companies in the subprime crisis, the agency raised questions about the accuracy of grades on structured-finance products and “the integrity of the ratings process as a whole.”
“Let’s hope we are all wealthy and retired by the time this house of cards falters,” one unidentified analyst told a colleague in a December 2006 e-mail, according to the SEC report. The e-mail was signed with a computerized wink and smile: “;o).”
In his first Inaugural Address, Ronald Reagan set the agenda for the next 30 years, “Government is not a solution to our problem, government is the problem.” It was this attitude that brought us to the precipice and even today the defenders of Laissez Faire like John McCain, refuse to believe they are culpable. That they refuse to believe that companies like S & P and Moodys would endanger our Republic for short term profits, shows their gullibility and unfitness for the responsibility of protecting the public and not just their fat cat contributors.