System of rating complex investments was 'nuts'
The system for assigning credit ratings to complex mortgage derivatives, which handed out gold-plated ratings to investments that have turned out to be worthless, was damned as "nuts" and as having created "a monster" - and that was just by senior employees at the rating agencies.
US politicians hauled bosses of the three main agencies before Congress for hearings into the causes of the credit crisis, and attacked them for presiding over a corrupt and possibly fraudulent system.
In front of a packed meeting room, members of the House oversight committee unveiled internal emails and instant messages that showed how senior executives at Standard & Poor's, Moody's and Fitch warned that their firms were engaged in a "race to the bottom" that compromised standards for a share of the profits from the boom-time credit markets. The agencies were paid by the issuers of the derivatives, a conflict of interest that a committee member, Jackie Speier, called "a bone-chilling definition of corruption".
Trillions of dollars of mortgage derivatives were given the highest ranking of creditworthiness, AAA, despite containing toxic sub-prime loans that have subsequently gone bad. The resultant losses, which now top $500bn, have been spread throughout the financial system, including to investors who believed what the rating agencies told them, namely that their investment was as safe as US government bonds.
"The story of the credit rating agencies is a story of colossal failure," said Henry Waxman, committee chairman. "They broke a bond of trust ... and the result is that our entire financial system is now at risk. …