CREDIT RATING AGENCIES AND THE FINANCIAL CRISIS ...

3what is going on in the subprime market. What happened was itwas a slippery slope. What happened in 2004 and 2005 with respectto subordinated tranches is that our competition, Fitch andS&P, went nuts. Everything was investment grade. It didn’t reallymatter. We tried to alert the market. We said we’re not rating it.This stuff isn’t investment grade. No one cared, because the machinejust kept going.The following day, a member of the Moody’s management teamcommented, ‘‘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. As for two,it’s our job to think of the worst-case scenarios and model them.Combined, these two errors make us look either incompetent atcredit analysis or like we sold our soul to the devil for revenue.’’The documents from Standard & Poor’s paints a similar picture.In one document, an S&P employee in the structured finance divisionwrites, ‘‘it could be structured by cows, and we would rate it.’’In another, an employee asserts, ‘‘rating agencies continue to createan ever bigger monster, the CDO market. Let’s hope we are allwealthy and retired by the time this house of cards falters.’’There are voices in the credit rating agencies that called for achange, and we are going to hear from two of them on our firstpanel: Frank Raiter from Standard & Poor’s and Jerome Fons fromMoody’s. In 2001, Mr. Raiter was asked to rate an earlycollateralized debt obligation called Pinstripe. He asked for the collateraltapes so that he could assess the creditworthiness of thehome loans backing the CDO.This is the response he got from Richard Gugliada, the managingdirector: Any requests for loan level tapes is totally unreasonable.Most investors don’t have it and can’t provide it. Nevertheless wemust produce a credit estimate. It’s your responsibility to providethose credit estimates and your responsibility to devise some methodfor doing so.Mr. Raiter was stunned. He was being directed to rate Pinstripewithout access to essential credit data. He e-mailed back, ‘‘this isthe most amazing memo I have ever received in my business career.’’Last November, Christopher Mahoney, Moody’s vice chairman,wrote Mr. McDaniel, the CEO, that Moody’s has made mistakesand urged that a manager in charge of the securitization areashould be held to account. Mr. Mahoney’s employment was terminatedby the end of the year.Investors, too, were stunned by the lax practices of the credit ratingagencies. The documents we reviewed showed that a portfoliomanager with Vanguard, the large mutual fund company, toldMoody’s over a year ago that the rating agencies, ‘‘allow issuers toget away with murder.’’A senior official at Fortis Investments was equally blunt saying,‘‘if you can’t figure out the loss ahead of the fact, what is the useof your ratings? If the ratings are BS, the only use in ratings iscomparing BS to more BS.’’Some large investors like PIMCO tried to warn Moody’s aboutthe mistakes it was making. But according to the documents, theyVerDate 11-MAY-2000 12:35 Aug 24, 2009 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 U:\DOCS\51103.TXT KATIE PsN: KATIE