CREDIT RATING AGENCIES AND THE FINANCIAL CRISIS ...

162Mr. SHARMA. We have continued to sort of, as I said, there aremany instances when we did not rate things, and as I said, thereare things——Chairman WAXMAN. Sometimes you didn’t rate. Sometimes youdidn’t give a rating. Therefore, if you gave ratings inappropriatelyin other cases, we should take that into consideration.Mr. SHARMA. Mr. Chairman, we also make all our criteria public.It is available to the investor. It is available to the issuers and publicat large for them to look at how we rate——Chairman WAXMAN. Let me get back to the essential issue here,because Mr. McDaniel solicited feedback from the company’s topmanagers about that meeting, and I want to read what one of themanagers said, ‘‘We heard two answers yesterday. One, people lied,and two, there was an unprecedented sequence of events in themortgage markets. As for one, it seems to me that we had blinderson and never questioned the information we were given, specificallywhy would a rational borrower with full information sign up for afloating rate loan that they couldn’t possibly repay and why wouldan ethical and responsible lender offer such a loan? As for two, itis our job to think of the worst-case scenarios and model them,after all, most economic events are cyclical and bubbles inevitablyburst. Combined these errors make us look either incompetent atcredit analysis or like we sold our soul to the devil for revenue ora little bit of both.’’Mr. McDaniel, one of your top managers said Moody’s was eitherincompetent or sold its soul to the devil. It’s a serious charge. Howdo you respond?Mr. MCDANIEL. I think the manager was referring to what theperception could be based on the stress that assets that had beenrated in the mortgage-backed securities area were undergoing.With respect to the comment they lied, I was not referring to anyoneat Moody’s, or, in fact, anyone in the industry. I was referringto media reports about the deterioration in the veracity of informationthat was flowing through the mortgage origination process.Chairman WAXMAN. In other words, people were claiming theycould pay back the loan but they couldn’t.Mr. MCDANIEL. Yes.Chairman WAXMAN. But that shouldn’t be hard to figure outwhen you have loans that are being given with an amount up 100percent and no equity in the hands of the borrower.Mr. MCDANIEL. Well, one of the——Chairman WAXMAN. Wouldn’t that be a more likely situation fora default?Mr. MCDANIEL. Certainly to the extent that there is more leverage.In a mortgage or in the purchase of a home, there is a greaterrisk of default.Chairman WAXMAN. So people are lying, or you weren’t modelingfor the worst-case scenarios. I’m trying to reconcile what you havesaid publicly on a number of occasions, including today, and whatyou said in a private meeting and it seems to me you are sayingtotally different things in public than you’re saying in private. Inpublic, you assure us that your industry meets the highest standardsbut in private, you’re telling insiders that conditions in yourindustry could lead to a financial crisis.VerDate 11-MAY-2000 12:35 Aug 24, 2009 Jkt 000000 PO 00000 Frm 00166 Fmt 6633 Sfmt 6633 U:\DOCS\51103.TXT KATIE PsN: KATIE