"I am shocked, shocked to see that gambling is going on in here,"–Captain Renault, "Casablanca: 1942
Of course, Captain Renault controlled the gambling in Casablanca, but it was best that, as the chief of police, he not admit that. Something similar happened at the big credit agencies including S&P and Moody’s. They were supposed to be honest brokers of opinions about paper like mortgage-backed securities. They neglected to fulfill that obligation. They may have been busy making buckets of money for themselves, perhaps in ways that compromised their judgments.
According to The Wall Street Journal, the SEC did a major investigation of how the credit rating agencies had been run. The paper writes "The 10-month examination uncovered poor disclosure practices, a lack of policies and procedures guiding the analysis of mortgage-related debt, and insufficient attention paid to managing conflicts of interests," Among those conflicts of interest where that analysts knew how their firms were paid by clients. Makes objectivity a little harder.
The SEC report is probably not the end of it. The document is likely to be used as evidence in a number of lawsuits against the rating firms. Banks and their clients lost billions of dollars by betting wrong on mortgage-backed paper. They relied on S&P and its peers for opinions instead of handling the due diligence themselves.
It is the American way. Someone lost money so someone has to pay.
Douglas A. McIntyre
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