In essence, banks started with the answers and worked backward, reverse-engineering top-flight ratings for investments that were, in some cases, riskier than ratings suggested, according to former agency employees.... Banks started with the answers and worked backward, reverse-engineering top-flight ratings for investments that were, in some cases, riskier than ratings suggested, according to former agency employees. ...
...The extent to which [credit ratings agencies] collaborated with Wall Street banks has drawn less notice.
The rating agencies made public computer models that were used to devise ratings to make the process less secretive. That way, banks and others issuing bonds — companies and states, for instance — wouldn’t be surprised by a weak rating that could make it harder to sell the bonds or that would require them to offer a higher interest rate.
But by routinely sharing their models, the agencies in effect gave bankers the tools to tinker with their complicated mortgage deals until the models produced the desired ratings....NYT
The ratings agencies -- Fitch, Moody's, S&P -- have earned their own serious punishment for this. But another agency, a government agency, is responsible for not preventing this fraud. Agencies like the Securities and Exchange Commission have added to the muddled perception that "big" government bureaucrats are where the buck stops.
The SEC is very busy trying to save its own life.
...The commission has been the subject of three scathing investigative reports over its failure to catch irregularities in some of the biggest investment debacles in history, including those involving Lehman Brothers and Bernard L. Madoff Investment Securities. It had received tips years ago that Mr. Madoff was running a Ponzi scheme but failed to develop a case against him. Ms. Schapiro said that the shortcomings noted in the recent reports had been addressed in part by the makeover of the enforcement division.
Mr. Khuzami said one of the most important changes was eliminating a rule requiring investigators to get majority approval of the five-person commission in order to issue subpoenas, which has allowed the division to move more quickly.
To which branch of government is the SEC -- an independent agency -- answerable, if any? Congress. Which party in Congress is most likely (neither escapes culpability) to keep a regulatory agency like the SEC on a short leash? The Republican party. Which party do anti-government voters seem to lean towards? The Republican party. What additional proof do we need that the Tea Party and other couch potato anarchists are completely out to lunch?
The Tea Party (and Republicans) have earned a new motto: "We have met the enemy and he is us."
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Meanwhile, McClatchy reports that ratings agency CEO's are not about to take the blame for their failures.
Moody's chief Ray McDaniel, under questioning, said that he didn't think his company had continued to rate complex deals backed by U.S. mortgages after it and competitor Standard & Poor's jolted the markets in July 2007 with massive downgrades of earlier deals.
"I apologize, I do not recall that," McDaniel said.
Elsewhere, in the same papers, the SEC has been shown to deliberately avoid investigating those ratings agencies.
Kevin McLaughlin had been saying it for years: The Securities and Exchange Commission, the nation’s guardian of stock markets, botched a potential investigation into opaque financial dealings that cost small investors millions of dollars.Now an internal investigation has vindicated some of his claims.
"If you're a guy sitting out here in Des Moines like me, you want to invest in accounting systems you understand," said McLaughlin, who filed 17 complaints with the SEC about the telecom company Metromedia International Group from 2005 to 2007 before it took any action. "I thought I had cops on the beat who could warn me about what's going on."
