Credit ratings agencies a 'key cause' of the financial crisis: Senate report
A bipartisan study on the financial crisis from a Senate subcommittee mirrors the Financial Crisis Inquiry Commission's report in that it blames credit ratings agencies for unleashing the market madness that consumed investors three years ago.
The Senate Permanent Subcommittee on Investigations released findings from a two-year study this week, saying "inaccurate triple-A credit ratings" from Standard & Poor's and Moody's Investors Service introduced risk into the financial system and "constituted a key cause of the financial crisis."
The report went a step further alleging that massive downgrades made by the credit ratings agencies a few months before the financial meltdown "precipitated the collapse of the residential mortgage backed-securities and CDO secondary markets" since the changes were "unprecedented in number and scope." The report added that "more than any other single event (the downgrades) triggered the beginning of the financial crisis."
S&P responded to the report Thursday, saying, "As we have said many times, we have been disappointed by the performance of our ratings on certain mortgage-related securities. The actions we took to downgrade U.S. RMBS and CDOs in 2007 and 2008 reflected the unprecedented deterioration in credit quality, but were not a cause of it. We regret that, like many others, we did not foresee the speed and extent of the housing downturn."
The report mirrors the FCIC which concluded that "failures of credit rating agencies were essential cogs in the wheel of financial destruction" and accused the agencies of being enablers. Industry executives also testified before the FCIC on ratings agency failures.
The Senate report says Moody's and S&P knew as early as 2006 that high-risk mortgages were incurring a great deal of delinquencies and default, but the agencies continued to issue "investment grade ratings" on RMBS and CDO securities tied to risky mortgages for the next six months.
When the firms were finally forced in the summer of 2007 to downgrade the RMBS and CDO ratings, investors sold their securities in mass. But, the report says RMBS and CDO securities held by financial firms lost their value with investors unwilling to invest in new securitizations.
The subcommittee also asserted that Moody's and S&P were too close for comfort to Wall Street firms that sought their ratings on mortgage-related products.
Because the ratings firms have an "issuer pays" model, the ratings agencies were dependent on Wall Street firms to bring them new business, the research study concludes.
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